Implications of the Crisis for Transition Economies: Vietnam
Prepared for International Conference on the Challenges of Globalization, organized by the Faculty of Economics, Thammasat University at the Royal Orchid Sheraton Hotel , Bangkok,Thailand on October 21-22, 1999.
By Tran Thi Ben, Faculty of Economics, University of Economics-HCM City, Vietnam.
Vietnamese economy is in transition from a centrally planned economy to a market-oriented one. Since Doi Moi (Economic Reform) Vietnam becomes more and more open to regional and world market and it has been gotten impacts from the Asian economic crisis. In the path of transition and integration Vietnamese economy has gained both achievements and challenges. How does Vietnam keep its sustainable growth and deal with challenges? The paper is aimed at the mentioned issues.
Some Main Features of the Economic Development in Vietnam
Economic Development in Vietnam can be divided into two periods: before Doi Moi (1976-1985) and after Doi Moi(1986 to now).
- Before ‘Doi Moi’:
After the reunification of the country in 1975 the economies of the North and South Vietnam were integrated into one. The model socialist Development was implemented throughout the country: collectivization in agriculture, emphasis was placed on heavy industries, strong central control of the entire economy and state sector considered as engine of growth. It led to sectoral imbalance and inefficiency. Vietnamese economy faced a great deal of difficulties such as low growth rate at 2,3% in 86, budget deficit, foreign debt increase at 8,5 million rubles & 1,9 million USD. Vietnam had to import some basic goods such as rice, cloth, 1,5 million tons of rice and 60 million meters of cloth per year and the end of 1986 the hyperinflation reached 775 %.
- After ‘Doi moi’:
Encountering enormous difficulties in 1986 Vietnam carried out economic reforms. In the five- year plan (1986-1990) period, the state carried out three large economic programs, namely food production program, consumer goods production program and export commodities program. The main purpose of the reform was to build a new economic mechanism, a market-based economy in which all economic sectors have been encouraged to work and develop effectively and fairly in attempting to exploit all the available resources more efficiently compared to that in the previous centrally planned economy.
In agriculture, with Decision 10 (1988) of the Party Central Committee ‘khoan san pham’ (product contract system) was implemented to households instead of to collective productive teams. Prices of agricultural products were adjusted to enable farmers to make profit. The law on land gave the land-use right to farmers up to 15 years( and up to 20 years now). These incentives were given to farmers to encourage them to invest all their resources in agricultural activities.
In Industry, Regulation 217 of the ministers Committee gave the self-management in production to state-owned enterprises and no more subsidies from the state for the loss of state-owned ones. From 1988, the state-owned enterprises did not get the capital for their activities from the budget but they have to borrow capital from the bank for their production. Private sector was encouraged to participate in production and business activities
At the end of 1987, Law on foreign investment was passed to attract inflows of foreign capital. In 1988, Banking system was rearranged to adapt to new economic situation. The state bank was separated from commercial operations. It only took the role of supervisor. Commercial banks were established. Since 1989 the state has gradually liberalized control on the price mechanism. About foreign trade, export management based on export quotas were reduced and export activities were given to local authorities, branches and even some associations of private sector.
The period after ‘Doi moi’ can be divided into two periods: period 1986-1990 and the 1991-1998 one. Under the economic reform, Vietnam has gained impressive achievements such as high economic growth rate.
