Vietnam's economic development:

Opportunities and challenges towards the integration tendency

Prof.,Dr. Nguyen Thi Ngoc Huyen and Prof.,Dr. Bui Anh Tuan

National Economics University, Hanoi, Vietnam

Abstract

Thanks to the comprehensive economic reform, the transformation from a

centrally planned economy into a market economy and the implementation of open

door policies, Vietnam has gained remarkable achievements in economic

development. In the period 1991 - 2003, annual economic growth rate is 7.46%, per

capita income (in US$) increases more than three times, economic structure shifts

towards reducing the share of agriculture and increasing the share of industry and

service. Foreign trade and investment have increasingly influenced economic

development. These achievements, however, have yet to meet the requirements of

development, and yet to correspond to the national potentiality and great opportunities

brought by globalization.

In order to fulfill the ambitious and ultimate goals defined in the Socio-

economic Development Strategy for 2001 - 2010 period, the Vietnamese Government

should control the integration process to take more advantages of opportunities

brought by globalization process and reduce the cost for internal and external

challenges. Fundamental policies that should be put in priority are: (1) Develop

enterprises towards abolishing the monopoly of state owned enterprises; expand and

strengthen the relationship between distributors, manufacturers, and suppliers in the

value chain; (2) Give incentives to shift investment preference from import substitute

industries to export oriented ones; (3) Promote production factor markets; (4) Broaden

foreign trade and actively integrate into the world's economy; and (5) Modernize the

state administration process.

This paper will focus on (i) evaluating the economic change of Vietnam

towards the integration tendency and (ii) analyzing fundamental policies of the

Government to cope with challenges.

1. Vietnam's economic development towards the integration tendency

In 13 years since the realization of comprehensive economic reform focusing

on liberalization, stabilization, institution transformation, structure reform and

opening to the world economy, Vietnam has gained miraculous economic

achievements with annual GDP growth rate of 7.46%, the reduction of inflation from

three digits to one digit, the increase of aggregated social investment to 35.9% GDP,

and the expansion and diversification of foreign trade.

High economic growth rate leads to a notable increase in Vietnam's per capita

income from 140 US$ in 1990 to 483 USD in 2003. Poverty rate, according to

international standard, decreases sharply from more than 70% in 1990 to 32% in

2003. Vietnam has reached the international millennium development goal to reduce

by half of the poverty rate in the period between 1990-2015. Annual natural

population growth rate decreases from 2.3% to 1.4%. Average life span rises from 65

years to 69 years.

Together with economic growth, Vietnam economy has witnessed a

fundamental change in its structure. In 1990, agriculture contributed 38.74% to GDP,

industry: 22.67%, and service: 38.59%. Thirteen years later, the role of agricultural

sector in the economy is reduced sharply while that of industry and service sectors

increases correspondingly. In 2003, the share of added value of agriculture in GDP is

21.8%, industry: 39.97% and service: 38.23% (See table 1), and contribution to GDP

growth is 9.67%, 53.31% and 37.02% respectively.

The move of activities from agricultural sector to other sectors has caused a

reduction of labor in the agricultural sector (59.04% of the total labor in the economy

in 2003 compared with 73% in 1990). Strong development of the industry, expansion

of the service and diversification of branches in agriculture have created a number of

jobs (around 1.2 - 1.5 millions), resulting in a downward trend in unemployment rate

in both urban and rural areas.

From a less developed country that used to have serious shortage in all kinds

of commodities, Vietnam is now assessed as a rapidly developing economy. Domestic

production has met most of domestic manufacturing and consumption demand.

Export is increasing. People's life has been remarkably improved. The followings will

focus on the development of some specific sectors considered in correspondence with

the impacts of policies.

1.1. Agriculture.

Agricultural reform is the most significant to the cause of economic

development and poverty reduction of Vietnam - a country with 75% population and

90% the poor living in rural area. From a country that was always short of food and

had to import 0.5 – 1 million tons of food to meet the people's demand annually,

Vietnam has become a food exporter. It is now the world's second biggest rice

exporter, right behind Thailand.

Food grain production development, agricultural restructuring towards

developing high-value industrial and fruit trees like coffee, rubber, cashew, litchi,

longan, etc, as well as strong development of agriculture, including domestic animals,

fowls and forestry have been paid special attention in Vietnam. Vietnam now is the

world’s biggest peppercorn exporter, and the third biggest coffee and rubber exporter

(see table 2).

Determining factors for the development of agricultural sector are: (1)

Realization of land allocation to farmers and transformation of agricultural

cooperatives and state-owned farms into household enterprises, making the

agricultural sector most privatized in Vietnam economy, in which state economy

accounts for 3%, (2) Increase of proportion of capital and labor force in inputs (87%

added value), (3) Development of irrigation and adequate provision of inputs for

agriculture like machines, insecticide, and chemical fertilizer (4) Application of

advanced biology achievements to diversify products, raise productivities and product

quality, and (5) Trade liberalization and export promotion.

1.2. Insdustry

Rapid industrialization, together with high economic growth and

macroeconomic stabilization, is seen as the most miraculous economic achievement

of Vietnam. In the period of 1991- 2003, annual growth rate of the industrial sector is

more than 10%. Both of the state and non- state sectors have put priority on the

expansion of size and innovation of equipments and technology in a number of

industries like electricity, mine, petroleum, cement, steel, chemical, electronics,

mechanics, garment and textile, sugar, and agricultural product processing, etc. In

general, Vietnam's industry has so far met domestic manufacturing and consumption

demand (see table 3). Some products are competitive in international market like

garments and wooden goods (see table 4).

There are a number of fundamental policies affecting the development of

industrial sector, namely (1) State- owned enterprises reform that mainly aims at the

equitization of more than 75% of over 12,000 state owned enterprises, the

corporatization of the remaining state owned enterprises that the state holds 100%

capital and the construction of strong state agglomerates. (2) Encouragement of

foreign direct investment. (3) Promotion of private enterprises. (4) Opening of foreign

trade to increase the export of industrial goods and import of materials and machines

(5) Import substitution (6) Protection for domestic goods through tariff, the state's

incentives and direct support. The effective protection rate of tariff imposed on tea is

243%, garments: 183%, motor and automobile: 146%, refined sugar: 111%, and

plastic: 109%.

