ECONOMICS IN VIETNAM
Vietnam is a densely-populated developing country that has been transitioning from the rigidities of a centrally-planned economy since 1986. Vietnamese authorities have reaffirmed their commitment to economic modernization in recent years. Vietnam joined the World Trade Organization in January 2007, which has promoted more competitive, export-driven industries. Vietnam became an official negotiating partner in the Trans-Pacific Partnership trade agreement in 2010. [Source: CIA World Factbook **]
In 2012 Vietnam’s economy was valued at around $124 billion. GDP (purchasing power parity) was $320.1 billion (2012 est.). Per capita gross national income was US$550. However, based on purchasing power parity (buying power for a basket of goods without regard for market exchange rates), Vietnam’s per capita GDP was approximately US$3,500. In 2004 the contributions to GDP by sector were as follows: agriculture, 21.5 percent; industry, 40.7 percent; and services, 37.7 percent. Reflecting Vietnam’s hybrid economy, industry ownership was mixed, as indicated by percentage of output, as follows (2004): state-owned, 40 percent and declining; privately owned, 25 percent, but employing four times as many workers as the state-owned sector; and foreign-owned, 35 percent. Though Vietnam is a communist country, it has posted high economic growth of more than 5 percent per year since 2000 under its "Doi Moi" reform policy.
Beginning in the 1980s, dire economic conditions forced the government to relax restrictions on private enterprise and sharply cut back on labor camp prisoners, many of them entrepreneurs. In 1986 Vietnam launched a political and economic renewal campaign (Doi Moi) that introduced reforms intended to facilitate the transition from a centralized economy to a "socialist-oriented market economy." Doi Moi combined government planning with free-market incentives. The program abolished agricultural collectives, removed price controls on agricultural goods, and enabled farmers to sell their goods in the marketplace. It encouraged the establishment of private businesses and foreign investment, including foreign-owned enterprises. [Source: Library of Congress *]
By the late 1990s, the success of the business and agricultural reforms ushered in under Doi Moi was evident. More than 30,000 private businesses had been created, and the economy was growing at an annual rate of more than 7 percent. From the early 1990s to 2005, poverty declined from about 50 percent to 29 percent of the population. However, progress varied geographically, with most prosperity concentrated in urban areas, particularly in and around Ho Chi Minh City. In general, rural areas also made progress, as rural households living in poverty declined from 66 percent of the total in 1993 to 36 percent in 2002. By contrast, concentrations of poverty remained in certain rural areas, particularly the northwest, north-central coast, and central highlands. *
Agriculture's share of economic output has continued to shrink from about 25 percent in 2000 to less than 22 percent in 2012, while industry's share increased from 36 percent to nearly 41 percent in the same period. State-owned enterprises account for roughly 40 percent of GDP. Poverty has declined significantly, and Vietnam is working to create jobs to meet the challenge of a labor force that is growing by more than one million people every year. The global recession hurt Vietnam's export-oriented economy, with GDP in 2012 growing at 5 percent, the slowest rate of growth since 1999. In 2012, however, exports increased by more than 18 percent, year-on-year; several administrative actions brought the trade deficit back into balance. Between 2008 and 2011, Vietnam's managed currency, the dong, was devalued in excess of 20 percent, but its value remained stable in 2012. Foreign direct investment inflows fell 4.5 percent to $10.5 billion in 2012. Foreign donors have pledged $6.5 billion in new development assistance for 2013. Hanoi has oscillated between promoting growth and emphasizing macroeconomic stability in recent years. **
In February 2011, the Government shifted policy away from policies aimed at achieving a high rate of economic growth, which had stoked inflation, to those aimed at stabilizing the economy, through tighter monetary and fiscal control. Although Vietnam unveiled a broad, "three pillar" economic reform program in early 2012, proposing the restructuring of public investment, state-owned enterprises, and the banking sector, little perceptible progress had been made by early 2013. Vietnam's economy continues to face challenges from an undercapitalized banking sector. Non-performing loans weigh heavily on banks and businesses. In September 2012, the official bad debt ratio climbed to 8.8 percent, though some independent analysts believe it could be higher than 15 percent.
The World Economic Forum’s latest Global Competitive Index, Vietnam fell 10 places to 75th, lagging behind Uruguay and Ukraine.
GDP (purchasing power parity): $320.1 billion (2012 est.), country comparison to the world: 42; $304.9 billion (2011 est.); $287.9 billion (2010 est.). GDP (official exchange rate): $138 billion (2012 est.). In 2004 Vietnam’s GDP was US$45.2 billion. [Source: CIA World Factbook. Library of Congress ***]
Growth rate: 5 percent (2012 est.), country comparison to the world: 62; 5.9 percent (2011 est.); 6.8 percent (2010 est.). The growth was 8 percent to 9 percent between 1991 and 1996.
GDP — per capita (PPP): $3,500 (2012 est.), country comparison to the world: 170; $3,400 (2011 est.); $3,300 (2010 est.). In 2004, per capita gross national income was US$550. However, based on purchasing power parity (buying power for a basket of goods without regard for market exchange rates), Vietnam’s per capita GDP was approximately US$2,700.
GDP — composition by sector: agriculture: 21.5 percent; industry: 40.7 percent; services: 37.7 percent (2012 est.). In 2004 the contributions to GDP by sector were as follows: agriculture, 21.8 percent; industry, 40.1 percent; and services, 38.2 percent.
Unemployment rate: 4.5 percent (2012 est.), country comparison to the world: 40; 4.5 percent (2011 est.).
Inflation rate (consumer prices): 6.8 percent (2012 est.). country comparison to the world: 176; 18.1 percent (2011 est.). Inflation was 700 percent in 1986; 68 percent, 1991; 14.4 percent in 1994. In 2004 inflation was 9.5 percent, higher than the 3.4 percent rate measured in 2000 but down significantly from 160 percent in 1988. The long-term decline reflects the beneficial effect of fiscal and monetary reforms aimed at stabilizing the economy.
Savings Rate increased from 2.1 percent in 1990 to 16.6 percent in 1994.