Table 1: Annual growth rates of GDP, Agriculture, Industry and Service Sector during 1986-1998 ( percentage)
Year / 86 / 87 / 88 / 89 / 90GDP Growth / 2.3 / 3.6 / 6.0 / 4.7 / 5.1
Agriculture / 2.4 / -0.5 / 3.9 / 6.8 / 1.6
Industry & Construction / 10.3 / 9.2 / 5.3 / -2.8 / 2.9
Service / -2.8 / 5.3 / 9.1 / 7.6 / 10.8
Year / 91 / 92 / 93 / 94 / 95 / 96 / 97 / 98
GDP Growth / 6.0 / 8.6 / 8.1 / 8.8 / 9.5 / 9.3 / 8.1 / 5.8
Agriculture / 2.2 / 7.1 / 3.8 / 3.9 / 4.8 / 4.4 / 4.3 / 2.7
Industry & Construction / 9.1 / 14.0 / 13.1 / 14.0 / 13.6 / 14.5 / 12.6 / 10 .3
Service / 8.3 / 7.0 / 9.2 / 10.2 / 10.0 / 9.3 / 8.3
Source: GSO 1997,1998.
From a low economic growth rate of 2,3 % in 86, the annual growth rate of Vietnam has increased to over 9% in both 95 and 96. The average GDP growth rate in 86-90 was around 4.3%, and in 91-96 period increased dramatically of almost 8% (table 1). It resulted in increasing per capita income, in US dollar terms, per capita income grew from barely $100 in 1987 to over $300 in 1996. In 1997 from the effect of Asian crisis the GDP growth rate declined and fell to 5.8% in 98, it is the lowest growth rate from 90.
The agricultural sector increased at a good rate, from an average growth rate 2.8 % in 86-90 to 4.3 % in 91-98 (Table 1). Food crop share was slightly declining but still contributed more than 63% in structure of crop's output during 90-98. Industrial crop share, vegetable and bean one contributed around 20% and 7% and were increasing while share of fruit crop was around 8% and almost unchanged during that time. Gross output of paddy in 1988 was 17 million tonnes then over 30 million tonnes in 1998. Coffee grain in 91 was 102,000 tonnes, reached 218,000 tonnes in 95 then 420,000 tonnes in 97. About structure of output of livestock, share of domestic animals contributed more than 64% and was increasing. Share of poultry and that of other were 17% and 15%. Pig was 12,2 million heads in 90 and 16,3 million heads in 95 then 18,1 million heads and buffaloes and cattle were around 7 million heads in 98. Area of water surface for cultivating aquatic and sea products from 95 to 98 was increasing. In 98 it passed 500,000 hecta (GSO 98).
The industry and construction sector have grown remarkably. In the first period, industry sector under new mechanism the state stopped all subsidies. Facing difficulties industrial and construction sector grew at an average modest growth rate of 5%, then decreased to 2.8 % in 1989. In the second period, industrial production expanded quickly and became the main source of economic growth for the entire economy. The high growth rate in industry, 14% for the period 90-96 (Table 1) has been contributed by many factors. The first contribution is from crude oil extraction activities in the offshore oil fields, then construction boom associated with huge inflows of foreign capital and a boost in tourism since the early 1990s. It also resulted from a large previous investment into important industries such as mining, electricity, cement, paper, steel. Utilizing fully capacity of factories and the most important is thanks to mechanism reform. Factories have their own self management right in their production and business activities.
Gross output of some industrial products such as electricity, steel, cement increased. Crude oil from 40,000 tonnes in 1986 increased to 7,6 million tonnes in 1990 and 12,5 million tonnes in 98. Service sector also grew with a high growth rate.
Table 2: Structure of Industrial Gross Output by Economic Sector (at constant 1994 prices) Unit: percentage
1995 / 1996 / 1997 / 1998Total / 100 / 100 / 100 / 100
1- Domestic sector / 74.9 / 73.3 / 71 / 68.2
State owned enterprises / 50.3 / 49.3 / 48 / 46.2
Non state enterprises / 24.6 / 24 / 23.1 / 22
2- Foreign invested sector / 25 / 26.7 / 28.9 / 31.8
Source: GSO 1998
In industrial sector state owned enterprises have played an important role. It shared over 50% in the structure of industrial gross output (95) but its share is declining (46.2% in 1998). The role of private sector has improved remarkably after economic renovation but for it contribution there is no more improvement in recent years. Foreign invested sector has taken part in the industrial sector and it plays an increasingly important role in industrial sector. Its contribution is increasing from one fourth (95) to one third (98) in industrial gross output (Table 2).
