Vietnam's Dilemmas and Options: The Dynamic of Migration and Settlement 9789814379434

Citation preview

VIETNAM'S DILEMMAS AND OPTIONS

The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit (AERU) is an integral part of the Institute, coming under the overall supervision of the Director, who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

VIETNAM'S DILEMMAS AND OPTIONS The Challenge of Econom ic Transiti on in the 1990s

Edited by MYA THAN & JOSEPH L.H. TAN

ASEAN Economic Research Unit

INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 1993 Institute of Southeast Asian Studies

Cataloguing in Publication Data Vietnam's dilemmas and options: the challenge of economic transition in the 1990s I edited by Mya Than and Joseph Tan. 1. Vietnam-Economic policy. 2. Vietnam-Economic conditions. I. Mya Than. II. Tan. Joseph Loong Hoe. sls92-67669 1993 HC444 V66 ISBN 981-3016-38-8 (soft cover) ISBN 981-3016-40-X (hard cover) The responsibility for facts and opinions in this publication rests exclusively with the contributors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters. Typeset by International Typesetters Printed in Singapore by Singapore National Printers Pte Ltd.

Dedicated to the memory of Professor KS. Sandhu Director of !SEAS, 1972-1992

CONTENTS

ix xiii

List of Tables Preface Contributors 1.

2.

XV

The Vietnamese Economy in Transition: Introductor y Overview Mya Than and Joseph L.H. Tan The Role of the State and Economic Developme nt in the Reconstruc tion of Vietnam

22

Dan Ton That

3.

Present Phase of Transition to Market Economy in Vietnam 51

Tetsusaburo Kimura

4.

Industrial Restructuri ng and Industrial Policy in Vietnam 71

Jiirgen Reinhardt

5.

Industrial Renovation in Vietnam, 1986-91 97

Adam McCarty

6.

1

Agricultural Development in Vietnam: Issues and Proposals for Reform 144

Le Thanh Nghiep vii

Contents

viii

7.

Human Resource Development in Vietnam Geoffrey B. Hainsworth

8.

9.

157

Vietnam's External Trade, 1975-91: A Survey in the Southeast Asian Context Mya Than

207

Vietnam and ASEAN: Near-Term Prospects for Economic Co-operation Myo Thant and Richard W.A. Vokes

237

10. Sustainable Development: Challenges to a Developing Country Frank Huynh and Heike Stengel

259

11. Some Reflections on Development Assistance and Transitional Economies: With Special Reference to Vietnam N.V. Lam

285

LIST OF TABLES

1.1

1.2

Vietnam and Selected Asian Economies: Basic Economic Indicators Policy Reforms in Vietnam

3 7

2.1

Average Annual Real GNP Growth of Seven OECD Countries, 1929-90 2.2 Average Annual Rate of Unemployment as a Percentage of the Total Labour Force 2.3 Average Annual Growth in the Consumer Price Index 2.4 GNP per Capita of Divided Countries, According to the Economic Model Adopted since World War II 2.5 Economic Performance of the ASEAN Countries and Vietnam, 1989 3.1 3.2 3.3 3.4 3.5 3.6 3.7

Vietnam: Structure of National Income Vietnam: Index of Gross Production of Industry, by Structure Major Products of Industry per Capita The State Budget, 1985-90 Monthly Development of Prices, Interest Rates, and Exchange Rates, 1989 The Structure and Development of Investment Structure of State Investment ix

29 30 30 31 31 53 55 57 61 64 66 67

List of Tables

X

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 5.1

5.2 5.3

Net Material Product, 1983-90 Employment, 1984-90 Gross Industrial Output: Annual Growth Rates Industrial Production, Number of Enterprises, and Investment, 1983-89 Industrial Employment, 1980 and 1988 Exports, by Commodity, 1985-90 Cumulative Approved Total Foreign Investment in Vietnam Accumulated Foreign Investment in Vietnam, by Sector, as of Mid-1991 Number of Industrial State Enterprises, Industrial State-Private Enterprises, and Labour Supply, by Group and Degree of Management, 1980-89 Results of Interviews with Manufacturing Enterprise Directors in Hanoi, 1991 Construction: State Investment Outlays, by Type of Outlays, Degree of Management, and Sector, 1976, 1980, 1986-90

