Brian Sepe, Paving the Way to a Better Vietnam: The Promise of Doi Moi

Introduction

With the defeat of the French at Dien Bien Phu in 1954, the country of Vietnam was divided between North and South at the Geneva Conference. The Republic of Vietnam and the Democratic Republic of Vietnam emerged from the conference differing politically and economically.  

In the North, a major emphasis was put on socialist transformation in all sectors.   This strategy was based upon similar systems implemented by the Soviet Union and China.   The arrangement put a great emphasis on state-controlled agriculture and   collectivization of peasants.   In the industrial sector, the few large corporations turned control over to the state. Due to a high level of investment, particularly in developing industries such as metal, mechanical engineering, fertilizer production, and mineral extraction, industrialization vastly improved.   Despite these increased levels of output, people of the North remained poor and impoverished.   Capitalism ruled in the South, providing room for private industries to grow.   This was especially true in the manufacturing sector.   Despite the differences between the two regions, both relied heavily on foreign aid.   The North received economic aid from China and the Soviet Union, while the South relied on American investment.  

After Saigon fell in 1975, the country was again unified, this time under the policies of North Vietnam.   Under the new planned economy, the large manufacturers of South Vietnam were to be joined with the predominantly agricultural-based North in a balanced economy.   A plan to be a fully unified economy by the year 1980 was the ultimate goal of the communist party. The economy, however, did not meet these lofty expectations.   Chinese investment stopped in 1978, with western investment coming to a halt a year later.   Outside investments dwindled because of failed crop productions and renewed Vietnamese military conflicts with Cambodia and China.   The U.S. embargo isolated Vietnam from international trade, leaving the current economic policies unable to sustain growth.   Due to lack of efficient production and limited government cash flows, The Socialist Republic of Vietnam was forced to renovate its economic policy.   This reformation period, known as doi moi , gradually moved Vietnam from a centrally planned to a market economy.   The current state of Vietnam today is a hybrid of the two economic systems.   As a result of the Asian Financial Crisis in 1997, decreased foreign investment, and   corruption and lack of stability, obstacles continue to deter Vietnam’s quest to achieve a balanced, stable economy.  

Doi Moi

Since the introduction of Doi Moi by the sixth party congress in 1986, Vietnam has seen remarkable economic growth.   This has been possible mainly due to stringent economic reforms.   First, it is crucial to understand that the origin of these changes came from a growing majority of younger members of the party congress who had never experienced the revolutionary ideology and had witnessed the consequences of a socially planned economy.   In the mid 1980’s, wages were very low, with an overwhelming 80 percent of the labor force in the agricultural sector.   With much resistance from the previously capitalist South, the effort to fully implement a centrally planned economy failed to produce sound economic results.

The Foreign Investment Law, passed in 1987 and implemented the following year, completely liberalized former socialist policies.   It allowed

•  100 percent foreign ownership of businesses in Vietnam. as well as

•  foreign repatriations (meaning foreigners were permitted to conduct business in-country and send profits home ), and

•  tax breaks and investment for technology, consumer goods, and processing of raw materials.

By 1996, this reform had culminated in $8.5 billion USD in project commitments and comprised approximately one-third of Vietnam’s total investment effort.

In March 1988, Resolution 10 was passed, furthering the development of reform in Vietnam.   This resolution abolished collectivization of agriculture and paved the way for agricultural growth.   The government distributed land to households, which in turn were given full authority in production and investment.   With the abolition of government contracts, goods could now be sold at market prices to the public as well the state. These reforms were further broadened in 1992 when land-use rights were extended.    Farmers could now hold onto land for up to 75 years.   Liberalization of agriculture produced quick, impressive results.   Vietnam is now the world’s third largest importer of rice, when it previously had been a net importer.

Another aspect of the Vietnamese economic infrastructure in dire need of renovation was the banking system.   Up until 1988, one lone bank controlled the money supply throughout the country.   This central bank was the sole financier of the national budget while simultaneously funding state-run enterprises.   The introduction of a two-tiered banking system called for a central bank and state-owned commercial banks whose main function would be to lend money to qualifying firms of that commercial sector.   This would allow the main central bank more time to focus on balancing the budget and controlling interest rates.   Under this transformation, Vietnam posted positive real interest rates for the first time in March 1989.