Fiscal year: calendar year
Money in Vietnam
Vietnam is very cheap by American and European standards. A good meal at a local restaurant often less than $5; a bowl of pho between $1 or $2. A decent room in a guesthouse is often less than $20. The currency of Vietnam is the dong (VND), which is often refereed to as the piastre. The dong is divided into 10 hao, which in turn is divided into 10 xu. Both hao and xu are worthless. Even though Vietnamese laws requires that all business transactions must be conducted in dong, dollars are accepted everywhere and prices in tourists areas are often listed in U.S. dollars and dong, with dollars being the preferred currency. Denominations: There are 100, 200, 500, 1,000, 2,000, 5,000, 10,000, 20,000, 50,000, 100,000 and 500,000 dong (VND) banknotes. There are also VND 5,000; 2,000; 1,000; 500 and 200 coins and cheques with value of VND 1,000,000 and 500,000.
Exchange rates: dong (VND) per US dollar -20,828 (2012 est.); 20,649 (2011 est.); 18,612.92 (2010 est.); 17,799.6 (2009); 16,548.3 (2008)
The dong is not fully convertible. Even though Vietnamese laws requires that all business transactions must be conducted in “dong”, dollars or used everywhere. Even taxi meters register in dollars. In 1995 the exchange rate with dollar stabilized.
As of December 2005, one U.S. dollar was equivalent to about 15,913 Vietnamese dong (D). The relationship between the U.S. dollar and Vietnamese dong is important because the dong, although not freely convertible, is loosely pegged to the dollar through an arrangement known as a "crawling peg." This mechanism allows the dollar-dong exchange rate to adjust gradually to changing market conditions.
Vietnam's Coins and Currency
The State Bank of Vietnam started issuing notes made from polymer in 2003. The polymer notes are currently printed in denominations of VND10,000, VND20,000, VND50,000, VND100,000, VND200,000 and VND500,000. AFP reported: “New banknotes and coins are being introduced in Vietnam to make life harder for counterfeiters as Vietnam's central bank reaffirmed it is on top of changes in the dong's exchange rate, state media reported. Durable, polymer banknotes made in Australia will replace the existing paper 50,000 dong (three dollar) notes, the most widely forged denomination. For the first time a 500,000 dong note will be put into circulation. Currently the largest denomination is the 100,000 dong note. "Using polymer will help us in the fight against counterfeit money," Le Duc Thuy, governor of Vietnam's central bank told AFP recently. "The choice of this material suits our climate and our tradition of using banknotes." Coins for 200, 1,000 and 5,000 dong will also make a comeback since being shelved in 1985 because of spiralling inflation. The new coins have been made by an unidentified European manufacturer and are said to last 10-15 times longer than notes. [Source: Agence France Presse — December 16, 2003]
Reuters reported: “Polymer-based, counterfeit proof banknotes that were also introduced last month were hit by rumours that the bills would be withdrawn because they had no year of issue printed on them. Then jewellery shops complained that their counting machines couldn't read the new notes. The central bank has been forced to issue stern admonitions. "Any individual who refuses to circulate the bank notes issued by the State Bank of Vietnam will be named as a lawbreaker and will face tough punishments," deputy governor Nguyen Thi Kim Phung said last month. In addition to a new 500,000 dong note, Vietnam also circulated a new design of its 50,000-dong note. [Source: Reuters, January 30, 2004 /:]
In January 2004, Reuters reported: New coins introduced by Vietnam's Central Bank are being gobbled up — not by collectors, but rather by children who swallow them after mistaking them for sweets. Since three coins were made available in mid-December after a two-decade absence, doctors have treated at least 17 children for swallowing them. Over the recent Lunar New Year holidays, six children aged between two and 10 were treated in the central province of Quang Nam after swallowing coins, the Tuoi Tre (Youth) newspaper reported on Thursday. Money is a traditional good luck gift for children during the festival. The mishaps are an unforeseen headache for Vietnam's central bank, which had hoped the coins would promote the use of vending machines and other conveniences. The launch of Vietnam's new money has faced other glitches. /:\
In August 2000, Voice of Vietnam reported: “A new bank note with the denomination of VND100,000 will be circulating in Vietnam as of September 1 this year. The State Bank of Vietnam announced the Prime Minister’s decision at Wednesday’ news briefing in Hanoi. The Deputy Governor of the State Bank of Vietnam, Nguyen Thi Kim Phung told VOV News about the purpose of the new bank note, "The new bank note worth VND100,000 originated from the necessity for notes of greater value. They also enable the State Bank to gradually withdraw issued payment bonds of low face value to lower costs of printing and delivery." [Source: Voice of Vietnam, August 31, 2000 ||||]
“Vietnam has circulated payment promissory notes worth from VND100,000 to VND5,000,000 since 1992 to reduce the economy’s pressure of cash supply. Therefore, with the new bank note, the State Bank of Vietnam will gradually withdraw promissory notes less than VND500,000. In addition, the new bank note meets high technical criteria against copying and counterfeit. It is the first time that Vietnam has used the technology of mercurial color inking and printing, a safety metal thread and top quality printing paper in combination with technical factors. ||||
“Ms Kim Phung says the issuance of the new bank note of VND100,000 is not designed to increase the volume of money circulated in the market, but to expand the structure of the currency denominations in circulation to meet the demand of the current economy. It matches the Government’s decree on non-cash payment and the State Bank of Vietnam’s draft decree on payment. This does not affect monetary policy, interest rates, investment and transactions. The new bank note of VND100,000 facilitates the circulation of money and payment, safe delivery costs, transportation, and preservation as well as enhancing the value of the VND in both technical and cultural aspects. |||
Counterfeit Money in Vietnam