6.1 Progress in Agricultural Collectivization 6.2 Production of Rice and Other Staples, 1958-75 6.3 Agricultural Production, 1976-89 6.4 Annual Growth Rates of Total Gross Domestic Product, Agriculture, and Industry, 1985-90 6.5 Regional Disparities in Rice Production, 1988 Selected Demographic Indicators, Vietnam and Other Countries 7.2 Life Expectancy and Basic Needs Indicators, Vietnam and Other Countries 7.3 Human Development Index (HOI), Vietnam and Other Countries 7.4 Estimates of Deprived Population and Numbers Assisted by Official Programmes, Vietnam, 1976-88 7.5 Households without Access to Water, Sanitation, and Electricity, Vietnam, 1976 and 1987 7.6 Leading Causes of Mortality and Morbidity,

72 74 76

77 79 80 86 87

105 112

126 146 147 149 149 151

7.1

159 164 167 168 171

List of Tables

7. 7 7.8 7.9 7.10 7.11 7.12 7.13 7.14 8.1 8.2 8.3 8.4 8.5 8.6 8. 7 8.8 8.9 8.10 8.11 8.12 8.13 8.14

Vietnam, 1978 and 1986 Selected Indicators of Maternal Health Care, by Rural and Urban Areas, Vietnam, 1976-87 Educational Achievement, Vietnam and Other Countries Educational Achievement and Enrolment, Vietnam, 1976-88 Labour Force Utilization Indicators, Vietnam and Other Countries Labour Force, by Major Sector, Vietnam, 1986-91 Female Representation, Demographically and by Activity, Vietnam, 1975--88 Composition of Work-Force, by Gender and Occupation, Vietnam, 1989 Distribution of Labour, by Sector and Type of Enterprise, Vietnam, 1989 Contribution of Foreign Trade to Vietnam's GDP, 1985-90 Trade Dependency Ratios of Selected Southeast Asian Countries, 1988 Vietnam's Exports and Imports, 1979--85 Vietnam's Exports, by Destination, 1979--85 Vietnam's Exports, by Group of Commodities, 1979--85 Vietnam's Imports, by Origin, 1979--85 Vietnam's Import Structure, 1979--85 Vietnam's Exports and Imports, 1986-91 Vietnam's Exports, by Destination, 1986-91 Vietnam's Exports, by Group of Commodities, 1986-90 Vietnam's Imports, by Origin, 1986-91 Vietnam's Import Structure, 1986-90 Vietnam's Exports to, and Imports from, Selected Asian Countries Vietnam: Foreign Trade Turnover, by Country

xi

172 176 178 180 185 188 190 192 195 209 210 213 214 215 217 218 222 223 224 225 226 229 231

PREFACE -----------·----

The widely recognized failure of centrally planned economies (CPEs) to generate growth and sustain developme nt has been one of the factors that forced Vietnam to transform its economy from a centrally planned to a market-oriented one in the 1980s. Some critics suggest that reforms have been carried out only to stave off a crisis and ensure the survival of an authoritaria n system. In any case, the challenge for Vietnam is formidable, as there has not been a single well-tested and proven model of successful transformat ion from amongst the former CPEs. It is this dismay at the experience of their centrally planned brethren which has encouraged the Vietnamese to seek their own appropriate development or "renovation" model with its Vietnamese accent, doi moi. Within this market-orie nted approach, economic reforms in Vietnam have had some limited success. A liberal foreign investment law was promulgate d in 1988 and it has been evolving progressively taking into account the needs of foreign investors. More recently, a new constitution was introduced, giving citizens more freedom in running their private lives and conducting business. Despite the U.S. embargo on foreign investment s and trade links, there has been an increasing inflow of foreign goods, services, capital, and technology in recent years. The acceding of the ASEAN Treaty of Amity and Economic Co-operation and attainxiii