Service sectorGrowth has originated from the liberalization in the economy (late 1980s). Shops, restaurants, traders mushroomed. Tourism development opened the way for the establishment of hotels and tourist agencies. Vietnam has received more than 1,6 million foreign visitors in 1996 and hopeful to lure 2 million international tourists in the year 2000. The openness of the economy, the economic improvement in industry, agriculture, construction and the improvement of banking activities from financial reforms has backed up the service sector.
Economic structural change: the share of primary sector (Agriculture) has decreased from 35.5% in 90 to 26.2% in 97, while that of secondary(Industry) and terteary (services) has increased from 23.9 % to 31.2 % and 38.6% to 42.6% relatively in that period of time. It is a good tendency for the long-term economic growth of Vietnam. (See table 3)
Table 3: Share in GDP of main sectors (Percentage)
Year / 90 / 91 / 92 / 93 / 94 / 95 / 96 / 97Agriculture / 31.5 / 39.5 / 33.9 / 29.9 / 28.7 / 27.5 / 27.2 / 26.2
Industry / 23.9 / 24.8 / 27.3 / 28.9 / 29.6 / 30.1 / 30.7 / 31.2
Services / 38.6 / 35.7 / 38.8 / 41.2 / 41.6 / 42.4 / 42.1 / 42.6
Source: GSO 1997
Besides accelerating growth rate, the reform has contributed in stabilizing the macro economic environment. Before 1988, exchange rate was greatly overvalued. It led to large distortion in the structure of prices. Since late 1988 exchange rate was mostly adjusted through market mechanism, real interest rate was kept positive. Reform in financial and fiscal policies is efficient in mobilizing personal saving, increasing tax collection and reducing budget deficit. In early 1989, hyperinflation was defeated. By implement of high interest rates and a tight state expenditure budget, inflation rate was brought down from three-digit rate, 774.7 % in 1986 to one-digit rate 5.2% in 93 (table 4).
Table 4: Inflation Rates (1986- 1999)
1986 / 1988 / 1991 / 1992 / 1993 / 1994 / 1995 / 1996 / 1997 / 1998 / Aug.99Inflation Rate (%) / 775 / 394 / 67.5 / 17.5 / 5.2 / 14.4 / 12.7 / 4.5 / 3.6 / 9.2 / 0.8
Source: WB 1995, VN Economic Times 98, GSO 98, The Saigon Times weekly, Sep.99
About Foreign trade, under the centrally planned system, Vietnamese state strictly controlled foreign trade. At that time Soviet Union and Eastern Europe were Vietnam's main trade partner. All trade transactions were undertaken by state owned enterprises. After economic reform in 1986, export was considered as a crucial goal. Many new policies were implemented. The unification and sharp devaluation of the exchange rate in 1989, liberalizing trade by simplifying the system of tariff and non-tariff restriction, all of these provided incentives to exporters. With the implement of Decree No.57 in 1998 all kinds of firms are allowed to join in foreign trade directly. Such trade liberalization measures have encouraged the rapid growth of trade.
Table 5: Growth Rate of Foreign Trade (1990-1998) in Percentage
Year / Total / Export / Import1990 / 123.5 / 114.3 / 107.3
1991 / 85.8 / 86.8 / 84.9
1992 / 115.7 / 123.7 / 108.7
1993 / 134.9 / 115.7 / 154.4
1994 / 143 / 135.8 / 148.5
1995 / 137.7 / 134.4 / 140
1996 / 135.2 / 133.2 / 136.6
1997 / 112.9 / 126.6 / 104
1998 / 100,4 / 101.9 / 99.2
Source:GSO 1998
In 1990, export growth rate reached 23.5%. Then 1991 the rate declined to minus 13.2 due to the decomposition of the Soviet Union and Eastern Europe, the Vietnam's main trade partners. In the later years, Vietnam searched for new export markets and Vietnam's trade partners have moved to East Asian markets such as Singapore, Japan, Taiwan, South Korea. The trade growth rate increased rapidly to over 30% in the years 94,95,96. Then the trend was declining from 94 and fell sharply in 97 and 98 due to the impact of Asian crisis.