Economic growth soared in the early nineties.   The privatization of firms and the relinquished power from the state provided the foundation for this dramatic growth.   Foreign investment resumed and Vietnam became a global trading country.   Foreign investment has been attracted by an abundance of cheap labor with the prospect of a higher average rate of return for the investor.   Inexpensive labor costs are ideally what attracted foreign firms to invest in Vietnam.    The country that supplies the labor (in this case, Vietnam) stands to gain a higher rate of employment and wage rate, which produces a higher cash flow back into the economy.   Consequentially, the high levels of foreign investment have ignited growth.  

In 1995, Vietnam joined the Association of Southeast Asian Nations (ASEAN), becoming the first communist member.  

Originating in 1967, ASEAN’s main goal was to initiate trade within its membership nations with minimal restrictions. ASEAN membership currently consists of the following ten nations: Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.  

Vietnam also committed itself to contributing to the ASEAN Asian Free Trade Area (AFTA) and signed a bi-lateral trade agreement with the United States in 2000.     The main goals of AFTA are to

•  increase trade between ASEAN countries by removing regional trade barriers,

•  Reduce tariffs on all commodities to 0-5 percent for all ASEAN countries, yet maintain current tariffs with the rest of the world, and

•  Increase competitiveness among developing ASEAN countries.

One particular problem facing Vietnam is the certain prospect of competition from neighboring countries.    As of publication of this document, Vietnam continues to lag behind in areas of manufacturing.   The lack of adequate machinery and training leaves Vietnam at a slight disadvantage.

In Vietnam, my classmates and I marveled at the abundance of cell phones.   “That girl has a nicer phone than I do,” I heard one of my classmates say.   Because of the Asian Free Trade Area (AFTA) incorporated by the ASEAN countries, it appears cell phones manufactured in Asia can be purchased in other Asian countries with minimal taxation.   Additionally, Vietnam has a much smaller land mass than does the United States, meaning fewer cell towers to be constructed.  

After President Clinton’s removal of the trade embargo with Vietnam, quality goods flooded into Vietnam’s market.   During our visit to Vietnam this past March, American commodities such as Coca-Cola® soft drinks and Marlboro® cigarettes were sold at numerous stands, stores, and restaurants.   In every city we visited, numerous curb-side shops posted Kodak® film signs; in Saigon. Kentucky Fried Chicken and Baskin Robbins have both opened franchises.   In 2002, with the approval of the United States Bi-lateral Trade Agreement (USBLTA), a diplomatic relationship between these two former enemies was formed.

While touring Vietnam in March 2003, Tony Nong, part owner of Ann’s Tours located in Saigon, shared with my classmates and me his life story.      After the fall of Saigon, Tony and his brother Tim left Vietnam for America and in the process lost contact with their mother for sixteen years.   Upon reuniting with their mother, the two brothers returned to their native country and founded Ann’s Tours, a privately owned company specializing in trip packages to Southeast Asia   In our discussion with Tony, he spoke optimistically about the current state of Vietnam and its future progress towards a free-market economy.   Their story is one of perseverance, dedication and love, and is a clear example of Vietnam’s transformed economy.   Tony said that, “Vietnam still has a long way to go, but now that many Vietnamese have experienced benefits of a free-market economy, the government has no choice but to push forward.”   Economic growth has slowed in recent years, however, due in large part to the Asian Financial Crisis.

The Asian Financial Crisis

Southeast Asia was violently shaken by economic crisis in July 1997.   This fiasco had an enormous impact on the economic growth of Vietnam .   The crisis originated in Thailand, beginning with the floating of the baht by the Thai Government.   This means that the purchasing power of the baht was incorrectly valued when its rate was fixed.   When allowed to float, market forces drove the value of the baht down.   The propping up of the baht by the Thai government resulted in a diminution of its foreign reserves.   With uncertainties surrounding the Thai economy, foreign confidence from surrounding nations declined.   Because of Thailand’s direct involvement with other ASEAN nations, the crisis quickly spread.     In economics, this is known as the “bandwagon effect.”   In further explaining this theory, money managers are compensated in direct relation to how   well their peers perform.   This induces money managers to make similar decisions, which in this case was withdrawn investment.   Due to this decreased level of confidence by foreign investors, Vietnam and other countries suffered substantially slowed economic growth.   Consumption levels dramatically decreased, as did foreign levels of investment .    Since then, growth has resumed, although not at the pace it once had.   Experts are inclined to suggest Vietnam still possesses the ability to emerge as a dominant industrial nation, although many factors including urbanization and education must develop accordingly.