Recent policies on industrial development are a debating issue in Vietnam.

The monopoly of state owned enterprises and foreign invested companies, weak

competitiveness of import substitute industries, and high cost of the restructuring have

been challenging Vietnam in its process of fulfilling integration commitments.

1.3. Service

Market oriented economic reform has pushed up the expansion of the service

sector. The service sector's annual growth rate is 7% in the period of 1991- 2003.

Trade, hospitality, restaurant, tourism, and road transportation experience a rapid

development. In recent years, scientific and technological, educational and training

sectors have had high growth rate, manifesting the government's priorities and efforts

in promoting human resource, science and technology.

The service sector's growth rate, even increasing in recent years, is still lower

than that of the first half of 1990s (see table 1). Despite some industries that have high

technological content and added value, and that significantly influence the

strengthening of competitiveness of the economy as well as enterprises, fields like

finance, banking, insurance, telecommunication, air transportation, sea transportation,

manufacturing support service and consulting service, etc, are slowly developed. Real

estate business is out of control. This situation results from (1) Uncompleted

institutions for service markets (2) Protection and incentive policies for state owned

enterprises (3) Low openness for foreign investors.

1.4. Foreign trade and investment.

Before 1990, Vietnam's foreign trade relations focused on the former socialist

countries. The open door policy started a new phase of relations between Vietnam and

the world. The ratio of import- export to GDP increased from 53% in 1991 to 115% in

2003, manifesting Vietnam's open trade. Vietnam has so far had foreign trade

relations with more than 160 countries. Joining ASEAN free trade area (AFTA) in

1996, Vietnam committed to abolish most tariff and non-tariff barriers imposed on

goods from ASEAN within a decade. Vietnam is determined to join WTO in 2005

and unilaterally implementing trade reform with the support of IMF, the World Bank,

and other members of aiding country community.

The policy on open foreign trade has pushed up Vietnam's economic growth in

a number of ways. First, export has become an important part of the national

economy. In 2003, export revenue reached 19.88 billion US$ (see table 5). In the

period of 1991- 2003, annual export revenue growth rate was 18.7%, this was 2.5

times compared with GDP growth rate. Added value generated in the export sector

contributed 11% to GDP. Second, imports went up rapidly, providing domestic

market with machines, equipments, materials and fuel for manufacturing industries as

well as consumer goods. Third, domestic market is not completely protected, forcing

enterprises to face with foreign competitors, putting pressure on raising productivity,

and encouraging restructuring to make products that satisfy both domestic and

international demand. A number of Vietnamese goods that are competitive in terms of

price and quality are favored in the world market like agricultural products (rice,

coffee, aquatic products), industrial goods and handicrafts (garment, wooden ware,

plastic, and electric wire and cable, etc). Fourth, illegal speculation is reduced and

flexible response to external shock is strengthened.

Thanks to incentive policies on foreign direct investment, up to the end of

2003, Vietnam has attracted 4,324 foreign direct investment projects with the total

registered capital of 40.8 billion US$. Foreign capital plays a significant role in

Vietnam's economic development. For instance, in 2003, foreign direct investment

capital made up 16.77% of the aggregated social investment capital. Foreign invested

economy contributed 14% to GDP (see table 6). Moreover, foreign investment has

boosted trade, created jobs, encouraged transferring of advanced technology and

management skills and learning. In 2003, export revenue of the foreign invested

sector was 10 billion US$, increasing by 27% compared with that of 2002 meanwhile

domestic sector's export revenue was 9.9 billion US$, increasing by 11.7% (see table

7). Up to 2003, around 90% technology transfer contracts have been made in FDI

sector. This sector has also created 665,000 jobs, and indirectly created jobs for

millions of labors. The facts show that foreign invested joint venture is of the most

efficient way to catch up with developed countries in a relatively short period of time.

Trade and investment liberalization has enhanced economic restructuring,

domestic enterprise reform and satisfied people's needs with multiple options to

access diversified, high quality, low price, and convenient goods and services. The

role of the state in the economy has rapidly changed towards constructing

environment and regulating the economy mainly by indirect tools.

2. Challenges to Vietnam's economic development in the

international integration tendency and fundamental policies.

2.1. Challenges

The above-mentioned analysis is reliable enough to define the role of

international integration as one of the key factors determining the development of

Vietnam's economy. However, in a rapid globalization process, Vietnam is

confronting severe challenges rising from international environment and inherent

weaknesses of a transformation economy.

§ Competition in international market

Vietnamese commodities, when accessing to international market, have to

compete with those from more developed countries. In a backward agricultural

economy that is characterized by the exploitation of natural resources, raw materials

and non - processed agricultural products are making a large proportion in Vietnam's

exports (57% in 2003). A rise in proportion of industrial goods and handicrafts is

mainly focused on processed and assembled goods that have low added value due to

advantage in low labor cost. High added value exports made up a small proportion.

Structure of Vietnam’s key exports does not much differ from those coming from

China and ASEAN, but they lack specialty and service that cause low competitiveness

due to rapidly increasing cost.

§ Competition in the domestic market

In the domestic market, Vietnam has to face with a lot of problems rising from

the liberalization of economic sectors in the committed integration process. Many

industrial and agricultural products are less competitive compared with those

imported from EU, US, Japan, China and ASEAN. For instance, the price of some

domestically produced goods is higher than international price: garment 15%, steel

25%, paper 27%, urea 31%, sugar 40%, and soda 63%. Pressure of competition put on

key services like finance and bank, post and telecommunication, and information

technology is even heavier. Thousands of state owned and private enterprises existing

under import substitute and protection policies will hardly remain in this competition.

Decreased profit, loss, bankruptcy and unemployment - inevitable consequence of the

structuring following the commitments to access international organizations,

especially WTO, may cause unfocused economic, political and social effects.

When Vietnam join WTO, foreign companies may promote their exports to

Vietnam, instead of investment, because import substitute polices lose their effects

and Vietnam’s investment environment is less competitive than other regional

countries.

