Asian Econimies Vietnam

assessment # 3 Asian ECONOMIES

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unit: economic analysis & asian economies.

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SUBJECT: VIETNAM 2007

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Word Requirement 3,800 =/- 5%

Word Count 3,960

Table of Content.

Executive Summary.

The following paper is on Vietnam and its business environment today and how it arrived at today??™s trading conditions as a result of its history. While Vietnam is a governed by the VCP, Vietnam Communist Party & is a communist country by title, you can be excused for thinking you reading about a quasi capitalist dictatorship.

From a closed boarded war torn country in 1976 to 2005 when 65% of GDP is export merchandise. And the country is now a member of AFTA, APEC, ASEM and in 2006 the WTO.

The adage ???Signal left turn right??? applies to Vietnam.

Introduction ??“ Why Vietnam.

I remember some of the American evacuation footage, but mostly the Vietnam War by the news reports and aftermath of the returned soldiers, the Chuck Norris movies and the American version of events and communism.
In May 2007 I travel through South Vietnam for 10 days. Landing at Saigon Airport we could see the aging arched concrete bunkers lining the runway with jets and choppers in them, exiting the plane we walked through a large, empty, spotlessly clean, 70??™s style hall & were greeted by a stern undersized officer in an oversize military uniform. I thought ???where the hell have I brought my family???.

That was the last military uniform we saw. Once we exited the airport we entered a frantic, happy, hot bed of capitalism. The people were well educated, incredibly clean (even in the poorest villages) and well dressed, hungry for contact, happy to help and always ready to sell you something and were happy whether you bought or not.
The country had clearly missed the industrial age and was short of anything metal (basic things like teaspoons were no thicker than alfoil) but they were making up for it doubly in the electronic age, wooden shacks no bigger than our garden sheds for a home, spotlessly clean, external ablutions, but mobile phones, colour televisions & satellite dish on the roof.
Where were the soldiers on very corner, the poverty stricken, oppressed people from years of communism, why the abundance of food, electronic goods and home additions on every dwelling we passed

My Paper is on Vietnam and how it got from war torn poverty and communism to this hive of Capitalism. The answer I found is through a planned economy of reforms called ???Doi Moi??? or Renewal

Country Overview.

Vietnam is a long narrow country running North / South, on the Eastern side of the Indo China Peninsula. Vietnam boarders Cambodia, Laos to the West and China to the north. The Eastern side of the country boarders the South China Sea, almost half the countries boarder is to the sea (3,451 klms of coastline). At its narrowest part it is 35 miles wide, making it an important sea port for the land locked Laos. See Map Appendix # 1
Land Area 330,000 sq.km
Major Cities Hanoi (capital), Ho Chi Minh (formally Saigon) & Danang.
Population 83.1 Million (2005)
Labour Force 43 Million
Life Expectancy 70 Years +
Official Language Vietnamese, Latin Based Alphabet
Economic Data 2005
Currency Vietnamese Dong (VND)
GDP Growth 8.4%
Total GDP US$ 45.2 billion (2004)
GDP per capita US$553 (2004)
Major Exports Crude Oil, Coal, Tin see Table # 1, Appendix # 2
Major Exports to USA, Japan, China, Australia & Singapore.
Major Imports Automobiles, Manufacturing & Construction Equipment See table # 2, Appendix # 3
Major Imports from China, Taiwan, Singapore. Japan & Korea.
Budget Deficit 4.9%GDP
Inflation 8.4%

Government Structure, Vietnam is a socialist state under the leadership of the Communist Party. The Party Central Committee has 160 full time members with several dozen alternate members. The National Assembly meets twice yearly for approximately a months at a time, it elects the President of the State and the Prime Minister, the Prime Minister is responsible for the day to day running of the country.
The country is divided into 64 States and Cities under direct control of the central authority. See National Assembly Administrative Structure Appendix # 4.

Current Government, In April 2006 the National Assembly met and several agenda items ensured the momentum of reform will continue.
??? The Vietnam Communist Party (VCP) enforced the policy that new full members of the Central Committee should be 55 years old or younger.
??? Election to the 160 strong Central Committee was democratized ~ 120 members were nominated or stood for elections, 79 of the 160 positions were newly elected.
(Luong 2006, p171-172)
More important than the personnel change is the noticeably stronger resolve of top VCP and government leaders to make the bureaucracy more accountable and to tackle corruption and abuse of power. (Luong 2006, p-173)

Brief History ??“ Why are the communists, socialist so capitalist.