Table 6: Main Markets of Vietnam's Export
1995 / 1996 / 1997Export Value ($m) / Share (%) / Export Value ($m) / Share (%) / Export Value ($m) / Share (%)
Total / 5448,9 / 100 / 7255,9 / 100 / 9185,0 / 100
Asia / 3945 / 72.39 / 5254 / 72.41 / 6017,1 / 65.5
Japan / 1461 / 26.8 / 1546,4 / 21.31 / 1675,4 / 18.2
Singapore / 689,8 / 12.7 / 1290 / 17.77 / 1215,9 / 13.2
Taiwan / 439,4 / 8 / 539,9 / 7.4 / 814,5 / 8.9
China / 361 / 6 / 340,2 / 4.7 / 474,1 / 5.2
Hongkong / 256,7 / 4.7 / 311,2 / 4.2 / 430,7 / 4.7
S. Korea / 235,3 / 4.3 / 558,3 / 7.6 / 417 / 4.6
Thailand / 101,3 / 2 / 107,4 / 1.4 / 235,3 / 2.6
Europe / 982,8 / 18 / 1172,1 / 16.2 / 2207,6 / 24
Russia / 80,8 / 1.5 / 84,7 / 1.2 / 124,6 / 1.4
United Kingdom / 74,6 / 1.4 / 125,1 / 1.7 / 265,2 / 2.9
Germany / 218 / 4 / 228 / 3.1 / 411,4 / 4.5
Netherlands / 79,7 / 1.5 / 147,4 / 2 / 266,8 / 2.9
France / 169,1 / 3.1 / 145 / 2 / 238,1 / 2.6
Switzerland / 61,8 / 1.1 / 151,8 / 2 / 331,9 / 3.6
America / 238.3 / 4.4 / 299.5 / 4.1 / 426.1 / 4.6
USA / 169,7 / 3.1 / 204,2 / 2.8 / 291,5 / 3.2
Australia and Ocean / 56.9 / 1 / 72.9 / 1 / 254.9 / 2.7
Australia / 55,3 / 1 / 64,8 / 1 / 230,4 / 2.5
Source: GSO 1998
About the markets of Vietnam's export: After the collapse of the former Soviet Union, the main previous export partner of Vietnam, Vietnam diversified its export markets. Up to 1997, the predominant export market of Vietnam is Asian countries. Its proportion was over 65% while that of Europe was 24%. The other markets such as American one (4.6%), Australian and Ocean one (2.7%), the share of these markets is increasing but it is still modest compared to the potential of these markets. Currently, top ten export markets of Vietnam are the neibouring Asian-Pacific countries: the top is Japanese market (18.2%) then Singapore one (13.2%), Taiwan (8.9%), China (5.2%), Hongkong (4.7%) and S.Korea (4.6%). Due to mainly relying on the Asian markets so Vietnam Export got impacts from recent Asian economic crisis.