Potential opportunity costs imposed by globalization can be a reason for some

stakeholders to obstruct Vietnam’s integration process (see table 8). Challenges of

integration, however, emerge from not only external environment but also the national

economy's weaknesses, requiring all economic institutes to be transformed to adapt to

rapid development of trade relations, investment and technology transfer.

§ Enterprise system

Vietnamese enterprises are still very weak and have low competitiveness.

According to the global economic forum, in 2003 Vietnam's growth competitiveness

ranks 60 among 102 countries, and its enterprises' competitiveness ranks 50 among

101 countries (see table 9). Apart from nearly 4,290 state owned and 4,300 foreign

invested enterprises there are only 140,000 private enterprises operating under the law

of enterprises. Ratio of people to enterprises is 1/400. Generally, enterprises have

small size. Close to 47% state owned enterprises have legal capital of less than

300,000 US$. Average legal capital of private enterprises is 80,000 US$. In general,

Vietnamese enterprises are at low development level in terms of technology,

management capacity and labor expertise. Capital mobilization capability is low,

especially for middle and long-term capital. Most enterprises have yet to get

appropriate business strategies to expand themselves in the international market. High

monopoly of state owned enterprises, discrimination between state owned and non-

state enterprises, and slow implementation of state owned enterprise reform have been

obstructing the improvement in investment and business process.

A big weakness of Vietnamese enterprises is loose linkage among them and with the

rest of the economy in value chains: input suppliers - intermediaries manufacturers -

finished product manufacturers - distributors, to make high added value. Prices of

agricultural products are down seasonally because they are not timely distributed,

meanwhile processing factories, lacking production materials, have to outsource at

high prices. More than 90% steel is produced by material imported, resulting in heavy

dependence on the world price. 80 cent in every 1 US$ of garment exports is spent on

imported materials or accessories. Limited linkage is one of the main reasons why

added value growth rate is lower than output value growth rate in industrial and

agricultural sectors (see table 10). The Government's efforts to set up clusters in

which state corporations and foreign companies are key actors have yet to get good

results.

§ Physical infrastructure system

This system, even remarkably improved recently, still restrains competitiveness. The

infrastructure network has not been developed nationwide, limiting a large number of

rural and minor ethnics people to access to market economy and international

integration opportunities.

The prices of some infrastructure services in Vietnam are higher than those in

regional countries and tend to increase (like electricity and water), negatively

affecting low - cost - based competitiveness of Vietnam. The dual prices for domestic

and foreign customers have yet to be completely settled. Construction of a developed

infrastructure is a big challenge to Vietnam, which requires external support through

FDI and ODA.

§ Science and technology

Technological level of most industries is more backward compared with

regional countries. Most enterprises are at the stage of technological absorbing

through importing machines and equipments. Technological and knowledge content

in Vietnamese goods is low, products are mainly based on capital and labor. In 2003,

capital contributed 52.7% to economic growth, labor 19.8%, and total production

factors 28,2%. Scientific and technological market, both supply and demand, is infant.

80% budget for scientific research and technology is from the State, opposite to the

situation of developed countries. Large state corporations that have adequate

resources for research and technological applications are not put under pressure of

innovation due to incentives in the protection regime. Domestic private enterprises

need to innovate their technology, but they are in affordable. Capacity of technology

transfer from foreign sector to domestic sector is low due to incomplete policies on

attracting transnational corporations in hi - tech industries, limited capability of

Vietnamese labors to absorb transferred technology, and weak linkage between

domestic and foreign enterprises, especially backward linkage. Organization model of

R&D agencies does not encourage the relation between them and users – enterprises.

§ Human resource

Vietnam has abundant human resource (of close to 40 million people), but

proportion of skilled labors is still very low (21% of the total labor force). In the labor

market, therefore, there exists a paradox: labor supply is high, meanwhile enterprises

are lacking skilled labors, especially technical workers, marketing, designing and

financial specialists, and business administrators. Productivity is low. For example,

productivity in the garment sector is as high as 2/3 of that in China, and increases

more slowly than wage rises. In recent years, wages increase 9% annually while labor

productivity increases fewer than 7%, lessening Vietnam's advantage in low labor

cost. This results from the gaps between vocational training size and economic

development requirements, between training activities and the labor market demand,

and from the lack of a relevant mechanism to encourage learning and attracting talents

in business sector.

§ Credit and Banking

The Vietnamese credit and banking market has revealed some weaknesses.

Financial depth is low, around 67% GDP. Capability of capital mobilization and

lending of commercial banks is low, credit quality is not high and most of the credits

are short-term credit. The credit market is relatively monopolistic; state commercial

banks make up 67% total mobilized capital and 80% credit market. State owned

enterprises, to some extent, are monopolistic customers of commercial banks, making

up 80% credit balance but contributing just 38.9% GDP. The banking system

restructuring is not as rapid as it is expected. Interest rate of VND is at a relatively

high rate (8 - 14% annually) and tends to rise due to the impact of consumer price

index increase. Ratio of bad debt in commercial bank is high, about 6%. If counted by

international indicators, this number can be higher (3 times) and the settlement

heavily depends on state owned enterprise reform process. The financial market is

less developed despite of the establishment of non - banking financial institutions like

financial companies, insurance companies, leasing companies and investment fund.

The security market is too small and has yet to be an efficient channel for capital

mobilization for the economy.

§ Business support services

Business support services like management consulting services, legal

consulting, investment consulting, information provision, and marketing, etc, have not

developed to meet enterprises' demand. Business support services have been paid

attention and developed only since the introduction of the law of enterprises, and now,

they contribute just 1% GDP. High cost of business support services limits the

accessibility of small and medium enterprises.

In general, in a risky business environment, many enterprises have short-term

goals and aim to set relations with the state system for incentive, preference or

priority rather than focusing on their own competitiveness and long-term business

strategies. As a result, the economy develops unhealthily basing on unsustainable

growth factors and has low growth competitiveness.

§ Macroeconomic environment

Vietnam’s macroeconomic stability indicators are assessed to be high (see

table 9). However, it has some signs of instability, shown as follows:

The state budget revenue, even accounting for 21- 22% GDP, is still limited.