Vietnam has been ruled by a series of dynasties, the first major dynasty being the Ly dynasty from 109AD to 1225 the last abdicating in 1945 to Ho Chi Mih or the bringer of light.

Prior to WWII the French traded / ruled Vietnam as part of their Indochina colonies for more than 80 years. The Japanese wanted to rule Vietnam as part of their Asia for Asians policy. When the France fell to the Germany in 1940, Japan being one of Germanys allies, through a series of political manurvers became the shared ruler of Vietnam with the French, Japan was content to leave the French in charge but occupy the country with troops and receive the majority of the Rice, Rubber etc of Vietnam??™s harvests. (Indochina was suppling approximately 40% of the worlds rubber and Vietnams coastline was essential to shipping in the region.)

This uneasy alliance ended in March 1945 when the Japanese took full control of government, throwing the French out, many of the French joined Ho Chi Mih.

The Chinese to the North did not like the Japanese / Germans with occupied troops close to their borders (North Vietnam borders China) so they sponsored the underground communist party under Nguyen Ai Quoc (under the new name of Ho Chi Mih ruling the Vietminh party). It is also worth noting that the communist party changed its doctrine to; only taking French held land, for the people, so as to gain members from all political persuasions including land holders and business owners to join them. The Vietminh (communist party) under Ho Chi Mih was the unity of all those against a Japanese / German forces both externally and internally against any occupying force.

The Chinese funded Ho Chi Mih, and the Americans funded the Chinese to fund Ho Chi Mih.

With Germany falling at the end of WWII the Vietminh strengthened their position as the unity party of Vietnam. This was further strengthened by a defeated Japan surrendering in August 1945 to the Vietminh, not the allies or the former French rulers, passing the Vietminh all their assets. Even in defeat the Japanese were able to continue their Asia for Asians policy.

On September 2, 1945, Ho Chi Minh declared Vietnam independent after more than 80 years of French and others rule. From 1945 to 1947 an uneasy truce existed, in 1947 the French declared war on Ho Chi Minh & the Vietminh. In 1954 they were defeated and under the Geneva conference of 1954 the country was split at the 17th Parallel, South being Communist under Ho Chi Minh & the Vietminh, North being capitalist. Since the end of WWII China & Russia had become communist. The Americans were concerned and supplied aid to South Vietnam from 1955 to 1975 ultimately being defeated by the communist of the North. While the North may have won the war and assimilated half the countries population into communism, for 20 years the south had been quite prosperous under capitalism. In 1976 Vietnam became united under the ???Socialist Republic of Vietnam??? and changed the political head from ???First Secretary??? used by China to ???Secretary General??? used by the Soviet Union. Through the 1980 the country continued to follow the Soviet Union line, until the 1986 when the country became so impoverished that the ruling party agreed to change under the economic reforms known as ???doi moi??? or Renewal.

So why are they so capitalist

??? Chronologically in the 80 years to 1940 the French ruled and run the country on a capitalist basis.

??? 1940 to 1945 even in the grip of war, trade and capitalism continued.

??? 1947 to 1954 with a quasi civil war between the Vietminh and the French (after 80 years of occupation many were French Vietnamese) capitalism continued.

??? 1955 to 1975 the country was split at the 17th parallel half being communist and half being Capitalist.

??? 1976 to 1986 the country was under true Communist rule. This is only a ten year period. With half the country coming from continued capitalism.

??? 1986 to current, the country has embarked on a period of reform introducing into law many of the basic economic function of a capitalist country.

The country has had many rulers through history, all of them living under the basic rules of enterprise; it is only in the 40 years up to 1986 that communism gradually became the dominant force. With a population of 83 million and a life expectancy of 70+ years it is easy to see why given some economic freedom the population has returned to capitalism.

A planned economy ??“ What is ???doi moi??? or Renewal.

A dynamic Government with a plan, the driver being reunifications and self determination, once this was accomplished socialism following the Soviet Union model (1976 to 1981) was the plan, once this proved to be the wrong path the government changed plans to a Socialist orientated multi-sector economy (1986 to Current). (Khien 2006, p11)

The period 1976 to 1981 saw Vietnam embark on a plan of socialism, taking over all assets and creating State Owned Enterprises (SOE) more than 12,300 all with fixed remuneration structures, product & production quotas. As the targets were not met the central government continued to subsidies these SOE??™s.