xiv

Preface

ment of observer status in ASEAN would facilitate Vietnam's increasing integration with the regional as well as the wider global economy. Although the final shape of such economic reform initiatives are uncertain, Vietnam is certainly on the point of no return to the former command/control economic system. Thus now Vietnam is at an important epoch in its history of development. Accordingly it was thought appropriate and timely that the Institute of Southeast Asian Studies should bring together a group of scholars (particularly economists of diverse nationalities and specialities) to produce a volume on Vietnam. The scholars provide a range of perspectives or dilemmas and options confronting a dynamic transitional economy restructuring itself in an uncertain global economy troubled with regionalism and emerging trading blocs. The chapters in this volume identify the major issues concerning the role of the state and economic management, the new directions in resource, agricultural, and industrial development and the challenges arising from the opening up of the economy to the stimuli of external trade and capital movements. However, it should be borne in mind that the contributors have to contend with serious limitations in information available for analyses. As in most developing countries, economic data on Vietnam are limited. Even the scanty official data suffer from weaknesses in terms of accuracy and reliability. Moreover, the national accounting system in Vietnam, as in other centrally planned economies, is quite different from the U.N. system. Finally, while we encourage all points of view, needless to say, the individual contributors are solely responsible for the facts and opinions expressed in their respective chapters, and their interpretations do not necessarily reflect the views and policies of the Institute or its supporters.

CONTRIBUTORS

Dr Dan Ton That is a Professor at the Department of Economics, University of Moncton, Moncton, Canada. Tetsusaburo Kimura is a Professor at the Institute for Asian Studies, Asia University, Tokyo, Japan. Dr Le Thanh Nghiep is currently the Resident Director of Josai International University at the University of California, Riverside. He was formerly a Professor of Economics at Josai International University, Chiba, Japan. Dr Jiirgen Reinhardt is an Associate Industrial Development Officer in the Regional and Country Studies Branch, United Nations Industrial Development Organization, Vienna, Austria. Adam McCarty is currently a consultant to the Living Standards

Measurements Study in Vietnam funded by the World Bank, and a Ph.D. candidate at the National Centre for Development Studies, Australian National University, Canberra, Australia. Earlier, he had worked for two years in Papua New Guinea as Adviser to the then Deputy Prime Minister and Finance Minister, Sir Julius Chan. Dr Myo Thant is an Economist in the Economics and Resource Center of the Asian Development Bank, Manila, Philippines. XV

xvi

Contributors

Dr Richard W.A. Vokes is an Economist in the Programs West 3

Department of the Asian Development Bank, Manila, Philippines. He was formerly a lecturer in Economics and Southeast Asian Studies at the University of Kent at Canterbury, United Kingdom. Dr Geoffrey B. Hainsworth is a Professor at the Department of Economics, University of British Columbia, Vancouver, Canada. Dr Frank Huynh is a Senior Lecturer in the Department of Eco-

nomics, La Trobe University, Melbourne, Australia. Heike Stengel is an Economist at the Volkswirtschaftliches Institut, UniversiUit Erlangen, Nurenberg, Germany. Dr N.V. Lam is a Senior Economist in the Development Planning Division, United Nations Economic and Social Commission for Asia and the Pacific, Bangkok, Thailand. Dr Joseph L.H. Tan is a Senior Fellow at the Institute of Southeast Asian Studies and Co-ordinator of the ASEAN Economic Research Unit. Dr Mya Than is a Fellow and the Joint Co-ordinator of the Indo-

china Unit at the Institute of Southeast Asian Studies.

