Adam Smart

4/29/98

INTS 92

Vietnam and Its Poised Economy

With the end of the fighting in Vietnam in 1975 South Vietnamís economy was taken over by North Vietnam and its strict government economy. Initially the results of this takeover were less than stellar. The Communist regime in Vietnam did not do a fundamentally sound job in attempting to approve the Vietnamese economy. However starting in 1986, the doi moi ("new road") was begun. The doi moi was a new group of market-oriented reforms aimed at helping to stimulating the economy in V ietnam. The plan aimed to do this by creating a legal framework for the private sector, allowing the market to set prices, and the opening of Vietnamís borders to imports. The results of the doi moi were extremely positive. One of the most positive exa mples of the programís successes are the drop in inflation from almost 1000% a year to a rate of about 16% in 1995, with a low point of 5.2 percent in 1993. The doi moi also enabled Vietnam to become an exporter of rice by 1989, actually becoming a top f our world exporter of the product. The most pervasive change occurred indirectly with Vietnamese exiles returning home because of the new initiative. many of these exiles returned with highly needed skills and the capital to pair with those skills (Ffor de, 1996).

However, doi moi, along with the change to a more market based economy was not always a readily accepted policy. Conflict between the Vietnam Communist Party, located in Hanoi, and the majority of the Vietnamese businessmen, overwhelmingly found i n Ho Chi Minh City has continued throughout the era of reform. This conflict has been a complex mixing of animosity still held between the North Vietnamese in Hanoi and the South Vietnamese in Ho Chi Minh City, the reluctance of the Communist Party to sh are its power in any form, and the committal attitudes of many elite Communist leaders to a strong socialist orthodoxy (Fforde, 1996).

One result of this conflict has been the continued proliferation of state enterprises throughout Vietnam. These enterprises have actually run a paradoxical path during the restructuring of the Vietnamese economy. Despite the fact that Vietnamí s economy has been heading towards a more market-based economy, the state enterprises have actually increased their proportion of the economy. As of late these businesses have actually been reduced in number, from 12,000 in 1990 to 7,000 in 1995. Howeve r, these businesses now provide about 40% of the countryís GDP. Vietnam was able to achieve this because of two factors. The first factor is that from 1990 to 1995 the proportion of loss incurring state enterprises has dropped from 50% to 8%. The secon d factor is Vietnamís foreign joint-venture plan and the fact that these partnerships are often made with state enterprises instead of private ones (Economist, 1995).

The future for growth potential in the Vietnamese economy does not appear to be located in state enterprises. Many see small to medium sized enterprises as the key to impacting the Vietnamese economy. However, the obstacles to setting up a succes sful small private enterprise remain daunting. State enterprises control ninety percent of the countryís capital in the manufacturing sector of Vietnam. Private firms must provide collateral to cover 130% of the loan, contrasted with state firms that do not need to present collateral at all. Many private entrepreneurs remain secretive and keep a low profile. They fear arbitrary and intense taxation coupled with heightened opposition by the government if any production increase is revealed. The privat e firms that achieve the highest success are those that avoid markets already dominated by state-owned enterprises thus decreasing the likelihood of being singled out by the government unfairly (Levine, 1998).

The Vietnamese government requires many foreign firms to enter into joint-ventures with local Vietnamese partners. The local partner in these ventures usually contributes land to the partnership and in return receives around 30% of the venture. T he most amazing aspect is that the local firms have the power to veto key decisions in the venture even though the foreign partner supplies most of the capital and takes most of the risk. This sort of partnership tends to handicap the foreign investors w ho undertake the majority share in the venture. Yet the foreign firms must continue to enter these ventures because turning a profit in Vietnam is illegal unless the foreign firm is paired with a local one. In addition the foreign firms face the dauntin g task of trying to turn a profit with a state enterprise partner who is not interested in making profits, only making sure jobs are provided (Levine, 1997).

The fact of the matter remains that relatively few of these joint-ventures have reaped successes. In addition there remain many other headaches for foreign investors in Vietnam. There tend to be an overwhelming of obstacles that need to be hurdle d to even get in the door for investment in Vietnam. Vietnam looks constantly for investments that fit in the countryís plans, which at this point are often limited to infrastructure projects. Investors must go to the Ministry of Planning and Informatio n to receive approval for their investment projects. This is not difficult for larger firms such as multinational construction companies, but smaller investors commonly face tough opposition (Levine, 1997).