The state expenditure on wages increase, debt payment, and irregular expenditure

rises radically while the budget revenue is not stable. The state budget surplus is high,

5.0% GDP in 2003 (see table 11) .

The state investment capital balance, especially capital invested in big

projects, is tense, while debt of projects is rising and has yet to be solved. Up to now,

outstanding debt in the fundamental construction sector is 11,000 billion VND,

accounting for 25% total investment capital from the state budget and more than 50%

state budget capital for fundamental construction in 2003. Losses in the state

investment, as reported in mass media, make up 30% due to weaknesses in planning,

allocation, supervision, and assessment. The increase of the state credits, especially

those given to state owned enterprises, not only restrains resources for private

investment, but also distorts interest rate and the credit market. A number of capital

invested in protected and poorly competitive industries like garment, iron and steel,

sugar can, etc, makes some troubles, especially in the acceleration of integration

process.

In 2003, trade deficit was 13.1% GDP and this is the highest level in the last 5

years. In the first half of 2004, consumer price index increases 7.2%, higher than

projection for 2004. Price of essential materials and consumer goods goes up

radically, obstructing production and business activities, slowing down investment in

construction, and negatively effecting people’s real income.

§ Public institutions

Despite of great endeavor of the State, the institution reform in Vietnam is

carried out very slowly. The legal system is inadequate, asynchronous, not detailed,

inconsistent, and not close to the reality so that it is hard to be realized. There lack

fundamental laws of a market economy like law of competition and law of intellectual

copyright. Some laws are irrelevant with the market economy. Domestic legal system

is not completely consistent with international commitments and WTO rules. A

number of legal documents are not timely and consistently issued, obstructing the

implementation of law.

Administration reform is not thorough. The administration apparatus is slowly

innovated, ineffective and inefficient. The corruption and the abuse of public rights

for private benefit of a part of state officials are handled slowly. Presently, the

administration apparatus is considered as the weakest and most slowly changed part,

and the biggest cause obstructing the progress of Vietnam's comprehensive reform.

2.2. Fundamental policies

The above mentioned analysis proves that it is time for Vietnam to move

driving forces of the economy from import substitute, preferential industries,

protection mechanism and state owned enterprises to a liberalized competitive

environment, a knowledge and high technology based economy while still taking

advantages of low labor cost. Vietnam has to rapidly promote competitive advantages

through stabilization of macroeconomic environment, modernization of public

institutions, enhancement of initiatives, improvement of business environment, and

sophistication of enterprises' strategies and operations. These are prerequisite for the

promotion of export and attraction of domestic and foreign investment.

In order to obtain these goals, the Government of Vietnam should be

determined to implement the following policies:

§ Accelerate state owned enterprises transformation for the purification of

the

state economy, abolish monopoly and protection of state owned enterprise (SOE)

Following equitization process set in SOE reform program. Equitize large and

efficient SOEs. Sell shares widely to enterprises' insiders and outsiders. Speed up the

equitization of state corporations in electricity, post and telecommunication, chemical,

metallurgy, banking and insurance sectors. Minimize proportion of SOEs in the

economy.

Accelerate the transformation of SOEs in which the State holds 100% share

into one-member limited companies, ensure the real independence and responsibility

of these companies. Remove subsidy for SOEs through incentive credit, debt

relaxation, debt forgiveness, and loss compensation. Purify corporate finance, settle

bad debt and redundant employees.

Prevent the transformation from state monopoly into enterprise monopoly.

Strengthening the control and regulation of super profit of state corporations that have

dominant market shares. Gradually form state agglomerates to avoid SOE monopoly.

Minimize the formation of new SOEs. Develop SOEs only in industries and

locations that other economic sectors are unable or unwilling to participate in.

§ Promote domestic private economy

The facts show that this sector has greatest potential for development,

acceleration of growth rate, and enhancement of economic efficiency and

competitiveness. In order to exploit these potentials, the State should create an equal

play-ground for the private sector, remove discrimination against the private

economy, especially in market access, land rent, and credit channels, abolish

unnecessary permits that are irrelevant with the market economy, settle the

irresponsibility of some organizations and individuals that obstruct enterprises'

performance, actively implement private enterprise supporting programs, and develop

business-support infrastructure and services.

§ Improve foreign investment environment

Despite great endeavor of the government in recent years, Vietnam'

environment for FDI is less attractive than regional countries. In order to raise FDI

inflows, Vietnam has to improve its investment environment towards equality,

transparency, consistence, foreseeability, attractiveness and competitiveness. Expand

investment forms and fields for foreign companies compatible with WTO

commitments in market opening. Settle the inconsistence in policy making and

implementation, bureaucracy of administration apparatus, remove obstacles for FDI

enterprises; adjust the law towards creating an equal playground for all economic

sectors but still pursuing commitments in FDI encouragement. Strictly follow the

procedure for information taking from enterprises that are regulated by forthcoming

legal documents before issuance, prevent incomplete implementation and negative

effects on the business investment environment.

In order to improve business environment, create a unified legal framework

and playground for all economic sectors and institutionalize Vietnam's commitments

to international integration, the Vietnamese Government should issue Competition

Law, Unified Enterprise Law applied for all forms of enterprises and Common

Investment Law applied for both domestic and foreign investment.

§ Promote backward and forward linkages between enterprises though

clusters

In order to create high added value based on the reduction of intermediate

costs in the value chain (manufacturing and distribution), Vietnam should settle the

separation between industries through clusters. A cluster is a group of suppliers,

manufactures, distributors, infrastructure and institutions that have interdependent

relations in the creation of a product brought to end consumers. Core enterprises in

the value chain are usually leading manufactures and distributors that have advantages

in production capacity, technological base, investment capital or market relations

Clusters in Vietnam can be divided in to three groups: FDI driven, domestic

private enterprise driven and SOEs driven. Vietnam should promote FDI and

domestic private driven clusters, and at the same time, take advantages of leading

SOEs through incentives, not administrative tools like local content requirements.

Besides, the state support is very important to raise the capability of Vietnamese

suppliers who are mostly small and medium enterprises and to help them establish

forward linkage with leading manufacturers and distributors.