Table 7: Vietnam's Export Structure 1990-1997 (Percentage)
1990 / 1991 / 1992 / 1993 / 1994 / 1995 / 1996 / 1997Primary Products (0-4) / 88.7 / 83.8 / 73.7 / 65.4 / 62.4 / 65.1 / 63.3 / 63.3
Manufacture (5-8) / 10.4 / 16.2 / 26 / 34.2 / 37.1 / 34.6 / 36.4 / 36.7
Chemicals (5) / 0.3 / 0.2 / 0.6 / 0.5 / 0.4 / 0.5 / 0.4 / na
Resource based (6) / 5.0 / 5.0 / 5.7 / 6.2 / 6.2 / 6.4 / 7.1 / na
Machinery &Transport (7) Equipment / 0.4 / 0.3 / 0.7 / 2.0 / 1.3 / 1.4 / 1.5 / na
Miscellaneous (8) / 4.7 / 10.6 / 19.0 / 25.5 / 29.2 / 31.2 / 31.7 / na
Textiles & Garment / - / 9.6 / 9.9 / 10.7 / 13.2 / 15.6 / 15.9 / 16.5
Footwear / 0.7 / 0.6 / 0.8 / 2.2 / 2.8 / 5.4 / 7.3 / 10.6
Unclassified / 0.9 / 0.1 / 0.7 / 0.5 / 0.5 / 0.3 / 0.3 / 0
US$ million / 1,282 / 1,650 / 2,227 / 3,130 / 4,187 / 5,449 / 7,255 / 9,185
Source: For 90-96: from Athukorala 1998, for 1998: Statistical Yearbook 1998.
Primary product still contributes a large share in structure of export (over 60%) although manufacture product share is increasing in the structure of export (from 10.4 % in 1990 and reached 36.7 in 97). Some key exportable as follow: Petroleum exports rose remarkably from 1,514 thousand tonnes (199,124 thousand US )in 1989 to 9,638 thousand tonnes (US$1.3 billion) in 97. Rice export has continually increased and Vietnam shifted from rice imported country to rice exported one (in 1989 rice export reached 1,4 million tonnes and in 1998 reached 3,8 million tons) and became the second largest exporter of rice in the world. Export of footwear, textiles and clothing contributed significantly to total export value. Its share was from 10.2% in 91 to 27.1% in 97 then decreased to 25.2% in 98. Export share of marine product, rubber, coffee and some light manufactured goods have also expanded rapidly.
Import growth rate was 7.3% in 1990, then declining to minus15.1 in 1991 after the decomposition of the Soviet Union and Eastern Europe. Then the rate increased again, up to 54.4% in 93. Import increased due to industrial development during that period it needed more material, equipment for the input of industrial development. Then it was slightly declined in 1994. Due to the economic shrink from the impact of Asian crisis, it fell to 4% in 97 and to minus 0.8% in 98
Foreign Direct Investment (FDI): Since Vietnam introduced its foreign direct investment in 1987, foreign direct investment has increasingly flowed into the country.
Table 8: Foreign Direct Investment Inflow in Vietnam (1988-1998)
Year / No. Of Projects / Registered Capital (US$mil.) / Growth RateRate (%) / Implemented Capital
(US$ mil.) / Impl. Cap./ Reg. Cap. (%)
1988 / 37 / 371.8 / 49 / 13
1989 / 68 / 582.5 / 56.6 / 130 / 22.3
1990 / 108 / 839.0 / 44 / 220 / 26.2
1991 / 151 / 1322.3 / 57.5 / 221 / 16.7
1992 / 197 / 2165.0 / 63.7 / 398 / 18.3
1993 / 269 / 2900.0 / 33.9 / 1106 / 38.1
1994 / 343 / 3765.6 / 29.8 / 1952 / 51.8
1995 / 370 / 6530.8 / 73.4 / 2652 / 40.6
1996 / 325 / 8497.3 / 30.1 / 2371 / 27.9
1997 / 345 / 4649.1 / -45.3 / 2800 / 62.7
1998 / 275 / 3897.4 / -16.1 / n.a / n.a
1988-98 / 2488 / 35520.9
Source: Statistical Yearbook 1998, Vietnam Economic News No. 3,4,5 of 1998
Generally, FDI in Vietnam grew in three different periods, from 1988 to 1990; from 1991 to 1995; and from 1996 until recently.