1

THE VIETNAMESE ECONOMY IN TRANSITION Introductory Overview MYA THAN and JOSEPH L.H. TAN

New developments in political, social, and economic spheres have been taking place in Vietnam since the latter part of the 1980s while the economies of the Soviet Union and Eastern Europe have been undergoing dramatic changes. Doi moi (renovation) marks a new stage in the economic development of the country since its aim is to transform the failed command/control economy to a market-oriented one. Doi moi also has secondary purposes, or what some have called "side dishes" with political objectives - for the gradual liberalization in the party, in the national assembly, and in the press. During the doi moi period Vietnam promulgated its first liberal foreign investment law and introduced some structural changes. However, it is facing many political, social, and economic problems at the domestic as well as international level with regard to inflation, refugees, employment, infrastructure, human resource, deep cuts in assistance from countries of the former Council for Mutual Economic Assistance (CMEA), among others. The inflow of foreign aid and investment is also limited by the embargo imposed by U.S.-led Western countries due to the Cambodia issue. Then, recently in 1991 the U.N.-sponsored peace accord on Cambodia was signed

2

Mya Than and Joseph L.H. Tan

by all factions from Cambodia and by all countries involved in the Cambodian peace process. This positive developme nt in the resolution of the Cambodian conflict, along with the arrival of Prince Sihanouk and the United Nations Transitional Authority for Cambodia (UNTAC), and the exchange of visits by high-level officials between Vietnam and countries of the Association of Southeast Asian Nations (ASEAN) have finally given the "green light" for greater trade and investment activities in Vietnam. Moreover, recent political developme nts in the Asia-Pacific region such as Vietnam's accession of the ASEAN Treaty of Amity and Economic Co-operation, Vietnam's and Laos' attainment of observer status in ASEAN, normalization of relations with China, and the formation of the ASEAN Free Trade Area (AFTA) and the North American Free Trade Area (NAFTA) have paved the way for increasingly democratic governance at the domestic level and the amelioratio n of conflict at the internation al level. As far as economic developme nt is concerned, economic growth rates in the Asia-Pacific region have greatly surpassed the world average. This is because their national economies are open to international trade, foreign direct investment, and internationa l loans; their policies are directed to increasing growth by promoting exports; and their foreign exchange rates are not overvalued . This growth trend will probably continue for some time in the future since present in most of the countries in the region are the basic prerequisit es for growth such as natural resources or access to resource supplies, a fair degree of political stability, productive skilled labour force, a larger role played by the private sector, and pragmatic and good leadership. However, unlike most countries in the Asia-Pacific region, Vietnam's economic performanc e has been very poor since the mid-1980s because of slower economic growth in the second half of the decade (for comparison , see Table 1.1). This slower growth rate was a result of the poor performanc e in the agricultural and industrial sectors, a stagnation in exports, and a heavy debt burden. In view of the Asia-Pacific dynamism, Vietnam should prepare itself to meet challenges in the face of an anachronist ic system of exchange rates, outdated and inadequate financial institutions, promotion of the private sector, inflation, inadequate

TABLE 1.1

Vietnam and Selected Asian Economies: Basic Economic Indicators ---·---------

1. 2. 3. 4. 5.

Population, 1991 (million) Total GNP, 1990 (US$ million) Per capita GNP, 1990 (US$) GOP growth rate, 1985-91 (%) GOP sectoral shares, 1990 (%) Agriculture Industry Manufacturing Services

Vietnam

Laos

Indonesia

Malaysia

Singapore

Thailand

Hong Kong

Korea

China

67.7 n.a. n.a. 3.9b

4.3 750 170 4.3b

177.6• 97,930 550 5.7•

18.2 40,380 2,320 5.9

2.8 35,260 12,310 6.4

56.9 79,390 1,420 8.9•

5.75 70,100 11,540 6.3

43.3 236,900 5,400 9.5

1,150.8 363,770 370 8.4

46.9 31.1 7.3 22.0

61.1 14.2 9.7 24.7

19.6 40.9 19.3 39.5

18.7 42.2 26.9 39.0

0.3 36.6 29.0 63.1

14.4 35.8 24.7 49.8

---·--·--·--··---------

----·

n.a. = Not available. a Forl990. 6 For 1986-90. SouRcE: Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries 1992.

n.a. n.a. n.a. n.a.

7.8 46.4 33.6 45.8

n.a. n.a. n.a. n.a.

4

Mya Than and Joseph L.H Tan

physical and institutional infrastructure, bureau cratic machinery, and so on.