Under Vietnam’s Penal Code, anyone who makes, possesses, transports and/or circulates fake bills will be sentenced to three to seven years in prison. In an “extremely severe” case, the terms will be extended to up to 20 years or even a life sentence. The violators can be fined VND10-100 million, and/or have part or all of their properties confiscated. The amount of fake money collected in the state treasury and banking system plummeted by 42.83 percent in the first half of 2013, from 2012 and 51.33 percent from the same period in 2011, the central bank said, noting that the seized fake polymer notes could be identified easily with hands and eyes by checking security features. [Source: Thanh Nien, August 5, 2013 //\ ]
Until fairly recently circulating counterfeit money was a crime punishable by death in Vietnam. In 2004, Associated Press reported; “Vietnam executed a woman convicted of circulating counterfeit Vietnamese currency, an official said. Tran Thi My Ha, 31, stood before a firing squad early Tuesday in central Quang Nam province, some 850 kilometers (530 miles) south of Hanoi, said Pham Van Xu, a provincial People's Court official. Ha was convicted of circulating 1.45 billion dong (US$92,350) in fake currency between 2000 until she was arrested in May 2002, Xu said. Her plea for clemency was rejected by President Tran Duc Luong in October, he said. [Source: The Associated Press, November 17, 2004]
In August 2012, Thanh Nien reported: “Border guards in the northern province of Lang Son have arrested a Vietnamese man for allegedly smuggling counterfeit Vietnamese notes valued at a total of VND620 million (US$29,184) from China to Vietnam. The anti-drug and smuggling team from the Tan Thanh Commune Border Guard Station caught Vu Ngoc Thang, 29, at the Tan Thanh border checkpoint carrying with him a bag of 3,100 fake VND200,0000-denomination polymer notes, Dan Tri reported The border guards said that all the notes were counterfeit. This is one of the biggest counterfeit money smuggling cases detected in Lang Son, which borders China, according to Dan Tri. //\
“Fake notes of the three later denominations have been seized several times over the past two years, with most supplies coming from China. Nearly a year ago, the People’s Court in the northern city of Hai Phong handed down life sentence to Dang Van Thang, 39, and jail terms of 18-20 years to his four accomplices for smuggling counterfeit bills, including VND100,000 and VND200,000 notes, from China and circulating fake money in Vietnam. They were also fined VND125 million in total. Thang and one of his accomplices, Tran Thi Mao, 62, was caught in Lang Son by the provincial police and their counterparts from Hai Phong and Ministry of Public Security, with more than VND280 million in fake notes on December 14, 2011. Their arrest led to the subsequent arrest of the other three. Between April and December 2011, the gang smuggling and circulated in Vietnam notes totaling nearly VND2 billion. //\
In July 2006, Thanh Xuan wrote in Thanh Nien, “The volume of counterfeit euro banknotes circulated in Vietnam has become heavier since early this year, according to an executive of the Ho Chi Minh-based commercial bank. The bank has suggested that people carry out foreign currency transactions at banks to ensure exchange safety. The fake euro banknotes are often made on "unqualified" paper that is not as tough as the real material and can be distinguished by its blurred color. It’s also recommended that people pay attention to security factors su/ch as anti-counterfeit stamps and the safety belt on the bill. The false euro bills are found mainly in €200, €100 and €50 denominations, said Nguyen Quang Triet, head of the Export-Import Bank of Vietnam (Eximbank)’s budget department. He added that the €100 bill was copied the most but the printing technique used to make the false €200 note was much better than the rest. To face a flow of faked foreign currency into Vietnam, the banks have increased cooperation in the sector with foreign banks to update information on the counterfeit money and exchange professional abilities. [Source: Thanh Xuan, Thanh Nien, July 28, 2006]
Macroeconomics in Vietnam
Vietnam is a poor country with a relatively small, protected economy. It relies on agriculture and the state sector. The Vietnamese government has been described its economic system as a "multi-sectoral, socialist,-oriented market economy with a state-oriented sectors, playing a leading role." Economists say that if Vietnam wants to grow it needs to expand the private sector and this has been happening to some degree. The private sector accounted for 60 percent of Vietnamese’s economic output in 2001, and the state. 40 percent. In the early 1990s the figures were reversed.
William Pesek Jr. wrote in Bloomberg News, “On any list of future Asian tiger economies, Vietnam has a place at the top. It has a high growth rate close to China's, it boasts an emerging middle class and is even winning some foreign investment. Vietnam also is embracing globalization on its own terms. It wants the benefits that come from the free movement of capital, goods and people, but not a McDonald's or 7-Eleven on every corner. This go-slow approach may help Vietnam's people avoid the boom-and-bust cycles that have slammed so many others in Asia. [Source: William Pesek Jr., Bloomberg News, June 2, 2003]
GDP — composition by sector: agriculture: 21.5 percent; industry: 40.7 percent; services: 37.7 percent (2012 est.). In 2004 the contributions to GDP by sector were as follows: agriculture, 21.8 percent; industry, 40.1 percent; and services, 38.2 percent.
Vietnam has relied on natural resources and unskilled labour to achieve rapid growth but the country's leaders now want a more advanced system of production based on technology and "high-quality human resources". While Vietnam has made a full transition to a market economy the communist government remains firmly entrenched. Vietnam's "market economy within a socialist framework" or "market socialism" is similar to "Market-Leninism" in China. China has been a model for Vietnam both in terms of setting up its socialist economy and making reforms.
In the mid 1990s a communist official and former revolutionary told National Geographic Marx had never said people had to be poor. "Poverty is more threatening to society than wealth." When asked if he was bothered by the fact that so many new discos were opening, he replied, "even I used to go dancing when I was 18!" Another communist official said, "If they go too fast in economic growth, they'll be more smuggling, prostitution, bullying, and economic discrepancies. If it is too slow, foreign investors will pull out."
Vietnam promotes itself as an alternative to China. Its labor costs are even lower than those of China. It’s go slow approach has made it immune to boom and bust cycle that were so disastrous in the Asian economic crisis in 1997. Overseas Vietnamese who have made money and had success have played a role in heling Vietnam prosper as they understand both Vietnam and the outside world.