Investors are often wary of Vietnam for another reason. The financial crisis that has come over Asia as of late has been contributed to many factors. The banking systems in these countries have been a major contributor to these economic failures. Vietnam is no exception to these banking system troubles. However, despite many similarities to the problems of other banks in the area, Vietnamís banks face some different difficulties.

Vietnamís banking system is a socialist style model that is nationalized. The banks use their position to further national policy by making loans to projects that meet state objectives along with the state run enterprises. This is not unlike othe r Asian countries that have used the banking system to further their national policies. The socialist model of Vietnam is actually a banking system that has a mix of characteristics that one would find in a socialist model and a market economy model. Th ere are four main state-owned banks in Vietnam, each with its own policy focus. Agribank provides credit for the agricultural sector. Incombankís mission is to foster domestic commerce. BIDV funds long term industrial and infrastructure finance. The f inal of the four banks, Vietcombank, is responsible for encouraging foreign trade. These four banks account for 85% of total assets. The reform of the banking system has been under progress by creating semi-private joint stock banks, usually with the go vernment holding a 30% share in these banks. Another reform is the allowance of foreign banks to set up regional offices in Vietnam (Golin, 1998).

The problem in Vietnam has been assuring investors that the banks are creditworthy, that is, able and desiring to repay their obligations. In order to asses the Vietnamese banksí level of creditworthiness analysts look at both quantitative data an d qualitative characteristics. the quantitative data includes items such as profitability, liquidity, capitalization, and asset quality. The qualitative analysis focuses on bank leadership qualities and strategies, management competence, and on a broade r level, understanding the political setup of Vietnam and the rules under which these banks must operate. The main fault with Vietnam and its banks remains that accurate analysis of these factors has been extremely difficult to carry out due to a lack of transparency. Transparency is the access to data about the actual financial conditions of the entities that the banks extend credit in a manner accurate enough to ensure proper assessment of risk (Golin, 1998).

This lack of transparency has caused significant problems for the Vietnamese banking system. In early 1997, defaults on letters of credit owed by Vietnamese banks and interbank loans to foreign banks caused a "mini crisis" in the Vietnam ese banking system. The effects of these defaults were magnified due to Vietnamís inability to provide transparency. The main stimulus of these defaults originated from the practice common in Vietnamese banking of extending deferred letters of credit. These 12 to 18 month letters of credit were often used for their original purpose, but instead of being immediately repaid, the proceeds from the original investment were then rechanneled into a high risk venture such as real estate. These real estate ve ntures often flopped in the mid nineties due to a downturn in the real estate market, leaving customers and banks both unable to fulfill obligations. Such instances were causes of great anxiety on the part of foreign banks investing in Vietnam (Golin, 19 98).

Progress is being made in Vietnam to rectify the troubles of the banking system. A new banking law has been passed and a new central bank governor is to be appointed. Yet, problems still persist for Vietnam and its banking system. Some of these may be due to the Vietnamese focus on national policy lending. Others are definitely due to the lack of transparency. In addition, the uncertainty of Vietnamís own currency, the dong, is proliferating a hoarding of foreign currency and even more questio ning of the Vietnamese economy and banking system (Golin, 1998).

Other opposition is often encountered due to Vietnamís attempt to balance two trade policies which are polar opposites of each other. Vietnam has expressed a desire to increase the effectiveness of a policy that promotes trade and boosts exports, a similar practice to countries all over Asia. However, as is the case with many other developing countries, Vietnam has attempted to create an environment of protectionism for its own infant industries to cultivate, as if greater levels of protectionism were needed considering the already highly protectionist levels of tariffs, quotas, and restrictions. Yet, these local industries are demanding greater protection from foreign competition. An example of such demands comes from the Vietnamese National C ement Corporation. Two-thirds of the locally produced cement in Vietnam is produced by this company. Vietnamese National Cement Corporation asked for a stop of all cement imports in July until the end of the year. The company argued that the domestic p rice of cement in Vietnam was being forced down too low due to the influx of over 350,000 tons of imported cement in the first half of the year. In fact the Vietnamese government has instated a three month hold on all imports of not only cement, but glas s and steel also. There are other motivations to such restrictions, such as shrinking the trade deficit, but they suit nicely the cries for greater protectionism. Frequent changes to the system of tariffs in Vietnam have created much confusion for impor ters and investors. The average tariff level for imports other than machinery is at least 22%, an extraordinary level compared to the rest of the world (Haughten, 1997).