§ Develop production factor markets

Up to now, the goods and service markets are relatively developed meanwhile

production factor markets like capital, real estate, telecommunication, labor, scientific

and technological markets are still infant, limiting the accessibility to resources of

economic actors. An urgent task of the Government, therefore, is to make policies on

pushing dynamic and orderly development of markets.

Real estate market: Implement the Law of Land (amended, 2004). Meet

enterprises' demand on land for business activities.

Capital market: Enhance the capital market through banking system, expand

and enhance the efficiency of the security market and other financial tools. Establish

the Bank for Social Policies, boost the restructuring and operation innovation of

commercial banks to be relevant with market mechanism, create a consistent and

transparent legal framework to enhance banks in all economic sectors in business, fair

competition, and meeting capital and banking service demand of enterprises and

people. Expand the participation of foreign banks in capital and banking service

market. Follow pilot equitization plan with the participation of foreign banks for two

state owned commercial banks, namely the Bank for Foreign Trade of Vietnam and

the Bank for Housing in the Cuu Long River Delta.

Scientific and technological market: Improve institutions of a market economy

towards creating an equal business environment, preventing monopoly, reducing

protection, and putting competition pressure on enterprises so that they have to

innovate technology to raise their competitiveness. Encourage foreign invested

companies to invest in technology innovation and transfer. Develop venture capital

companies and scientific and technological enterprises participated by foreign

partners. Encourage scientific and technological organizations to participate in official

transactions in the market. Innovate operation forms of R&D organizations towards

changing from subsidy and administrative management mechanism to market

mechanism. Support small and medium enterprises in investment in technology

innovation.

Labor market: Enhance the examination of the implementation of the Labor

Law, ensure right interest of employees and employers. Promote transactions to create

exchange between labor supply and demand. Discourage appointment and recruitment

based on relations. Strengthen training for workers, specialists and managers.

Boost the state investment in the construction of infrastructure in rural and

minority group areas. Encourage domestic private enterprises and foreign investors to

offer infrastructure goods and services.

§ Pursue open door policy and active economic integration, promote the

preparation for WTO accession.

Boost the realization of incentive measures to shift investment priority from

import substitute to export oriented industries. Pursue export-oriented strategy based

on low labor cost in some industries like agricultural products, garment and textile.

Raise incentive measures for export oriented and high added value industries like

agricultural product processing, electronics, electric equipment, and information

technology. Settle obstacles in the implementation of policies like incentive interest

rate, tax exemption, quota allocation, tariff procedures, banking payment mechanism,

export bonus and support. Operate Fund for export credit support, export credit

guarantee, support in information, and exhibitions. Constructs mechanism for export

insurance, especially for agricultural products, and export bonus based on exports'

added value. Develop open economic zones and trade information centers. Promote

FDI incentives as a measure to promote export.

Follow (on time or prior to) bilateral and multilateral commitments, especially

those in the framework of AFTA, Vietnam - US bilateral trade agreement, WTO, and

international financial organizations for reducing integration cost and enhancing long

term private investment of domestic and foreign companies in the industries that

Vietnam has competitive advantages

Set agenda for the reduction of tariff and non-tariff measures. Information of

the agenda should be given to enterprises and people so that domestic and foreign

inventors can decide where and how to invest. Protection reduction agenda should be

focused on least competitive industries to limit investment in the sectors that are not

competitive in long term.

Actively deal with barriers imposed by developed countries as well as the

removal of quota on garment of WTO members from 2005.

Together with promoting export, Vietnam should analyze carefully import

demand to have solutions to reduce import surplus while fulfilling tariff reduction

commitments and removing non-tariff barriers in CEPT/AFTA framework at higher

level.

Actively prepare for WTO accession, promote negotiation and rearrange

production and business activities to raise the efficiency and competitiveness.

§ Maintain macro economic stability

Check the capability of state budget revenue in order to collect right and

sufficiently for the state budget, prevent fraudulent, tax evasion, generate budget

income to compensate budget revenue lost by tariff reduction commitments. Enhance

inspection, solve breakdown in budget expenditure. Restrain over- expenditure in a

possible limit.

Control balance of payment and import surplus. Strengthen the role of the

State Bank in money circulation, purify the capital market and control inflation. Set a

rational interest rate for VND, prevent from negative effects on development

investment.

Observe the world market price, ensure the national reserve, actively interfere

by appropriate measures to stabilize the market price, deal with speculation in price

increase or monopoly linkage for price increase.

§ Strengthen the state administration reform

The strengthening of state management capability should be starting from

policy making process. Building a powerful database system, using modern

quantitative tools and consultation to research into international and domestic

environment, forecasting, determination of policy options and selection of optimal

policy are essential to have appropriate policies, to ensure feasibility through specific

resources towards long run economic development tendency and rational agenda.

Knowing experiences of countries that have similar socio-economic conditions is very

necessary for Vietnam when determining its own way in a sharply internationalized

environment. Besides, participants in policy making process, especially those are

directly affected by policies, have to be diversified.

In the current condition, the construction of institutions for enterprises and

markets like capital, labor, real estate, science and technology, and service is an

urgent task. New laws must be consistent with the reform and integration process.

Administration procedures should be further reformed towards simplification of

administrative procedures, application of "one-door" mechanism, and concrete and

clear regulations on individual responsibilities at work.

Enhance the master program in the state administration reform for the period

2001-2010 to build an administration system operating under the principles of

jurisdiction, effectiveness, efficiency, transparency, responsibility and participation.

Simplify the administration apparatus, increase the state management

decentralization, raise the right and responsibility of local authorities, improve

working style of administration offices, modernize information system and

management tools. Public information on Vietnam's economic reform.

Develop training for state officials. Reform wages to ensures their lives and

raise their responsibilities. Penalize strictly state institutes and officials that break the

law and obstruct enterprises. Be determined to fight against corruption.

Continue to restructure the state budget and decentralize finance and state

budget. Widen the participation of non-state organizations in public services through

tendering, develop public service market. Support and encourage non-profitable

organizations under the supervision of the State and community.

