Mid-Reform, Vietnam Asks for Patience

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When Vietnam embarked on its economic-reform program in 1986, the country's leadership worked to reap the benefits of modernization and capitalist markets.

Like most of Southeast Asia this decade, Vietnam achieved high economic growth (averaging 8 percent per year) with low inflation. In the first half of the 1990s, American corporations lobbied hard for the United States government to lift economic sanctions and normalize diplomatic relations with Vietnam. Their efforts proved successful as sanctions were lifted in 1994 and relations were restored in 1995.

But less than four years later, much of the goodwill of the early 1990s has disappeared. Contracted foreign investment plunged by almost 40 percent last year as government red tape, high overheads, and capricious decisionmaking rendered many businesses unviable. Compounding these problems is Asia's financial crisis: More than 70 percent of Vietnam's foreign investment comes from within Asia.

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Government-sector reform looms as the most difficult challenge to Vietnam's leaders. Since 1990, the number of state-owned enterprises (SOEs) has dropped from 5,800 to 1,200. Some foreign economists say this number could be shaved by an additional 1,000 with little drop in output given the poor performance of small state firms.

While Prime Minister Phan Van Khai has demanded an acceleration of reforms to boost competitiveness and efficiency, he has had to temper these views in order to appease Communist Party hard-liners by calling for the state to play a "leading role" in driving the economy toward rapid industrialization. A recent report by the East Asia Analytical Unit of the Australian government's Foreign Affairs Department says SOEs "have slowed their market orientation, reflecting either adjustment fatigue or their response to government policy changes that emphasize state-managed industrialization."

Faced with the prospect of capital flight, Vietnam is striving to convince the foreign business community that it has not lost the will (or the means) to tackle problems so that Vietnam can become an attractive place for foreign investors.

Concern about poverty and corruption is growing. Although incomes have doubled this decade, estimated gross domestic product per capita is $300, making Vietnam one of the world's poorer nations. Last summer, demonstrations against corrupt local party officials had a deep impact on stability.

Prime Minister Khai recently has been outspoken on corruption, saying, "The danger of corruption runs against the nature of our regime."

Despite village protests against alleged government corruption, demonstrations that threaten the legitimacy of the government's one-party rule are not tolerated. In December, the Communist Party selected Gen. Le Kha Phieu to be its new secretary general, the first time a military man has been given the party's top job.

General Phieu is viewed as an arch-conservative, untainted by corruption. He was quoted two years ago as saying capitalism is "obsolete and would soon be replaced." Recently, however, Phieu has shown a softer side, saying despite differences, capitalism and socialism can "peacefully coexist." Phieu's biggest challenge will be linking the need for reform to political stability.

Concerns also have been raised about Vietnam's export competitiveness. Its nonconvertible currency, the dong, is 40 percent overvalued. Rice prices are falling, depressing rural incomes.

Last year, Vietnam exported 3.7 million tons of rice, making it the second-largest rice exporter in the world. However, with Thailand's baht losing half of its value over the past seven months, high-quality Thai rice has become just as cheap as Vietnam's.

While investor sentiment is not in Vietnam's favor, the country should not be viewed as having little promise or as unable to reform. The Vietnamese people are highly motivated and trained. The government should develop policies that will allow Vietnam's small, but emerging, private sector to prosper. Credit, rarely a problem for large state enterprises, is a problem for these companies burdened with unofficial taxes and fees. Yet it is in this sector where the majority of Vietnam's work force will find jobs in coming years.

The Asian countries that will emerge strongest from the present financial crisis will be those that cut away elements of crony capitalism and corruption and allow the advantages of low costs and effective infrastructure to come to the fore. Reform in the financial sector and state enterprises is imperative if Vietnam's economy is to become internationally competitive.

Vietnam has shown a penchant for reform, but at its own pace. The country's leadership is telling foreign investors to wait out the short-term pain for the long-term profit. But unless Vietnam takes additional steps to develop sound policies that will bolster the credibility of the economy, it may be mistaken in expecting patience from its foreign investors.

* John J. Brandon is a Southeast Asia specialist in Washington.

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