Contrasting to this view of intense protectionism Vietnam is attempting to commit themselves to a level of trade that is open and focused on reducing trade barriers. In attempting to join the Association of South East Asian Nations Free Trade Area (ASEAN AFTA) it has especially committed itself to reducing barriers between itself and its members. In specific the goal of reducing its tariffs to below 5% on imports from other member countries by the year 2006 (as opposed to 2003 for other members because Vietnam joined the association late). In Vietnam these reductions in tariffs will happen slowly and already there are those in Vietnam searching for possibilities to get around doing it at all (Haughten, 1997).

In light of these two contrasting philosophies concerning Vietnamís trade policy, international governments are beginning to put more pressure on Vietnam to lower its level of protectionism. The United States is holding the incentive of Most Favor ed Nation status out to the Vietnamese for improvements in the tariff levels. The European Union is offering loosened quotas in order to gain wider trade access to Vietnam. Other groups such as the World Bank and the International Monetary Fund are usin g their leverage also. Yet, the main incentive for Vietnam to continue on the path it has chosen is that government-owned enterprises are the major beneficiaries of barriers to imports. However as more of these firms begin to rely on exports, high tarif fs in Vietnam will only harm their ability to export. Some sort of consensus must be reached on how to end this double trade policy (Haughten, 1997).

With all of these issues currently facing Vietnamís economy, enters a new regime of leadership in Vietnam. In September, both a new president, Tran Duc Luong, 60, and a new prime minister, Phan Van Khai, 63, were appointed (Haughten, 1997). In De cember the Communist Party of Vietnam Central Committee held a fourth plenary session at which Le Kha Phieu was approved as the new Secretary General. These changes in the ruling troika came along with a slew of other changes (Thayer, 1998). The total n umber of deputy prime ministers was increased from three to five. Seven new ministers were approved along with the ousting of the old governor of the state bank system. The increase in the deputy prime ministers should serve to lessen the power of the r uling three. In addition, it should be noted that all five of the deputy prime ministers are considered reformists along with the two new appointees to the troika. However, one must keep in mind that all of these leaders were given old style Soviet Unio n training so "reform oriented" is a relative term. Nevertheless, the hard-line conservatives seem to be on their way out and the focus now is turning away from the army and other such issues to the idea that Vietnamís economy needs a boost (Ha ughten, 1997).

At the CPV Central Committeeís plenum economic issues were heavily discussed and several concrete attempts to address the countryís problems emerged. "Comprehensive and uniform renovation" emerged as the first plan to deal with Vietnamís economic woes. Specific changes to be incorporated in this new plan are varied. Efforts will be made to mobilize Vietnamís capital by using treasury bonds and other such measures to stimulate internal savings. Vietnam plans to balance its budget, cutt ing government spending. The government seeks to continue to attract foreign investment. However they were wary of completely opening Vietnamís capital market. The plenum did decide to readjust the tariff system in effect in Vietnam, still giving certa in selected industries protectionist treatment, but these measures were underscored as temporary, in accordance with the ASEAN Common Effective Preferential Tariff agreement. Major emphasis was also placed on reorganizing the state-owned enterprises in V ietnam. Foreigners will be allowed to invest in some of the state-owned enterprises on a trial basis after they are transformed into joint-stock companies. In addition, those small state-owned enterprises that are continually incurring losses will be gr adually shed off by the Vietnamese government through options such as merger, lease, sale, or contracting out. Further reforms in the banking system were also discussed with an eye on outstanding credit cases (Thayer, 1998).