Build a system for supervision, assessment and management of the

implementation focusing on outputs, service distribution outcomes and impacts to

raise the transparency and responsibilities of administration bodies who are

considered as the weakest and most slowly reformed sector and the biggest obstacles

to Vietnam's comprehensive reform process. Public response plays a significant role

in this system.

Conclusion

Vietnam has witnessed fundamental changes during 13 years of

comprehensive reform towards market and the world economy. High economic

growth rate, macroeconomic stability and perspectives, opportunities to gain high

profit in business, achievements in poverty reduction are the factors attracting

domestic and foreign investment and support of the world community. However, the

Vietnamese Government has realized the need of further changes to fulfill the task to

transform into a market economy, maintain high and stable economic growth rate, and

comprehensively integrate into the world economy. Great domestic and foreign direct

investment inflows to substitute industries result in the development of less

competitive industries while the Government of Vietnam starts to lessen trade barriers

following international commitments. Labour-intensives based export oriented

policies are losing their effects when wages rise faster than labor productivity. Slow

implementation of state owned enterprise reform and slow development of production

factor markets have obstructed non-state enterprises' development. Therefore,

Vietnam has to be more active when opening to the international market, rapidly

transform from import substitute and protection mechanism, preferential industry and

state owned enterprises promotion into a highly competitive environment and

knowledge and high- technology - based export while still taking advantages of low -

labor - cost - based export activities. The Government plays a great role in this

transformation cause. With further strengthening policies on development of

enterprises, abolishment of monopoly of state owned enterprises, development of

production factor markets, macroeconomic stabilization, acceleration of integration

process, and modernization of public sector, Vietnam will gain higher benefit from

opportunities in the globalization as well as minimize possible costs and reach the

projected goals.

References

1. Brian Ames, Ward Brown, Shanta Devarajan, Alejandro Izquierdo, “ Macro –Economic Policy and Poverty Reduction”, IMF, 2001.

2. Penelope J. Brook, Suzanne M. Smith, “Contracting for Public Services”, WorldBank, 2001.

3. Derick W. Brinkerhoff, Benjanin L. Crosby, “ Managing Policy Reform”,Kumarian Press,inc, 2002.

4. Mai Van Buu, Phan Kim Chien,” Economic management”, Scientific andTechnical Publishers, Hanoi, 2002.

5. Adam McCarty, “Globalization, convergence and Vietnam: the positive vision of2050”, report of the international workshop on the challeges of globalization,2003.

6. Central Institute for Economic Management, “Vietnam’s Economy in2001,2002,2003”, National Political Publishers, Hanoi, 2002,2003,2004.

7. Goro Ono, “ The Industrial Policy for the Economic Reform – The Japan,sExperiences”. National Political Publishers, Hanoi,1998.

8. Nguyen Thi Ngoc Huyen, Doan Thu Ha, “Sosial – Economic Policy”, Scientificand Technical Publishers, Hanoi, 2001.

9. Lim Chong Yah (edited), “Economic policy management in Singapore”, Addison-Wesley publising company, 1996.

10. Alain Mingat, Jee-Peng Tan, “Tools for Education Policy Analysis”, World Bank,2003.

11. David Nachmias, “Public Policy Evaluation”, St. Martins Press, 1997.12. Michael E. Porter, Klaus Schwab, Xavier Sala-i-Martin, Augusto Lopez-Claros,

“The Global Competitiveness Report 2003-2004”, Oxford university press.13. Michael P. Todaro, “Economics for the ThirdWord”, Education Publishers, Hanoi,

2002.14. Tevfik F. Nas, ” Cost – Benefit Analysis”, Sage Publications, 1996.15. David L. Weimer, Aidan R. Vining, “Policy Analysis – Concepts and Practice”,

Prentice Hall, 1999.16. The Socialist Republic of Vietnam, “ The Comprehensive Poverty Reduction anh

Growth Strategy”, Hanoi,2003.17. Vietnam Economic Times, “Vietnam’s and World’s economy”, Vietnam

Economic Times, 2002,2003,2004.18. World Bank, ”The State in a changing world”, Published for the world bank,

Oxford university press, 1997.19. World Bank, ”World Development Reports 2002 – Building Institutions for

Markets”, Oxford University Press for the World Bank.20. World Bank, “World Development Reports 2003 – Sustainable Development in a

Dynamic World: Transforming Institutions, Growth, and Quality of Life”, OxfordUniversity Press for the World Bank.

21. World Bank, International Finance Corporation, Planning Ministry, DiÔn ®µndoanh nghiÖp ViÖt nam 2001,2002,2003.

Table 1: Vietnam: GDP growth rate, inflation, growth rate of sectors, and GDP

structure by sectors in 1990-2003 (%)

Year GDP

growth

rate

Consumer

price index

Growth rate of sectors GDP structure by sectors

Agriculture Industry Service Agriculture Industry Service

1990 5.09 67.1 1.00 2.27 10.19 38.74 22,67 38,59

1991 5.96 67.4 2.18 7.71 7.38 40.49 23,79 35,72

1992 8.65 17.5 6.88 12.79 7.58 33.94 27,26 38,80

1993 8.07 5.3 3.28 12.62 8.64 29.89 28,90 41,23

1994 8.84 14.4 3.37 13.39 9.56 27.43 28,87 43,70

1995 9.54 12.7 4.80 13.60 9.83 27.18 28,76 44,06

1996 9.34 4.5 4.40 14.46 8.80 27.76 29,73 42,51

1997 8.14 3.6 4.33 12.62 7.14 25.77 32,08 42,15

1998 5.76 9.0 3.53 8.33 5.08 25.78 32,49 41,73

1999 4.77 6.8 5.23 7.68 2.25 25.43 34,49 40,08

2000 6.79 -0.6 4.63 10.07 5.32 24.53 36,73 38,74

2001 6.89 -0.2 2.98 19.39 6.10 23.25 38,12 38,63

2002 7.04 4.0 4.06 9.44 6.54 22.99 38,55 38,46

2003 7.24 3.0 3.20 10.34 6.57 21.80 39,97 38,23

2005

Projected

7.5/year in

2001- 2005

<5 4.0 10.4 6.8 20-21 38-39 40-41

2010

Projected

7-8/ year in

2001- 2010

<5 4.0 – 4.5 10.0 –

10.5

7.0 –

8.0

16-17 40-41 42-43

Source: Vietnam and the world economy in 2003-2004, Social – Economic Strategy

2001 – 2010, various issues

Table 2: Vietnam: Export of key agricultural products (Million US$)