See Separate Article on Business in Vietnam
Vietnam’s Macroeconomic Situation in the 2010s
Agriculture's share of economic output has continued to shrink from about 25 percent in 2000 to less than 22 percent in 2012, while industry's share increased from 36 percent to nearly 41 percent in the same period. State-owned enterprises account for roughly 40 percent of GDP. Poverty has declined significantly, and Vietnam is working to create jobs to meet the challenge of a labor force that is growing by more than one million people every year. [Source: CIA World Factbook]
The global recession hurt Vietnam's export-oriented economy, with GDP in 2012 growing at 5 percent, the slowest rate of growth since 1999. In 2012, however, exports increased by more than 18 percent, year-on-year; several administrative actions brought the trade deficit back into balance. Between 2008 and 2011, Vietnam's managed currency, the dong, was devalued in excess of 20 percent, but its value remained stable in 2012. Foreign direct investment inflows fell 4.5 percent to $10.5 billion in 2012. Foreign donors have pledged $6.5 billion in new development assistance for 2013. Hanoi has oscillated between promoting growth and emphasizing macroeconomic stability in recent years. [Source: CIA World Factbook]
In February 2011, the Government shifted policy away from policies aimed at achieving a high rate of economic growth, which had stoked inflation, to those aimed at stabilizing the economy, through tighter monetary and fiscal control. Although Vietnam unveiled a broad, "three pillar" economic reform program in early 2012, proposing the restructuring of public investment, state-owned enterprises, and the banking sector, little perceptible progress had been made by early 2013. Vietnam's economy continues to face challenges from an undercapitalized banking sector. Non-performing loans weigh heavily on banks and businesses. In September 2012, the official bad debt ratio climbed to 8.8 percent, though some independent analysts believe it could be higher than 15 percent. [Source: CIA World Factbook]
Reserves of foreign exchange and gold: $20.9 billion (31 December 2012 est.), country comparison to the world: 57; $14.05 billion (31 December 2011 est.).
Debt — external: $41.85 billion (31 December 2012 est.). country comparison to the world: 61; $39.63 billion (31 December 2011 est.) In 2004 external debt amounted to US$16.6 billion, or 37 percent of gross domestic product (GDP).
Vietnam, a Model for the Developing World
Population below poverty line: 11.3 percent (2012 est., CIA World Factbook). According to the World Bank the number of poor households decreased from 58 percent in 1993 to below 20 percent in 2004. In that time more than 25 million people escaped poverty.
In the early 1990s, 45 percent of the children in Vietnam were regarded as malnourished and 51 percent of the population ate less than the World Bank's 2,100 calorie a day subsistence level. according to the World Bank. People sifted through the waste products of rice mills to extract bran for animal feed and husks for cooking fires. Buying a can of Coke was a major luxury and expense. Over half the country lived in absolute poverty, compared to 9 percent in China and 15 percent in the Philippines and four million children under the age of five suffer from malnourishment. The legendary North Vietnamese general Gen. Vo Nguyen Giap said: "Before, we launched a war against foreign aggressors. Now we must launch a war against poverty."
The broad based growth in Vietnam in the 1990s and 2000s contributed to rapid poverty reduction across all regions of the country. In 2004, though one in five households lived in poverty, per capita expenditures were steadily rising for all including the ethnic minorities. This has contributed to the economic well being of the population and is reflected in the high Human Development Index and the Gender Development Index relative to other countries at similar levels of development.
Bojana Stoparic wrote in Women's e-news, "On the surface, these policies look successful. Poverty levels in Vietnam have dropped from around 70 percent of the population to less than 20 percent in the past 15 years, according to the World Bank. The country's economy grew by 8 percent in 2006, and average per capita income has increased to $723 in 2006 from $485 in 2003. But a government survey found that the wealthiest individuals earned 12.5 times more than the poorest, who mostly live in rural, remote areas and depend on agricultural production. A disproportionate number of the poor also belong to ethnic minorities. Vietnam introduced fees for both health care and education in the late 1980s, said Faulkner, adding that these policies have particularly penalized women in rural areas. "Families that don't have the money to pay for school fees and supplies are more likely to take girls out of school than boys," she said. Health care costs have rocketed beyond the reach of most poor families and women tend to sacrifice their own health needs to allow their children and husbands to receive services, she added. Vietnam's government remains intolerant of criticism, Human Rights Watch's 2007 World Report finds. In the past year it has persecuted dissidents, restricted public gatherings, controlled access to the Internet and prohibited all free press and independent labor unions. "Vietnam wants to open up economically, but the ruling Communist Party also wants to keep political control," said Faulkner. [Source: Bojana Stoparic, Women's e-news, February 15, 2007]
Economies of the North and South
The north has traditionally been more industrialized than the south. The French launched more industry in the north and than the south and the Communist expanded it. North, South, and Central Vietnam historically were divided by ethnolinguistic differences, but until the midnineteenth century and the beginning of the French colonial period, they were all agrarian, subsistence, and village-oriented societies. The French, who needed raw materials and a market for French manufactured goods, altered these commonalities by undertaking a plan to develop the northern and southern regions separately. The South, better suited for agriculture and relatively poor in industrial resources, was designated to be developed agriculturally; the North, naturally wealthy in mineral resources, was selected as the region in which industrial development was to be concentrated. The separation distorted the basic Vietnamese economy by overly stressing regional economic differences. [Source: Library of Congress *]
In the North, while irrigated rice remained the principal subsistence crop, the French introduced plantation agriculture with products such as coffee, tea, cotton, and tobacco. The colonial government also developed some extractive industries, such as the mining of coal, iron, and nonferrous metals. A shipbuilding industry was begun in Hanoi; and railroads, roads, power stations, and hydraulics works were constructed. In the South, agricultural development concentrated on rice cultivation, and, nationally, rice and rubber were the main items of export. Domestic and foreign trade were centered around the Saigon-Cholon area. Industry in the South consisted mostly of food-processing plants and factories producing consumer goods. The development of exports — coal from the North, rice from the South — and the importation of French manufactured goods, however, stimulated internal commerce.
The entrepreneurial South has traditionally been Vietnam’s economic engine. It generated two thirds of the wealth in the early 2000s. It helps support the government-dominated North by sending nearly 90 percent of its tax revenues to the central government in Hanoi. When the south was getting richer much faster than the north, many Vietnamese worried this would stir up resentments and bring about calls for secession.
The south manages to prosper in spite of efforts by the government to control and soak up its money. Ho Chi Minh City accounted for one third of Vietnam's $15 billion economy in 1995. Business in the area include textile factories and shrimp-processing plants. At that time 80 percent of tax revenue went to the central government. Sometimes state officials from the north have high positions in the factories and business. The per capita income in Ho Chi Minh City in the early 2000s was $810, four times the national average. Dong Nai province on the outskirts of Ho Chi Minh City has the highest growth rates in the country.