In the first period of 1988-1990, it is initial step. FDI flowed into Vietnam in modest amount. Only 37 foreign projects were licensed in 1988 registered at US$371.8 million. It reached 68 projects and US$ 582.5 in 1989 and was 108 projects and US$ 839 million in 1990. From 56.6% in 89 the growth rate of FDI declined to 44% in 90. In this period of time, the predominant fields of FDI were oil and gas exploration and exploitation, hotels and restaurants. FDI in agriculture, forestry, fishery, transport and communication was low.
The second period (1991-95) recorded a significant growth of FDI. FDI increased steadily in term of registered and implemented capital. In this period of time many events happened favoring investment environment of Vietnam. Cambodian settlement, Vietnam-China normalization, Singapore lifted its investment ban on Vietnam in 1991, diplomat relation re-establishment with South Korea in 1992 encouraging Korean investment. The removal of US embargo in 1994, Vietnam joining ASEAN in 1995 these events completely ended the era of international isolation and Vietnam began integrating into the world economy.
Compared to the first period, in 1991 registered capital reached 1322.3 million, the growth rate of FDI rose sharply to 57.5% then 63.7%, 33.9%, 29.8%, and 73.4% in 1992, 1993, 1994, and 1995 respectively. The implemented ratio was 16.7%, 18.3%, 38.1%, 51.8% and 40.6% in that sequence of years. The low ratio of implemented capital related to the characteristics of FDI. It is 2-3 years lag of project implementation. There were difficulties in project implementation and a large share of dissolved investment. It led to the average growth rate of FDI was over 50% and the average implemented ratio of FDI was 33% in the period of time. It can be said that the high growth rate of FDI was due to the strong economic growth and the stability of the macro economic environment in that period of time. It can be seen as a positive sign that foreign investors felt confident on the country's economic outlook..
The third period (1996-1998), since 1996, FDI inflow has declined. Registered capital continued to increase in 1996 by 30%. It included two mega-land projects with a registered capital of US$3,108 of which one was dissolved in 98 and the other suspended. In the case these projects were excluded, registered capital decreased by 16% in 1996, by 45.3% in 1997 and by 16.1% in 1998. The Asian financial crisis strongly affected capital flows to Vietnam and FDI in Vietnam declined quickly in 97-98 was. From the impacts of Asian financial crisis foreign investors have faced financial difficulties, many had to revoke their investments abroad, and many were not able to invest more overseas. Vietnam suffered seriously from the FDI withdrawal as the country has relied heavily on Asian investors.
About the forms of FDI, previously, most of FDI in Vietnam has come to joint venture with state-owned enterprises (SOEs). Up to now it still occupies a big share, 49.1 % in total projects licensed and 66.1% in total registered capital. It is due to advantages of SOEs. Only SOEs allowed to contribute land use rights in joint ventures. Some SOEs in industries under trade protection, it is destination of investors aiming at capturing the local market or benefits from the influences of SOEs on governmental decisions. The form of wholly foreign invested enterprise is currently in increasing tendency. Its share in total projects licensed in 96 was 18.6%, then 27.9% and 18% in 97 and 98. Up to 1998 its share in total projects licensed was 45.2% and 23.6% in total registered capital. There are many reasons for the decline of FDI in Joint-venture form. Besides some positive contribution, FDI in joint-venture form faces some constraints. Capital contribution capacity from Vietnamese partner is small, mostly by land use right. Foreign partners raise the price of inputs and lower the price of output to avoid tax but Vietnamese partners cannot check the matter. Foreign partners spending a lot for advertisement and lowering their product price in competition, it leads to loss for a long period of time and Vietnamese partners cannot endure. The dissimilar ideas, disagreement between two partners leads many joint ventures to termination or shifting to wholly foreign invested enterprises. Decision 51 issued in March 99 allows foreign investors to invest their investments into fields that are only offered for joint-venture form previously such as telecommunication, tourism, entertainment, cement, steel production (Investment times, 9/1999.)