A Brief Review of Economic Reform The econom ic reform s in variou s countr ies of mainla nd Southeast Asia carry differe nt name tags: In Vietna m it is doi moi (renovation), in Laos it is New Economic Management (NEP), and in Myanmar, open-d oor policy. All reform s started with trade liberalization (especially the partici pation of the private sector in domes tic as well as extern al trade), provis ion of greate r financial autono my and decision-making respon sibiliti es to state-o wned enterp rises (SOEs), introdu ction of new liberal foreign investm ent laws, encour aging private -sector partici pation in the produc tion and marke ting of agricu ltural produ cts, restru cturin g of the bankin g system , adjust ments in foreign excha nge rates, and reforms in the pricing system . These reforms were implem ented during a short period of four to five years and some are still evolving. Before review ing the econo mic reform in Vietna m, it is import ant to analys e the factors or situati ons which forced the leader ship of the Comm unist Party of Vietnam to implem ent the reform . Before reunif ication with the south ern part of the country, Vietnam's econom ic develo pment policy was based on collect ive agricu lture, heavy indust ry, and interna tional trade mainly with former CMEA countr ies. Meanwhile, South Vietnam's econo my was depen dent on private ly owned small- scale agriculture, small- and medium-sized light indust ries partici pating in interna tional trade with Weste rn develo ped countr ies. Organizational restructuring by collectivization and C(}{)peratization has been taking place in the South during the post-unification period (1976- 80). These measu res were followed by a Five-Year Plan (1981- 85) which saw the prelim inary steps toward s the decent ralization proces s. However, the plan did not deliver the desired goods. Gross domes tic produc t (GDP) started to falter from 1985, when it fell from 8.4 per cent in 1984 to 5.6 per cent, 3.3 per cent, and 2.6 per cent in 1985, 1986, and 1987, respec tively (see Figure 1.1). The most severe proble m was hyper-inflation. The annual

1. The Vietnamese Economy in Transition: Introductory Overview

5

inflation rate in 1985 was more than 400 per cent mainly due to a decline in food production. Debt-service ratio increased as a result of poor performance in the export sector along with a decline in saving and investment. All these economic ills forced the country to a radical reform, and doi moi appeared on the scene in 1986. Of course, international pressure such as the reforms carried out in the Soviet Union and China also had an enormous impact on Vietnam. Although doi moi had been approved by the Sixth Congress of the Communist Party in late 1986, its actual implementation started only in 1987/88. This marked a new stage of economic development in the country since its aim is to reform the centrally planned system. Although the main thrust was economic, doi moi also had political objectives - for a gradual liberalization in the party, in the national assembly, and in the press. According to Myo Thant and Vokes (Chapter 9 in this volume), the key elements of the policy of renovation are 1. the decentralizati on of state economic management and

autonomy to state-owned enterprises in making decisions relating to production, distribution, and financing; 2. the replacement of administrative measures and controls by economic ones and, in particular, the use of market-oriented monetary policies to control inflation; FIGURE 1.1 Vietnam: GDP Growth Rate

10

5

0 L-----~----~----~----~----~----~----~ 1991 1990 1988 1988 1987 1985 1984 1986 SouRcE: Asian Development Outlook Report 1992 (1992, table 2.2, p. 148).