By the early 1980??™s the country was nearly bankrupt and suffering food shortages.

The period 1981 to 1986 saw the introduction of Product Contract System (1981), farmers in return for a fixed production quota gained the ability to sell into a free (local) market, their excess production. The effects were dramatic and two fold, firstly food productions increased dramatically, solving the food shortage and even allow some for export and much needed foreign currency.

The second effect split the Micro economy. Food and consumer goods were in short supply, the majority of the population on a fixed wage and price system. Lowly farmers with oxen as their only source of horsepower suddenly were able to sell excess into a free market, while the balance of the population was legally tied to the fixed economy. Demand exceeded Supply, the wealth of the nation moved to these farmers, triple digit inflation followed.

Credit to the ruling communist party, rather than crush this, they embraced it, following the success of the Product Contract System (1981). The Sixth National Congress of the Communist Party of Vietnam held in December 1986 initiated the overall economic renovation policy know as Doi Moi or Renewal.

Since 1986 the reforms have continued, being ratified as law

??? Household Contracting System (1988)

??? Land Law System (1993)

??? Labour Code of 1995 see further explanation

??? Ordinance on Foreign Exchange, Loans & Loan Repayments (2005)

The Plan continues with the Equitization (the term used for privatisation in Vietnam) and the Ocean Strategy to 2020.

The Vietnam Communist Party operates a planned economy; from my readings it is debatable as to wether it is the people with the plan and the government ratifying it or the government with the plan and the people following it.

The reforms introduced since 1986~have produced radical changes in the political economy of Vietnam ~ centrally controlled planning model has been replaced by a transitional model, where the free market has increasingly influenced the allocation of resources. The economic reforms have brought radical changes to towards privatisation and decentralisation. (Quang & Kammier 2002 p 386)

Work Choices ??“ Vietnam.

After the ???Socialist Republic of Vietnam??? was proclaimed in 1976, Vietnam followed the Soviet Union and their socialist views. Under Marxist- Leninist socialist society there are three kinds of interests;

o The Social Interest.

o The Collective Interest and,

o The Individualist Interests.

As a socialist you achieve your Individual interest by achieving the Social & Collective interests. In following this line of collectiveness all assets became the assets of the state (thus becoming assets of all the people).

The Socialist Republic of Vietnam (SRV) introduced central planning and subsidisation, permanent employment with a fixed reward system and guaranteed employment through to 60 for men and 55 for women with retirement benefits.

Unfortunately the collective system failed to motivate people; rather, it promoted lazy workers, suppressed decision making and intuitive.

Egalitarianism failed to stimulate individual employees to improve their skills and knowledge because it offered no recognition of its achievements. ~ Farmers became unsatisfied with the collective regime; it deprived them of land ownership and its produce. ~ Farmers had no incentive to produce more or to improve the quality of their products. (Than & Hess 2004, p 4)

In less than 10 years the government of SRV had concluded that the system had failed, the recognition brought home by food shortages. To solve the food shortage problems, in the early to mid 1980 farmers were given responsibility for their land for up to 15 years with a fixed volume of production required, over which they could sell. The results from the changes in productivity lead the way for the labour code of 1995.

DOI MOI brought with it three main changes to employment and motivation from January 1st 1995 with the promulgation of the Labour Code of SRV.

??? The application of a contract basis at work.

??? The implementation of democracy in the economic domain.

??? The introduction of contribution ??“ related rewards.

(Than & Hess 2004, p 5)

Under Contract of Employment, you could be offered a no-term, a seasonal-term of a one to three year term of employment. Democracy in the economic domain was to introduce transparent structures and processes to guarantee self determination, incentive and innovation. Contribution ??“ related rewards was based on the view that those who work harder and do more for society should be receive greater benefits.

The combination of these three elements meant you had to be suitably qualified for the position or competitors would take your position, this resulted in workers became mobile, chasing those jobs that motivated them, they achieved more and as a subsequence, better rewarded.