David Fullbrook wrote in the Asia Times, “The difference between the public and private sector has a geographic corollary. Around 85 percent of government revenues come from Ho Chi Minh and Vung Tau, an oil town nearby where entrepreneurial spirit is stronger and more aggressive. Yet the north's share of government spending still far exceeds what it contributes. If this were not the case, some observers suspect the economic chasm between the two regions would bear comparison with that between North and South Korea. "I think the south is going ahead in leaps and bounds, the north just plodding along," says the logistician. He, like other foreign investors and managers, remains overwhelmingly optimistic, impressed by a slew of reforms introduced earlier this decade. China's reform and boom, though still very much a work in progress, shows the way for Vietnam. "I think they will continue riding on the coattails of China, they will get into the WTO at the end of 2005. I think what happens in China today, happens here tomorrow," the logistician says. [Source: David Fullbrook, Asia Times, December 2, 2004 ==]
Government and the Economy in Vietnam
The Vietnamese government still retains iron-fisted central planned policies.In 1995, the government banned of conversion of agricultural land to industrial land, and confiscated legal title to all land and prohibited borrowing against land.
The government has learned how to collect taxes to pay for roads, railways, health care, infrastructure projects and other essential services. Analysts have said that the government has to make political and economic reforms if it wnats to stave off unrest.
Like the Chinese government, the Vietnamese government and military are deeply involved in a number of business. The army has built golf courses; the ministry of agriculture sells fertilizer; and the Culture Ministry charges journalists $50 day for guides who earn $100 a month. [Source: Stanley Karnow in Smithsonian magazine]
The Vietnamese economy is shaped primarily by the VCP through the plenary sessions of the Central Committee and national congresses. The party plays a leading role in establishing the foundations and principles of communism, mapping strategies for economic development, setting growth targets, and launching reforms. [Source: Library of Congress *]
Planning is a key characteristic of centralized, communist economies, and one plan established for the entire country normally contains detailed economic development guidelines for all its regions. According to Vietnamese economist Vo Nhan Tri, Vietnam's post-reunification economy was in a "period of transition to socialism." The process was described as consisting of three phases. The first phase, from 1976 through 1980, incorporated the Second Five-Year Plan (1976-80) — the First FiveYear Plan (1960-65) applied to North Vietnam only. The second phase, called "socialist industrialization," was divided into two stages: from 1981 through 1990 and from 1991 through 2005. The third phase, covering the years 2006 through 2010, was to be time allotted to "perfect" the transition. *
The party's goal was to unify the economic system of the entire country under communism. Steps were taken to implement this goal at the long-delayed Fourth National Party Congress, convened in December 1976, when the party adopted the Second Five-Year Plan and defined both its "line of socialist revolution" and its "line of building a socialist economy." The next two congresses, held in March 1982 and December 1986, respectively, reiterated this long-term communist objective and approved the five-year plans designed to guide the development of the Vietnamese economy at each specific stage of the communist revolution. *
Second Five-Year Plan (1976-80)
The optimism and impatience of Vietnam's leaders were evident in the Second Five-Year Plan. The plan set extraordinarily high goals for the average annual growth rates for industry (16 to 18 percent), agriculture (8 to 10 percent), and national income (13 to 14 percent). It also gave priority to reconstruction and new construction while attempting to develop agricultural resources, to integrate the North and the South, and to proceed with communization. [Source: Library of Congress *]
Twenty years were allowed to construct the material and technical bases of communism. In the South, material construction and systemic transformation were to be combined in order to hasten economic integration with the North. It was considered critical for the VCP to improve and extend its involvement in economic affairs so that it could guide this process. Development plans were to focus equally on agriculture and industry, while initial investment was to favor projects that developed both sectors of the economy. Thus, for example, heavy industry was intended to serve agriculture on the premise that a rapid increase in agricultural production would in turn fund further industrial growth. With this strategy, Vietnamese leaders claimed that the country could bypass the capitalist industrialization stage necessary to prepare for communism. *
Vietnam was incapable, however, of undertaking such an ambitious program on its own and solicited financial support for its Second Five-Year Plan from Western nations, international organizations, and communist allies. Although the amount of economic aid requested is not known, some idea of the assistance level envisioned by Hanoi can be obtained from available financial data. The Vietnamese government budget for 1976 amounted to US$2.5 billion, while investments amounting to US$7.5 billion were planned for the period between 1976 and 1980. *
The economic aid tendered to Hanoi was substantial, but it still fell short of requirements. The Soviet Union, China, and Eastern Europe offered assistance that was probably worth US$3 billion to US$4 billion, and countries of the Western economic community pledged roughly US$1 billion to US$1.5 billion.