6

Mya Than and Joseph L.H. Tan

3. the adoption of an outward-oriented policy in external economic relations. Key elements of this policy were the adoption of realistic exchange rates and an extremely liberal foreign investment law in 1988; 4. the adoption of agricultural policies which allowed for longterm usufruct rights and greater freedom in the marketing of products; and 5. the reliance on or acceptance of the private sector as the engine of economic growth. What is remarkable about the implement ation of these reforms is that they were made without external financial assistance from industrialized capitalist countries or multinational institutions such as the International Monetary Fund (IMF), the World Bank, and the Asian Development Bank (ADB). Details of significant policy changes are shown in Table 1.2. Initial results have been encouragin g despite many physical and institutional obstacles. Three-digit inflation has been curbed (from 478 per cent in 1986 to 67 per cent in 1990), food production has increased remarkably (from 18.4 million tons in 1986 to 21.5 million tons in 1990), and the export market is buoyant (export earnings in the 1986--90 period were 2.4 times higher than those in the 1981-85 period). The GOP growth rate also grew from 2. 7 per cent in 1987 to 6.1 per cent and 7.1 per cent in 1988 and 1989, respectively (see Table 1.1 and Figure 1.1). However, it slowed down again in 1990 and 1991 due to sequencing problems and apparent hesitation in further implementi ng fundamenta l longterm reforms. For 1992, according to ADB estimates, the GOP will grow further as radical reforms are carried out and a new constitution gives an impetus and confidence to its citizens as well as foreign businessme n. Non-state sectors are playing an increasingly significant role, and the response to investment in diverse sectors of the economy by many foreign investors (particularl y those from Taiwan, Hong Kong, and Australia) has been encouraging (Appendix Table 1). As for foreign trade, since mid-1989, with trade liberalization, trade-relat ed economic organizatio ns have been increasing rapidly. In 1989 there were about 202 such organizations; by the

1. The Vietnamese Economy in Transition: Introductory Overview

7

TABLE 1.2 Policy Reforms in Vietnam 1987

• Removal of restrictions on private-secto r trade and transport sector involvement • Introduction of foreign investment law • Adjustment of prices of non-essential consumer goods • Restructuring of the banking system • Reduction of the rationing system except for rice and kerosene • Devaluation in the official exchange rate

Reduction of state control over SEE production decisions Legal rights for family economy and the private sector Encourageme nt of individual agricultural production Financial and decision-mak ing autonomy for agricultural cooperatives • Devaluations in official exchange rate • Enactment of foreign exchange regulations 1989 • Announceme nt of positive real exchange rate policy (devaluation) • Removal of import duties for industrial needs 1990 • Decree governing commercial banks, credit co-operative s, and other financial institutions, respectively, introducing greater autonomy to commercial banks and stricter controls on credit co-operatives • Decree introducing new instruments through which the State Bank can control the credit expansion of the banking sector including open market operations

1988

• • • •

1991

• Decree on foreign bank branches • Introduction of export-proce ssing zones (EPZs) • Decree for dissolution of bankrupt SEEs and for the establishmen t of new ones • Introduction of constitution al amendments which guarantee individual rights and nationalization of foreign investments • Approval to corporatize seven state firms

1992

end of 1990 the number had grown to 500 units covering all economic sectors including privately own firms. There was also a dramatic change in the pattern of trade flows - after 1988, Vietnam's trade with its traditional CMEA trade partners (USSR/ CIS, Czechoslov akia, Hungary, and Bulgaria) declined. But its trade with industrializ ed market countries and Third World countries (France, Japan, Hong Kong, Singapore, Taiwan, and so

8

Mya Than and Joseph L.H Tan

forth) increased dramatically (Appendix Table 4). As mentioned earlier, Vietnam is transforming from a centrally planned economy into a market-oriented system, or at least, measures have been introduced which under positive circumstances could help to trigger private-sector initiatives. The reform measures implemented in the country are described in the previous section. This section assesses how far these formerly centrally planned economies are in the process of their transition to a market economy. First of all, what is a market economy? A market economy is here defined as a system in which people, the basic economic unit, enjoy freedom to act in both economic and social fields. A market economy cannot flourish without the widest individual freedom for manreuvre. The goals of a market economy are high growth and increased trade. To assess these economies, Tun Thin (1992) developed and listed forty indices to measure individual freedom, financial and monetary stability, and switching mechanism (Appendix Table 3). According to Tun Thin (ibid.), if points are given to the newly emerging and newly industrialized countries of Asia, they would have scored close to 40 points, whereas the countries in transformation, including Vietnam, would have attained 10-20 points. He also finds that the average GOP growth of the latter countries is about 5 per cent a year, about half of that of the former countries (ibid., p. 4). This means that, although no proper weights are assigned to each point, there must be a positive correlation between market economy indices and GOP growth rate. The contribution of the state sector in GOP also decreased by 14.2 per cent from 54.2 per cent in 1987 (before doi mm) to 40.0 per cent in 1990. This indicates that Vietnam is on the right track to a market economy. However, one has to be cautious in interpreting the initial results without considering the factors of sequencing, timing, consistency, and credibility of reform measures. On the other hand, Kimura's findings (Chapter 3 in this volume) show that central state enterprises have expanded their shares in all fields at the cost of other economic units such as locally managed state firms, co-operatives, and private enterprises. As Vietnam's reform is fragile these factors are taken into account.