Using Rice as a measure of success, in 1989 SRV managed to export 1.4 million tonnes. By 2001 it had become the world third largest exported of Rice, by 2005 the world second largest exporter at 5.2 million tons or US$1.4 billion. (Khien 2006, p23)

While Australia concerns itself with minor variations around the edged of labour reform, Vietnam has taken it to the extreme left, realised that lack of choice and reward for effort, kills all innovation and motivation. Reversing that and allowing choice, transparency and reward, Vietnam has motivated a country over 80+ million people.

I raise work Choices because from all the reading it is clear that the Doi Moi reform policy was and remains a great success. However the policy was driven by the failure of earlier policies of collectivism, which resulted in near bankruptcy and starvation of SRV. Reforms to farming and the results showed the way, these basic reforms have progressively unleashed a population.

Caution; Between 1999 and the end of 2005, the cumulative inflation rate was 36.4% although the minimum wage set in Vietnamese currency had not been adjusted. As a result, numerous wildcat strikes took place in foreign enterprises. (Luong 2006, p170)

Key Financial Data and Facts.

Limited data prior to 2000 exists, as the economy has opened up the data has become available and more accurate.

Banking System The banking system operates on a two-tier system one central bank and a private banking system, the major foreign banks can be found in the larger cities.

Monetary Policy A tight monetary policy has been introduced to keep inflation under control, the government now issues bonds and treasury notes to fund deficit spending. The previous policy was one of printing money.

Exchange Rates The Dong has a single exchange rate reflected by the market forces.

Stock Market In 2000 a stock market was established to assist in the Equitization of the State Owned Enterprises (SOE). SOE through mergers, dissolution and Equitization have dropped from 12,300 in 1989 to approximately 3000 in 2005. (Khien 2006, p12). This has created issues on how to value the assets and employment issues with many SOE operating over staffed by 8% to 40%. (Ngu 2003 p 3)

Corporate Laws and Structures New ???Laws of Enterprise??? came into effect July 1st 2006. They allow the establishment of multi and single shareholding Pty Ltd companies, partnerships and private enterprises. One hundred percent foreign ownership is allowed but this is regulated and can be industry specific. (Khien 2006, p89)

Land Ownership Vietnam does not allow land ownership, all land belongs to the people through the State. Foreigners can lease land provide they have an investment plan requiring the land. Vietnamese nationals with existing Land Lease Use Rights can on lease land to investors, including for foreigners.

Opportunity; 70% of Vietnam??™s population live in rural areas, as the cities develop as a result of foreign investment many people are moving to the cities. This is resulting in housing shortages. Decree 108/CP 2006, requires the local government to offer residents of more than 3 years, Local Residency entitling them to Stable Employment, and Legally Valid Housing. In 2005 only 8% of applicants were granted Local Residency. (Luong 2006, p170) Development opportunities exist here.

Foreign Offices Foreign Firms require a licence to open an office in Vietnam. The Peoples Committee in the province has to be submitted with a request to operate, by law they have 15 day to reject or approve the licence.

|Vietnam Economic Data |2003 |2004 |2005 |2006 |2007 |
|GDP (US$bn) |39.6 |45.3 |52.8 |61.7 |71.0 |
|Real GDP growth (%) |7.3% |7.8% |8.4% |8.2% |8.4% |
|Consumer Price Index |3.1% |7.8% |8.3% |7.7% |8.1% |
|Exports of Goods (US$m) |20,149 |26,485 |32,442 |39,970 |49,909 |
|Current account Balance (US$m) |-1,931 |-957 |217 |-45 |-1,199 |

Twenty years on ??“ What next for Vietnam.

The past 20 years of Doi Moi have been very successful for Vietnam.

??? Annual domestic output has averaged 7% over a 20 year period, exports growth has exceed 20% per year. (Koh 2006 p 44)

??? The GSO/ World Bank poverty indices have dropped Vietnam from over 70% in the mid 1980s to 19.5% in 2004. (Quang & Kammier 2002 p 386)

??? The VCP has continued the reforms process and ensured this remains the case with the insistence on younger members who are voted in with an element of democracy. (Khien 2006, p23)

A key ingredient to Vietnam??™s success has been its ability to maintain the reform process and retain the low labour cost advantage it has. This and the large domestic market it has ready for consumption, these factors have ensured the solid inflow of Foreign Direct Investment FDI.

According to David Koh of the Far Eastern Review, there are three things Vietnam must do to stay ahead.