Third Five Year Plan (1981-85)
By 1979 it was clear that the Second Five-Year Plan had failed to reduce the serious problems facing the newly unified economy. Vietnam's economy remained dominated by small-scale production, low labor productivity, unemployment, material and technological shortfalls, and insufficient food and consumer goods. [Source: Library of Congress *]
To address these problems, at its Fifth National Party Congress held in March 1982, the VCP approved resolutions on "orientations, tasks and objectives of economic and social development for 1981-85 and the 1980s." The resolutions established economic goals and in effect constituted Vietnam's Third Five-Year Plan (1981-85). Because of the failure of the Second Five-Year Plan, however, the Vietnamese leadership proceeded cautiously, presenting the plan one year at a time. The plan as a whole was neither drawn up in final form nor presented to the National Assembly for adoption. *
The economic policies set forth in 1982 resulted from a compromise between ideological and pragmatic elements within the party leadership. The question of whether or not to preserve private capitalist activities in the South was addressed, as was the issue of the pace of the South's communist transformation. The policies arrived at called for the temporary retention of private capitalist activities in order to spur economic growth and the completion, more or less, of a communist transformation in the South by the mid-1980s. *
The plan's highest priority, however, was to develop agriculture by integrating the collective and individual sectors into an overall system emphasizing intensive cultivation and crop specialization and by employing science and technology. Economic policy encouraged the development of the "family economy"; that is, the peasants' personal use of economic resources, including land, not being used by the cooperative. Through use of an end-product contract system introduced by the plan, peasant households were permitted to sign contracts with the collective to farm land owned by the collective. The households then assumed responsibility for production on the plots. If production fell short of assigned quotas, the households were to be required to make up the deficit the following year. If a surplus was produced, the households were to be allowed to keep it, sell it on the free market, or sell it to the state for a "negotiated price." In 1983 the family economy reportedly supplied 50 to 60 percent of the peasants' total income and 30 to 50 percent of their foodstuffs. *
Free enterprise was sanctioned, thus bringing to an end the nationalization of small enterprises and reversing former policies that had sought the complete and immediate communization of the South. The new policy especially benefitted peasants (including the overwhelming majority of peasants in the South) who had refused to join cooperatives, small producers, small traders, and family businesses. *
The effort to reduce the capitalist sector in the South nevertheless continued. Late in 1983, a number of import-export firms that had been created in Ho Chi Minh City (formerly Saigon) to spur the development of the export market were integrated into a single enterprise regulated by the state. At the same time, the pace of collectivization in the countryside was accelerated under the plan. By the end of 1985, Hanoi reported that 72 percent of the total number of peasant households in the South were enrolled in some form of cooperative organization. Despite the plan's emphasis on agricultural development, the industrial sector received a larger share of state investment during the first two years. In 1982, for example, the approximate proportion was 53 percent for industry compared with 18 percent for agriculture. Limiting state investment in agriculture, however, did not appear to affect total food production, which increased 19.5 percent from 1980 to 1984. *
The plan also stressed the development of small-scale industry to meet Vietnam's material needs, create goods for export, and lay the foundation for the development of heavy industry. In the South, this entailed transforming some private enterprises into "state-private joint enterprises" and reorganizing some small-scale industries into cooperatives. In other cases, however, individual ownership was maintained. Investment in light industry actually decreased by 48 percent while investment in heavy industry increased by 17 percent during the first two years of the plan. Nonetheless, the increase in light-industry production outpaced that of heavy industry by 33 percent to 28 percent during the same two-year period. *
The July 1984 Sixth Plenum (Fifth Congress) of the VCP Central Committee recognized that private sector domination of wholesale and retail trade in the South could not be eliminated until the state was capable of assuming responsibility for trade. Proposals therefore were made to decentralize planning procedures and improve the managerial skills of government and party officials. *
These plans were subsequently advanced at the Central Committee's Eighth Plenum (Fifth Congress) in June 1985. Acting to disperse economic decision making, the plenum resolved to grant production autonomy at the factory and individual farm levels. The plenum also sought to reduce government expenditures by ending state subsidies on food and certain consumer goods for state employees. It further determined that all relevant costs to the national government needed to be accounted for in determining production costs and that the state should cease compensating for losses incurred by state enterprises. To implement these resolutions, monetary organizations were required to shift to modern economic accounting. The government created a new dong in September 1985, and set maximum quotas for the amount permitted to be exchanged in bank notes. The dong also was officially devalued. *
Fourth Five-Year Plan (1986-90)
The central economic objectives of the Fourth Five-Year Plan were to increase production of food, consumer goods, and export goods. Increasing food production was of primary importance. Grain production was targeted to reach 22 to 23 million tons annually by 1990, and rice production was planned to total 19 to 20 million tons annually. Combined output for subsidiary crops was established at about 3 million tons annually. Planned annual per capita food production was set at 333 to 348 kilograms, and an effort was initiated to bring subsidiary food crops (corn, sweet potatoes, manioc, and white potatoes) into the people's diet. [Source: Library of Congress *]
Grain-production policy was accompanied by measures dealing with land use, water conservation, Mekong Delta irrigation works, Red River Delta dike consolidation, fertilizer imports, pest control, animal husbandry, tractor use, and seed production. The plan also stressed the cultivation and harvesting of marine products and the development of short-term industrial crops (crops that can be planted and harvested in a single growing season and that require some form of processing before being marketed, such as beans, peanuts, and oil-bearing crops) and long-term industrial crops (crops that also include a processing stage but that require a lengthy period of cultivation, such as coffee, tea, pepper, and coconuts). The government also identified forestry as an important sector of the economy to be developed. *
Production of consumer goods was improved in order to meet the basic needs of the people, to balance goods and money, to create jobs, and to develop an important source of capital accumulation and export commodities. The volume of consumer goods produced was expected to increase by an average annual rate of 13 to 15 percent, compared with the 11.3 percent average annual increase recorded during the Third Five-Year Plan. Adequate incentive policies for raw materials production were deemed critical to the development of high-quality consumer goods for internal consumption and export. Priority in using foreign exchange was to be given to importers of needed raw materials. The plan also sought to protect domestic production of consumer goods and to emphasize local production of goods over imports. *
In order to obtain the foreign exchange needed to fulfill import requirements and to carry out trade agreements with other countries, the government scheduled a major increase — 70 percent above the previous plan's target — in the volume of exports. Under the Fourth Five-Year Plan, particular emphasis was to be given principal products such as processed agricultural goods, light industry, handicraft goods, and fish products. *
Privatization in Vietnam
Vietnamese state firms undergoing a process called "equitization” transfer most company shares to private hands and the state typically retains a minority stake of 20 percent. Margot Cohen wrote in the Far Eastern Economic Review, “ The process is essentially the same as privatization, but that remains a dirty word in Vietnam. Over the past decade, 710 Vietnamese state companies have passed into private hands. But the pace is slowing, with just 132 companies taking the plunge in 2001 compared to 212 last year. At this rate, it looks unlikely that Vietnam will reach its target of transforming more than 1,800 out of the nation's 5,571 state-owned companies by 2003, mainly because so many managers remain resistant to change. They know their heads will be on the block if profits don't improve. But there are some pioneers worth watching, as they grapple with the pressures of adapting to the marketplace. [Source: Margot Cohen, Far Eastern Economic Review, December 20, 2001]
A few decades ago, everything was owned by the state. Even In mid 1990s, people he had to work predominantly for the government because there were few opportunities in the private sector. Now the private market is just as powerful. There are private hotels, factories and industrial zones. In December 2006, Prime Minister Nguyen Tan Dung approved a list of 71 major state-owned enterprises, including national carrier Vietnam Airlines, that will be partially privatized between then and the year 2010. There are an estimated 2,000 state-owned enterprises, down from some 12,000 in the mid-1980s, when Vietnam began economic reforms. [Source: Kate McGeown, BBC, November 27, 2006]
In June 2011, Reuters reported: “The Vietnamese government will accelerate privatisation of state-owned companies, Deputy Prime Minister Nguyen Sinh Hung said, signalling plans to loosen the state's grip on key parts of the economy. Hung said that the "equitisation", or privatisation, of state-owed enterprises had been slow in recent years because of the economic downturn and sluggish stock markets, but he said the government would speed up the pace and even sell stakes in its biggest firms, known as economic groups. "If we can keep macroeconomic development at a rapid pace in the next five years, most big state-owned groups and companies will be equitised," he said. [Source: Reuters, June 9, 2011 ]
Investors have been eagerly awaiting the privatisation of select state-owned companies, like telecoms operator Mobifone, saying it will help improve the structure of the economy and give the country's stock markets more depth. Victoria Kwakwa, the World Bank's country director in Vietnam, said the comments showed "renewed commitment" on the part of the government to reform state firms. "The government is going to have a stronger oversight role," Kwakwa told Reuters. "It's very much a government effort to make the economy more efficient, more productive. They are moving in right direction to subject SOEs to competition and efficiency." The default last year of state shipbuilding conglomerate Vinashin on a $600 million international loan surprised analysts who had expected the government to intervene even though there was no explicit guarantee. The government has come under heavy criticism domestically for letting Vinashin amass a mountain of debt unchecked and come to the brink of bankruptcy. Economists say the inefficient use of capital funnelled into state-owned companies contributes to Vietnam's inflation problem.