I. The Vietnamese Economy in Transition: Introductory Overview

9

All the same, Figure 1.1 confirms that there is a positive relation between market reform and economic growth. This is probably because, unlike in Eastern Europe, the growth base was very low and the impact of reform in the agricultural sector on the whole economy was very strong as these economies were agriculture-based. However, after the initial two years of recovery, growth in these economies slowed down due to sequencing problems and apparent hesitation in implementing further reforms. In sum, Vietnam is almost half way to becoming a market economy, if Tun Thin's yardstick is used. The country is, it seems, at a point of no return. However, there is danger that Vietnam may fall into a reform trap, when partial reform programmes may bring more problems than solutions. In short, Vietnam's transition from a centrally planned economy to a market-oriented system calls for a detailed study of external and internal dimensions of economic development, analyses of various sectors of the economy at the macro as well as the micro level. Rapid changes in international events as well as in the domestic situation in Vietnam should encourage Vietnamese economists and social scientists, at home or abroad, and also foreign specialists on Vietnam, to share their knowledge and diverse experiences to assist in the current programme of reform and restructuring of the Vietnamese economy so as to increase the well-being of the Vietnamese people. Dan Ton That, a Vietnamese-Canadian politico-economist, by using a production function model, suggests that economic development for Vietnam is not only the result of external economic relations and openness alone, but has to do first and foremost with the readiness and commitment of its leaders to find the right path towards economic development, which implies, among other things, the existence of a strong national consensus and an opportune economic environment. He further elaborates that for all these prerequisites to be properly set in place for the reform, the role of the state is very important. The role of government intervention to achieve economic progress has to be clearly charted and publicized. This will enable the country to build a solid foundation for sustainable economic

10

Mya Than and Joseph L.H Tan

development. He also suggests that the state look into how it can attract foreign direct investment and international assistance and maximize the benefits derived thereof for economic reform and development. Kimura, a Japanese economist, explores the present phase of Vietnam's transition to a market-orien ted economy dealing particularly with the management of fiscal and monetary aspects. He points out that although Vietnam has succeeded in slowing down the three-digit hyper-inflatio n by taking bold reform measures in fiscal and monetary management, state enterprises have expanded their share at the expense of non-public economic units because of the subsidies and preferential treatment that they enjoy. This has led the government to accept the fact that privatization is the way to go in its transformation into a market economy. As far as the industrial sector of the Vietnamese economy is concerned, a veteran UNIDO industrial-eco nomist, Reinhardt, analyses the industrial policy and industrial restructuring in Vietnam in the light of doi moi. He notes that foreign investment, privatization of public enterprises, and maximizing benefits from economic linkages and co-operation are key issues for industrial restructuring in the 1990s. Since he has found no single industrial development strategy appropriate for meeting the challenges ahead, he proposes a mixed strategy composed of several or all of those strategies such as a growth strategy with a strong orientation to major export markets, a basic needs strategy which puts heavy emphasis on the agro-industry and the promotion of smallscale industries, a resource-base d strategy characterized by the optional exploitation of natural resources, and an employment strategy focusing on maximum productive employment in labourintensive production processes. On the other hand, Adam McCarty uses a case-study approach to analyse industrial renovation in Vietnam from 1986 to 1991. According to his assessment, the first five years of doi moi should be regarded as a success by any reasonable definition: Vietnam is now a market economy- with gross distortions, corruption, rent-seeking activities, and inadequate "rules of the game". A major test in this period, as noted by McCarty, will be the

1. The Vietnamese Economy in Transition: Introductory Overview

11

government's ability to introduce the legal and institutional framework necessary to underpin a dynamic economy. He identifies the political dimensions of this task as reduced party control, the closing of numerous bureaucratic rent-seeking avenues, the establishment of an independent judiciary, and letting the people get rich. Vietnam's renovation policy initiated in 1986 in the agricultural sector is reviewed by Le Thanh Nghiep, a Vietnamese-Japanese agricultural economist. A recognition of non-socialist forms of production including family- and individual-based farms, increasing farmers' control over their means of production in C }l

..... ~

~.....