1. Do not compete directly against China, many of the ingredients of success run parallel for the two countries. China has the size advantage to win a head to head competition.

2. Raise the education standard, while the literacy rate is reported at 90% the quality of basic education leaves a lot to be desired.

3. The Vietnamese language is Latin Based; therefore they have a distinct advantage over China with its character based language when it comes to programming. This need to be exploited with the Information Communications & Technology sector.

From my readings the three things that require attention are;

1. Infrastructure, as the population becomes more affluent and mobile, they are demanding more in basic services, water, electricity, transports services etc. the same applies to industry, in order to maintain the past levels of FDI these basic service will need to meet the standards of Vietnams competitor nations.

2. Port Facilities, it is apparent that despite the large coastline and proximity to land locked Laos, Vietnam has limited Deep Water Port facilities and port and freight charges are more costly than its competitor countries.

| |Hanoi |HCMC |Bangkok |Jakarta |Manila |KL |
|40-Foot |1,630 |1,150 |1,300 |990 |950 |725 |
|Container to | | | | | | |
|Japan(US$) | | | | | | |

(Khien 2006, p69)

3. Corruption and Cost Overruns; Infrastructure construction already under way is behind schedule and over budget and undertones of corruption exist in much of the reading. While the National assembly addressed this in 2006, the fines & penalties handed out in 2005 were seen an insufficient. If the CPV is to retain credibility and the rates of FDI it will need to address corruption more aggressively.

Conclusion ??“ Vietnam.

Vietnam has made a remarkable recovery from years of war and choosing the wrong path in collective socialism. The Communist Party of Vietnams ability to see and correct its mistakes in policy puts many western governments to shame. The renewal of the party to a younger more democratic generations also ensure in the medium term the policies of growth and reform will continue.

As the wealth of the country and its population develops and their demand on the government become greater, their will certainly be challenges ahead. But if the past is any indicator of the future, capitalism with a socialism twist will be the order of the day.

As a foreign country to invest in, I would put my money in Vietnam.

Signal left, turn right.

References.

(Than & Hess 2004, 4)

Work Motivation in Vietnam, Aspects of Change under Doi Moi. Labour & Management in Development Journal. Volume 4, Number 5, Vu Than & Michael Hess. Asia Pacific Press 2004.

(Khien 2006, p23)

Doing Business in Vietnam, Vietnam Chamber of Commerce & Industry VCCI Fourth Edition 2006, Written by Nguyen Duy Khien.

(Luong 2006, p168)

Vietnam in 2006, Stronger Global Integration & Resolve for Better Governance. Hy V. Luong, Professor University Toronto, Asian Survey Vol 47 Issue 1 pp 168-174

(Thi & Ton,? 2004 p 67)

Dao Trong Thi,? Le Danh Ton.? 2004.? Vietnams economy: Achievements and perspective.? International Journal of Asian Management? 3,? no.? 1? (December? 1):? 67-75.?  http://www.proquest.com.dbgw.lis.curtin.edu.au/? (accessed November 26, 2007).

(Ngu 2003 p 3)

SOE EQUITIZATION IN VIETNAM: Experiences, Achievements, and Challenges.? 2003.? Southeast Asian Affairs? (January? 1):? ***[insert pages]***?  http://www.proquest.com.dbgw.lis.curtin.edu.au/? (accessed November 19, 2007).

(Haughton 2000 p88)

Jonathan Haughton 2000.? Ten puzzles and surprises economic and social change in Vietnam, 1993-1998.? Comparative Economic Studies? 42,? no.? 4? (January? 1):? 67-92.?  http://www.proquest.com.dbgw.lis.curtin.edu.au/? (accessed November 26, 2007).

(Quang & Kammier 2002 p 386)

Changes in the political economy of Vietnam and their impact on built environment of Hanoi. Nguyen Quang & Hans Detlef Kammeier. Cities, Vol 19 # 6 p 373-388, 202. Elsevier Ltd Great Britain.

(Koh 2006 p 53)

Vietnam, Beyond Fish & Ships. David Koh, Far Eastern Economic Review; December 2006

(Quang & Kammier 2002 p 386)

Vietnam, Must Map its own Flight Path. Jago Penrose, Jonathon Pincus & Scott Cheshier, Far Eastern Economic Review; Sep 2007 [pic]