Commodities Unit 1990 1995 2000 2001 2002 2003

1. Fishery - Mil.US$ 239 621.4 1475 1778 2023 2217

2. Rice - 1000ton

- Mil. US$

1642

376

1988

546

3477

668

3721

625

3241

726

3820

719

3. Coffee - 1000ton

- Mil. US$

90

74

248

560

733.9

485

931.0

391

719.0

322

700.0

473

4. Rubber - 1000ton

- Mil. US$

75.9

50.0

138.1

193.5

273.4

170

308.0

166

449.0

268

438.0

383

5. Cashew -1000ton

- Mil. US$

8.6

26.0

19.8

97.7

34.2

128

43.6

152

62.0

209

83.6

282

6. Vegetable - Mil. US$ 52 56 213.1 344.3 201.0 152

7. Pepper -1000ton

- Mil. US$

9.0

15

17.9

27

37.0

55

57.0

91

77.0

108

74.4

104

Source: Vietnam economy in 2003, various issues

Table 3: Vietnam: Outputs of key industrial products

Products Unit 1990 1995 2000 2001 2002 2003

1. Electricity Mil.KWh 8790 14665 26682 30673 35562 41117

2. Coal Mil. ton 4.60 8.35 11.61 13.40 15.90 18.96

3. Crude oil - 2.70 7.62 16.29 16.83 16.60 17.69

4. Cement - 2.53 5.83 13.30 16.07 19.48 23.28

5. Rolled steel - 0.10 0.47 1.58 1.91 2.43 2.68

6.Chemical

fertilizer

- 0.48 0.93 1.21 1.07 1.18 1.28

7. Sugar - 0.32 0.52 1.21 1.07 1.08 1.36

8. Electric engine set 16750 29390 48855 53442 56650 74149

9. Garment Mil. set 102 171.9 337.0 375.6 439.3 618.6

10.Automobile set 2,254 3,524 13,547 20,394 27,599 40,883

Source: Vietnam and the world economy in 2003-2004, various issues

Table 4: Vietnam: Key industrial exports

Commodities Unit 1990 1995 2000 2001 2002 2003

1. Crude oil - Mil.ton

- Mil.US$

4705

581

7652

1033

15423

3582

16732

3125

16879

3270

17169

3777

2. Garment Mil.US$ 158 850 1892 1975 2752 3630

3. Footwear Mil.US$ 10.5 296 1472 1578 1867 2217

4.Electronics

and computer

components

Mil. US$ 29.7 156 789 696 505 686

5.Wooden goods Mil. US$ 35 129 290 331 434 563

6. Handicrafts Mil. US$ 54 102 238 300 331 367

7. Electric wire

and cable

Mil. US$ 17 64 158 180 184 290

8. Black coal - Mil.ton

-Mil.US$

1173

48

2821

89

3251

93

4292

113

6049

156

7049

180

9. Plastic Mil. US$ 18 32 101 120 150 175

10. Bicycle and

parts

Mil.US$ 11 67 116 134 150 155

Source: Ministry of Trade

Table 5: Vietnam: Import and export revenue and growth rate, trade deficit in

1990 -2003

Year Export

(mil.US$)

Growth

rate

(%)

Import

(mil.US$)

Growth

rate

(%)

Trade

deficit

(mil.US$)

Percentage

of trade

deficit (%)

1990 2404 23.5 2754 7.3 350 14.6

1991 2087 -13.2 2338 -15.1 251 12.0

1992 2581 23.7 2541 8.7 -40 -1.5

1993 2985 15.7 3924 54.4 939 31.4

1994 4054 35.8 5825 48.5 1771 43.7

1995 5449 34.4 8155 40.0 2706 49.7

1996 7256 33.2 11144 36.6 3887 53.6

1997 9185 26.6 11592 4.0 2407 26.2

1998 9360 1.9 11499 -0.8 2139 22.9

1999 11541 23.3 11742 2.1 201 1.7

2000 14483 25.5 15636 33.2 1153 8.0

2001 15.027 3.8 16162 3.4 1135 7.6

2002 16706 11.2 19733 21.7 3027 18.1

2003 19880 19.0 24995 26.7 5115 25.7

Source: General Statistics Office, Ministry of Trade

Table 6: Vietnam: GDP and aggregated social investment structure by economic

sectors

1995 2000 2001 2002 2003

GDP structure 100 100 100 100 100

State economy 41.24 38.52 38.40 38.31 38.33

In which, state owned

enterprises

31.56 27.73 27.29 27.15 27.20

Non-State economy 51.89 48.20 47.84 47.79 47.67

Foreign invested economy 6.87 13.27 13.76 13.90 14.00

Development investment

capital structure

100 100 100 100 100

State capital 46.07 57.50 58.10 56.20 56.53

In which, state budget 16.23 23.75 24.68 21.97 21.60

State credit and

commercial loan

11.73 18.51 17.14 17.37 17.23

State owned enterprises 14.11 15.24 16.27 16.86 17.69

Non-state capital 16.65 23.80 23.50 25.30 26.70

Foreign invested capital 37.28 18.70 18.40 18.50 16.77

Percentage of development

investment to GDP

26.5 32.9 34.0 34.3 35.9

Source: General Statistics Office, various issues

Table 7: Contribution of domestic and foreign invested

sectors to exports, 1995 - 2003

1995 2000 2001 2002 2003

Exports of goods (US$

million)

5449 1448

3

1502

7

1670

6

1988

0

Exports of domestic

sector (US$

million)

3976 7672 8229 8834 9880

Exports of domestic

sector (% total

exports)

72.9

7

52.9

7

54.7

6

52.8

8

49.7

0

Exports of foreign

invested sector

1473 6811 6798 7872 1000

0

(US$)

Exports of foreign

invested sector

(% total exports)