The new government is made up of very promising technocrats who appear to have the ability to bring about improvement for Vietnam. The banking system is looking at investing more capital into local industries, injecting cash into the economy, and a loosening of the stiflingly low inflation levels of the economy. Trade policy is being considered and most of the leaders feel that a continued level of moderate protectionism must continue to exist in the short-run to increase production capability of local businesses. However after this goal is achieved, the leaders understand that they must focus on meeting the goals necessary to become a member of the global economy. Foreign investment in Vietnam has flattened out and prospects for future investm ent are uncertain. Another pressing issue this new government will have to face is the rising inequality in Vietnam. The country faces an enormous gap in earnings between those in the cities of Ho Chi Minh City and Hanoi and the rest of the rural populat ion, which makes up about 80% of the population. One tactic being explored is a greater emphasis on agriculture. The reduction of monopolies on rice exporting and a realistic exchange rate are two key focuses of this tactic. These are just a few of the pressing issues that the new Vietnamese government will need to address in the coming future to enable Vietnam to once again resume the rise to success that it once began to achieve (Haughten, 1997).

Where does Nike fit in this complex puzzle. As of late, the criticism of state-owned enterprises has caused a careful examination of those state-owned enterprises not turning a profit. With such intense scrutiny, it is only a matter of time until some of these state-owned enterprises are shut down for good. Resulting from such shutdowns would be immense layoffs of Vietnamese workers. For a country with an economy such as Vietnamís, it can ill afford to increase the number of jobless citizens. Something must step in to pick up the slack when this large work force becomes available or the woes of Vietnamís economy will only continue to grow. One would like to think that smaller Vietnamese owned firms will be able to help absorb some of this wor k force, but the likelihood is very small since these firms are merely trying to survive at a smaller level and can not truly take in a large work force. This is where foreign multinationals such as Nike can contribute to the economy of Vietnam. With en ormous factories around densely populated areas, Nike and other multinational corporations can take some of the burden off of the Vietnamese economy by creating a great number of jobs.

However in order to truly ensure that large multinational corporations such as Nike are enticed to come to Vietnam some obstacles need to be addressed. The division in the Vietnamese government on the issue of free enterprise and foreign involveme nt in the Vietnamese economy does not provide the stability that many multinational corporations are on the lookout for. In addition foreign owned industries, such as Nike factories in Vietnam, have to pay a minimum wage 150% times that required of state -owned enterprises. Nike also faced the daunting task of how to set up shoe factories in Vietnam when no such facilities or expertise existed prior to their entrance to the country. In fact, Nike decided to bring in foreign managers and plant owners fro m Korea and China despite the animosity that existed between these cultures and the Vietnamese. As a result of this Nike is attempting to train native Vietnamese managers as quickly as possible to facilitate a better rapport between the management and th e workers in these factories located in Vietnam. However, with little to no history of shoe production in Vietnam, the process is not a quick one. Despite these problems and obstacles it has still been possible for companies such as Nike to have a posit ive impact on the economy of Vietnam. Nike products themselves represent five percent of Vietnamís exports (Knight, 1998). Nike has also contributed, along with other multinationals located in the same areas, to an increase in per capita income for the Vietnamese located in these areas. This is not to say that Nike itself has achieved this, but only serves to emphasize the importance of attracting foreign investors to Vietnam to help boost the economy in this time of adjustment. The question is whethe r the new government in favor of increased free enterprise will win out over the old regime who would like to eliminate free enterprise all together. If this scenario does occur, perhaps multinationals such as Nike can have an even greater impact on the Vietnamese economy.

Bibliography

Fforde, Adam and Vylder, Stefan. From Plan to Market the Economic Transition of Vietnam. Boulder, CO: Westview Press, Inc., 1996.

Golin, Jonathan. "Should You Bank on It," The Vietnam Business Journal. Jan./Feb. 1998.

Haughten, Jonathan. "The Face of Change," The Vietnam Business Journal. Nov./Dec. 1997.

Haughten, Jonathan. "Trade Tension," The Viatnam Business Journal.

Sept./Oct. 1997.

Knight, Phil. Class Discussion, 4/28/98.

Levine, Joshua. "Losing Its Stripes," The Vietnam Business Journal. Nov./Dec.

1997.

Levine, Joshua. "Untapped Potential," The Vietnam Business Journal. April 1998.

____________. "Living With Contradiction: Vietnam," The Economist. Dec. 2, 1995: 34, 337.

____________. "Who Knows? Banking in Vietnam," The Economist. May 3,1997: 68, 342.

Thayer, Carlyle. "Keeping an Even Keel," The Vietnam Business Journal. April 1998.

Copyright, 1998
Adam Smart, INTS 092
UNC - Chapel Hill