Jason Folkmanis of Bloomberg News wrote: “As of September, Vietnam had cut the number of government-owned companies in the country to fewer than 3,200 from more than 5,600 in 2001, based on World Bank figures .But the country's banking system faces a high level of bad debt in part because of loans to state companies, according to a government report given at a meeting. Vietnam’s target of high growth could be jeopardized by the government's retention of a controlling interest in the majority of larger state companies, a statement by the U.S. delegation to the meeting said. [Source: Jason Folkmanis, Bloomberg News, December 7, 2005 ^^^]
"The dominance of the state sector continues to crowd out capital that could otherwise be used by the private sector," it said. "We urge the government to reconsider its decision to retain control over many state-owned enterprises, to address the debt issue, and to significantly expand the role of the private sector." The development of privately held companies is essential if Vietnam is to maintain its level of economic growth, the European Union said in its statement to the meeting. "Continued support for non-competitive state-owned enterprises will drain resources and hinder economic development," it said. "The process of reform of state-owned enterprises needs to be accelerated if Vietnam's ambitious economic growth targets are to be achieved." ^^^
Vietnam's policy is to retain full ownership of industries considered important to public security and national defense, and of those where other businesses cannot or do not want to participate, the National Steering Committee for Enterprise Reform and Development told the meeting. For other state-owned companies, government policy is to attract foreign investment, it said. Khoan cited the sale of shares in the Vietnamese dairy products company, Vinamilk, as an example. Still, the sale of shares in more than 2,400 state companies in the last five years, "accounts for only 10 percent of the total capital of state-owned enterprises," the U.S. statement noted. ^^^
In January 2007, Associated Press reported: “Vietnam's ruling Communist Party and the military will relinquish control of dozens of companies, ranging from hotels to telecoms, as part of an ongoing government overhaul, officials said. The 160-member Central Committee decided to transfer the companies managed by the Party and the armed forces to the state, said Dao Duy Quat, deputy director of the party's Ideological and Cultural Commission. He said the move is part of overall government restructuring that will push Vietnam toward a market economy. However, the armed forces, including the military and police, will maintain control of some companies that are directly related to national defense and security, he said. It's still unclear how many businesses will be transferred, but the process must be completed by the end of this year, Quat said. The Defense Ministry, the country's most powerful sector, manages more than 100 businesses, ranging from hotels and garment factories to banking and construction companies. It owns the Viettel mobile phone company, one of the country's largest operators. [Source: The Associated Press, January 31, 2007]
China Versus Vietnam as a Place to do Business
Wittaya Supatanakul wrote in the Bangkok: “When it comes to China and Vietnam, the following comparison could be helpful for those wondering which offers the better value and greater return. From the information available to me in my dealings with customers, especially investors from Taiwan, here are some of the key differences between the two countries: 1) Preferred businesses: Vietnam welcomes large corporations, as well as small and medium-sized investors, whereas in China the red carpet is laid out primarily for large multinationals with deep pockets and good connections. [Source: Wittaya Supatanakul, Bangkok Post, September 22, 2007 ]
2) Labor costs: The costs of labor are about the same but China's cost structure is on the upward trend, while in Vietnam, the cost rises only once every few years. For example, over the past 10 years, wages rose only once in April this year from $35-45 a month to the current level of $45 to $55.
3) Incentives: As for privileges offered for raw materials imported for production, Vietnam gives a tax break of nine months while China collects 17 percent when goods are imported and returns 9 percent when the products are exported. The remaining 8 percent is returned in the future, but in reality the funds are asked to be donated to local organizations that are underprivileged and it is difficult to say no; therefore, doing business in China ends up being more expensive.
4) Currency value: The Vietnamese dong has had a tendency to depreciate and over the past four years it has weakened by 1 percent annually. The yuan, on the other hand, has been appreciating against the US dollar and Beijing is under intense pressure from the United States and European countries to float its currency.
5) Dumping problems: China faces various anti-dumping measures from countries such as the United States and the European Union but Vietnam sees its products welcomed, especially by European countries. This has caused a lot of companies in China, such as furniture and candle producers, to close shop and move to Vietnam.
6) Tax rates: The tax rates in both countries also make a difference. As a member of the 10-member Asean, Vietnam has the advantages that China does not have. Import and export taxes are therefore lower and transport and logistics are more convenient and cheaper as it is closet to Thailand.
7) Policies: The policies of the central and provincial governments are in line with each other in Vietnam, but in China this is not always the case. In one case, the court in Beijing allowed Thai businessmen to invest in Shenzhen but the local administration in the province blocked the move, citing local laws.