Urbanization

In the decade following unification, urbanization decreased due to the migration of people to rural areas.   This was caused by the new centralized government’s re-education policy, the destruction of cities, and lack of employment opportunities.   The old-style socialist model threatened social development.   From 1980, urban development expanded rapidly, but the state’s urban management committee lacked experience and knowledge to deal with the situation.   The main cities in Vietnam that incurred substantial growth were Hanoi, Ho Chi Minh City, Da Nang, and Hai Phong.   An estimated 60 percent of revenue was created in urban settings, with the people living in cities consuming about half of the expenditures of the state despite the fact that 70 percent of the labor force resided in rural areas.   Gross Domestic Product (GDP) for HCM city was 12.5 percent in 1993, while the rest of the country accounted for only 8 percent GDP.   This magnifies the important role the industrial sector played throughout the transformation.    Currently, as a percentage of GDP, industrial value is increasing, while the agricultural contribution is decreasing in importance.  

In 1996, HCM city included nearly one million unregistered people who traveled great distances from rural areas and distant provinces.   Many workers remained unregistered, and without any form of social security, owing to the strict criteria for registration and residency.   School health care facilities and administrators are required to register with the government.    This further exacerbates the disparity between urban dwellers and their rural counterparts.

Because of a lack of specific knowledge on urban planning, the government unwillingly relinquished power to rectify inadequate housing situations.   In 1988, the government permitted national and local construction companies to build houses using capital provided by themselves, the state, or the purchaser of the home.   Because the level of capital provided by the state was insufficient, companies sought private investors to purchase homes with their own money.   This opened the door for a market-oriented model of house construction to take place, despite obstacles created by government controls.  

With only 25 percent of its population living in cities, Vietnam is still well behind the average for the East Asian Pacific region at 37 percent.    This is attributable in large part to the high correlation between increasing per capita GDP and high rates of urbanization.   Thus, urbanization is likely to continue increasing in line of Vietnam’s growing GDP per capita.  

Education

Building on a traditional respect for education and with heavy public subsidies, Vietnam turned a largely uneducated, illiterate population repressed by French colonialization into a regional leader in education and literacy.   To be sure, the percentage of the population age fifteen and older that is illiterate is a mere 6 percent versus the 14 percent average for the East Asia & Pacific region. Furthermore, the trend in recent years is toward continuing the reduction in illiteracy rates.   Though tremendous progress has been made in education, the situation is not uniformly positive throughout the country.   Even as women, men, and minority groups are relatively equal from a literacy perspective on the whole, vast disparities still exist in Vietnam.   In much of the mountainous Northern region, for example, women have much lower literacy rates than their male counterparts.   While ethnic minority groups account for 13 percent of Vietnam’s population, only 4 percent are represented in the student population.   

Currently the World Bank is implementing numerous programs in order to strengthen primary education.    Increased training is being provided for the main publishing company in charge of writing all textbooks.   In addition, training is being provided for all teaching aids involved in primary education.   These current projects fall in line with education reforms of the past ten years that call for a higher emphasis on primary education.   Vietnam’s future economic development depends heavily on increased training and education.

Overall, the topics discussed have loosely outlined doi moi and specific aspects of the socio-economic structure crucial to facilitating growth in Vietnam.   In the past fifteen years, Vietnam has undergone remarkable change in the economic sector.   Growth has increased in the industrial sector thanks in large part to foreign investment and the privatization of many firms.   Vietnam’s involvement in ASEAN and the USBLTA has further laid blueprints for future economic development.   The Asian financial crisis in 1997 temporarily slowed growth in 1998 and 1999, but Vietnam’s economy gradually is recovering.   Still, many obstacles face Vietnam as it marches towards a free-market economy. With the current economy neither central nor market based, the prediction of where the economy is headed remains unclear.   Although mitigating factors such as the Asian financial crisis prevented its unfettered implementation, the policies of doi moi have successfully positioned Vietnam to more effectively exploit future growth opportunities.  

References

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