27.0

3

47.0

3

45.2

4

47.1

2

50.3

0

Source: General Statistics Office and Ministry of Trade

Table 8: Vietnam: Potential benefits and costs of international integration

Benefit Cost

• Better allocation of resources based on

competitive advantages. Adjustment of

advanced economic structure

• Market expansion, cheaper inputs cost

• Scale economic advantage and product

diversification

• Benefits from competition

• Profit decrease, loss, and bankruptcy

due to low competitiveness in both

domestic and international markets

• Employment instability, increase in

differentiation between the rich and the

poor because some groups are not

benefited by integration

enhancement

• Benefits from investment

diversification and risk sharing

• Receipt of FDI capital inflows

• New opportunities for foreign

development aid

• Transfer of technology, management

skills and knowledge

• Human resource training and

development, enhancement of learning,

job creation, income generation and

poverty reduction

• Application of international rules for

the national policies: decrease of

inefficient investment, strengthening of

policy effectiveness, prevention and

settlement of difficulties if necessary,

and activeness in the globalization

process

• Decrease in FDI

• Adjustment cost for economic

restructuring in integration process

• Negative impacts on the state budget

due to tariff reduction

• Dependence on loan and aid

• Direct impact from changes in

international market, loss of control

over some resources and industries

• Increase in international pressure to

implement economic policies

• Influence from other cultures, loss of

national identity

• Faster destruction of environment

Source: Adam McCarty, Globalization, integration and Vietnam: Perspective for

2050, Hanoi, 2002, various issues

Table 9: Competitiveness rankings of Vietnam and selected regional countries

in 2003

Competitiveness Rankings Vietnam China Indone

-sia

Malaysia Thailand Singapore Philippi

-ne

1.Growth CompetitivenessIndex Rank

60 44 72 29 32 6 66

Macroeconomic environment Index Rank

45 25 64 27 26 1 60

Macroeconomic Stability Subindex Rank

16 4 42 11 1 2 46

Government Waste Subindex 40 35 80 25 34 1 89

Rank

Country Credit Rating Rank 67 34 76 35 41 17 54

Public Institutions Index Rank

61 52 65 34 37 6 85

Contracts and Law Subindex Rank

54 60 88 28 30 7 75

Corruption Subindex Rank 61 50 78 39 45 5 92

Technology Index Rank 73 65 65 20 39 12 56

Innovation Subindex Rank 69 70 74 41 37 15 49

ICT Subindex Rank 82 62 63 32 45 6 67

Technology Transfer Subindex Rank (out of 77 non-core innovators)

30 47 60 1 4 12

2.Bussiness CompetitivenessIndex Rank

50 46 62 26 31 8 64

Sophistication of Company Operations and Strategy Index Rank

53 42 62 26 31 12 48

Quality of the National Business Environment Index Rank

48 44 60 24 32 4 71

Source: World Economic Forum: The Global Competitiveness

Report 2003-2004

Table 10: Vietnam: Production outputs and added value growth rate of period

1991 -2003

Industry AgricultureYear

Production outputs Added value Production

outputs

Added value

1991 10.4 8.5 4.1 2.2

1992 17.1 13.4 7.4 6.9

1993 12.7 11.2 6.5 3.3

1994 13.7 11.9 6.8 3.4

1995 14.5 13.9 5.9 4.8

1996 14.2 13.9 7.7 4.4

1997 13.8 13.1 6.4 4.3

1998 12.5 11.3 4.9 3.5

1999 11.6 9.3 7.4 5.2

2000 17.5 10.8 7.3 4.6

2001 14.6 9.7 4.9 3.0

2002 14.8 9.1 6.5 4.1

2003 16 10.3 4.9 3.2

1991-2003

(Average)

14.2 11.2 6.2 4.1

Source: Vietnam and the world economy in 2003-2004. various issues

Table 11. Vietnam: Key indicators

Indicators 1990 1995 2000 2001 2002 2003

Population (millions) 66.02 72.00 77.64 78.69 79.73 80.67

GDP (% change previous

year)

5.09 9.54 6.79 6.89 7.04 7.24

GDP (US$ bn) 9.268 17.280 31.335 32.685 35.085 38.973

GDP per head (US$) 140 240 404 415 440 483

Unemployment rate (%.

urban areas)

8.3 6.08 6.4 6.3 6.0 5.8

Consumer price index (%

change. period-end)

67.1 12.7 -0.6 -0.2 4.0 3.0

Total investment (%GDP) 12.6 26.5 32.9 34.0 34.3 35.9

State budget revenue

(%GDP)

25.2 23.2 20.4 21.6 21.0 21.7

State budget expenditure

(%GDP)

27.8 25.1 23.8 26.9 26.3 27.3

Government balance

(% GDP)

-2.6 -1.9 -4.95 -4.67 -4.96 -5.0

Domestic public sector debt

(accumulated. %GDP)

- 2.8 2.0 3.3 4.3 5.0

Trade balance ($US

million)

-350 -2706 -1153 -1133 -3027 -5115

Exports of goods ($US

million)

2404 5449 14483 15029 16706 19880

Exports of goods (%

change. previous year)

23.5 34.4 25.5 3.8 11.2 19.0

Imports of goods ($US

million)

2754 8155 15636 16162 19733 24995

Imports of goods (%

change. previous year)

7,3 40.0 33.2 3.4 21.7 26.7

Current account balance

(US$ million)

-259 -1868 503 670 -500 -1300

Current account balance

(percent GDP)

-2.0 -10.8 1.6 2.0 -1.4 -3.3

Total external debt (US$

billion)

23.3 25.4 12.8 12.6 13.4 14.3

Total external debt (%GDP) 251 147 40.9 38.5 38.2 36.7

FDI (US$ million) 120 2000 800 1000 1100 1200

Reserves. including gold

(US$ million)

400 1379 3030 3400 3700 4600

Reserves (in weeks of

imports)

7.5 8.8 10.9 9.7 8.7 9.7

Credit to the economy (%

change. period-end)

21.3 52.9 38.1 21.4 22.2 25.0

Exchange rate (VND:1US$

period-end)

8125 11015 14514 15084 15368 15612

Source: General Statistics Office, WB, IMF, various issues