Apart from these advantages, Vietnam has lots of natural resources such as seafood, ores, crude oil and natural gas. It also exports farm products in large volumes such as rice (second-largest in the world), coffee (second after Brazil), cashew nuts (second to India), pepper (world's largest), frozen food (sixth largest in the world), and tea leaves (seventh largest). These strengths, coupled with the highly efficient workforce in Vietnam, have help attract some of the labor-intensive industries out of the various countries in this region. Other areas that investors could look to tap into are the automobile industry. Although right now car sales in Vietnam are not very high, they are increasing every year and the area that is really booming is the motorcycle market. Currently, there are 20 million motorcycles in Vietnam and the number is increasing by two million a year. Thai entrepreneurs can look to tap this growing market by supplying parts and accessories, exporting or building clusters of factories.
Vietnam Charges Currency Trader with Death for Losing $5.4 Million
In 2006, United Press International reported: “Vietnam has charged a woman who ran a national bank's currency desk with a capital crime because some of her deals resulted in a loss. Nguyen Thi Quynh Van, until this March the deputy head of trade financing at a branch of Industrial and Commercial Bank of Vietnam, one of Vietnam's biggest state-owned banks in Hai Phong, reportedly lost $5.4 million in currency deals with three foreign banks. Now she is under arrest for "losing state resources through economic mismanagement" — a crime that could put her in front of a firing squad. At its root, Van's troubles appear to stem from a turf war between the State Bank of Vietnam, formally responsible for financial regulation but politically impotent, and the Ministry of Public Security, which controls the police and is very powerful. [Source: United Press International, August 9, 2006]
Bill Hayton of the BBC News reported: “There cannot be many places in the world where you can get shot for losing money on a foreign exchange deal, but Vietnam is one of them. That is the situation potentially facing Nguyen Thi Quynh Van. Until March this year, she was the deputy head of trade financing at a branch of one of Vietnam's biggest state-owned banks in the port city of Hai Phong. Now she is under arrest, having been charged with "losing state resources through economic mismanagement" — a crime that carries the death penalty in Vietnam. She is alleged to have lost $5.4m in a series of speculative currency deals with at least three foreign banks based in Vietnam — in particular the Dutch bank ABN Amro, one of the 20 biggest banks in the world. [Source: Bill Hayton, BBC News, August 8, 2006 +]
“There are four members of ABN Amro's staff currently under arrest — and one of them, according to his supporters, has been held by the police without charge or access to a lawyer for four months. The general manager of ABN Amro in Vietnam, a Vietnamese-American, has been banned from leaving the country. The bank insists that both it, and its staff, are innocent. "ABN Amro believes the trades [with Incombank] were valid and all the trades were settled," it says in a statement. But Incombank insists that a crime has been committed. "Many kinds of currency have been illegally withdrawn and it is our policy that once someone has intentionally caused damage to our company, they have to be responsible for the return of what they have taken," one official in the bank's legal department says. +\
“At one level, the case rests on the interpretation of part of a directive issued by the State Bank of Vietnam seven years ago, but not implemented until last month. Under Decision 101/QD-NHNN of 23 June 1999, foreign exchange dealers have to register with the State Bank of Vietnam. But the Incombank official argues that did not happen. "The people involved at our branch weren't registered, and persons at the other bank knew about this and still undertook transactions with them, so it's clear that they were wrong as well," the official says. Foreign lawyers with knowledge of the case argue, however, that that part of the Decision was intended to apply to banks selling currency to the public — not to deals done between banks. +\
“They point out that the State Bank only sent out a letter to banks asking them to register their traders last month, well after this case had become controversial. The State Bank is remaining unusually quiet about the whole case. No one is prepared to speak on the record. "The State Bank is not taking part in the investigation because it is not the Bank's function," says a senior official, on condition of anonymity. "It is the responsibility of the Police Economic Crime Department. We have to wait for the results of their investigation." +\
Political-Economic Implications in Vietnam of the Death Charge Against the Currency Trader
Bill Hayton of the BBC News reported: “This is no simple tale of a rogue trader being brought to book. This case is about where political power lies in modern Vietnam and ultimately about whether it can succeed in transforming itself from a country governed by the rule of the Communist Party into one governed by the rule of law. Trying to find out exactly what is going on is extremely difficult. Very few people will risk talking to the media either on the record or in private. [Source: Bill Hayton, BBC News, August 8, 2006 +]
"This case is making representatives of foreign companies in Vietnam very nervous because there is such a lack of information," says Adam Sitkoff, executive director of the American Chamber of Commerce in Hanoi. That is because the response of Ms Van's employers, the Industrial and Commercial Bank of Vietnam — Incombank for short — has been to sue ABN Amro for the return of the $5.4m. +\
“Privately, several people with knowledge of the case say they believe the State Bank has already carried out an internal investigation of the whole case and decided that ABN Amro had not broken any laws. So if that is true, why is the police pursuing the case? The answer, according to foreign lawyers and bankers with knowledge of the situation, is that real power in Vietnam doesn't lie with the people and institutions that are formally given that power in law. Real power still lies with the Communist Party, and that power responds to lobbying from state-owned institutions and individuals who have strong private connections with influential people. So although the State Bank of Vietnam is formally responsible for financial regulation, it is virtually powerless in comparison with the Ministry of Public Security, which controls the police force. And since the judicial system is similarly controlled by the Party, there is little expectation that the case will be settled on its merits in the courts. +\
“All of this suggests that foreign companies might become rather more wary of doing business with Vietnamese state-owned businesses. The chairman of the American Chamber of Commerce, Tom O'Dore, says in a recent statement that he is concerned by the "criminalisation of normal business transactions, and the lack of involvement by the State Bank in legal proceedings involving financial institutions". "The first could freeze business in Vietnam," he says. "The second could negatively impact Vietnam's financial markets in general — and foreign exchange markets in particular." Legal experts in Hanoi say that in similar cases in the past foreign businesses have backed down and paid up, but ABN Amro appears to be digging in its heels for a fight. The outcome could have profound implications both for doing business in Vietnam, but also for the fate of political and legal reforms in the country. As one foreign businessman says: "People's impressions are that representatives of a foreign bank are being wrongly arrested and held hostage in order to protect staff in a state-owned bank who may be facing a firing squad." +\
Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, Vietnamtourism. com, Vietnam National Administration of Tourism, CIA World Factbook, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Global Viewpoint (Christian Science Monitor), Foreign Policy, Wikipedia, BBC, CNN, Fox News and various websites, books and other publications identified in the text.
Last updated May 2014