-

0

Ul

106

Adam McCarty

was in the form of directed "survival" loans {interview #17- see Appendix}. Continuing bail-outs and discriminat ion against the non-state sector, along with a failure to ensure fiscal discipline were concerns that carried over to the 1990s and threatened macro-economic stability. 1.1. The 1990s

In the second half of 1989 the monthly inflation rate rose progressiv ely from 0.2 per cent in August to 3 per cent by December. The first six months of 1990 saw the monthly rate fluctuate between 1.9 and 3.8 per cent, it then rose further to levels above 5 per cent, and this trend seems to have continued into 1991. In 1989 the governmen t budget revenue had covered 61 per cent of total expenditure s, which was pushed up to 66 per cent in 1990 and this contributed to the fall in the primary deficit from 9.4 per cent of GDP to 7.5 per cent. 1 Further, the proportion of this deficit financed by the State Bank fell from 75 per cent in 1989 to 58 per cent in 1990. However, the fiscal restraint was insufficient to stem the rise of inflation over the period. The 1990s have seen the SOEs still responding to the reforms of 1989. Employme nt levels continued to fall as enterprises restructure d to meet customer demands and improve their competitive ness. Production of consumer goods, notably reed mats, tinned milk, fish brine, tobacco, and confection eries increased while "about 30 varieties among the traditional ones are no longer produced owing to the lack of customers" (Do Due Dinh 1991, p. 8). Production by locally managed state industry grew by 4.1 per cent in 1990 after the substantial decline in the previous year. The state sector under central managemen t grew by an impressive 13 per cent in 1990, much of this in the heavy industry sector. One consequen ce of these divergent performances was that the proportion of the state sector under central managemen t grew from 32.9 per cent in 1989 to 38.1 per cent in 1990 (So Lieu Thong Ke 1991) (see Table 5.1). It seems then that the biases and subsidies going to the centrally managed state industrial sector continued to be substantial into the 1990s and even resulted in an increase in its

5. Industrial Renovation in Vietnam, 1986-91

107

relative importance. Certainly, there is little doubt that the nonstate sector still faces strong discrimination and uncertainty. This is particularly true with regard to access to finance where the collective and private sectors, which generate two-thirds of gross domestic income, account for only some 5 per cent of bank loans. Also, "the heavy hand of government regulation still affects most private sector activities in Vietnam" (Vo Nhan Tri and Booth 1992, p. 16). Regulation, both formal and informal, and networks of rent-seeking intermediaries operate to stifle much entrepreneurial activity by the private sector. However, the important point to note is that the existing regime is markedly less stifling than that of only a few years ago. It is the relative increase in economic freedom and relative decrease in discrimination that has stimulated the non-state sector to play an even greater role in the economy. A natural consequence of the transition to a market economy is that uncertainty about ownership and regulations are now emerging as central reform issues. As early as 1988 a privateowned handicraft factory director had recommended the following: The government should introduce rights of ownership of private assets and means of production into the constitution, but not merely in the form of resolutions, so that private economic units can be courageous to invest and attract shares. (Hoa Bin Fine Handicraft Factory 1988, p. 4)

In a 1991 survey, 95 per cent of individuals interviewed agreed that people are still reluctant to invest in production and business because of the absence of concrete state regulations, and 75 per cent said they were deterred from investing because of the intricacies of administrative procedures. 2 The ability of the central government to tighten the budget constraints of SOEs concomitant with a removal of persistent discriminatory practices against the private sector will be a crucial test of their authority and the reform process into the 1990s. The uncertainty is compounded by the fact that the economy is still, officially, on the "road to socialism". Indeed, in a March 1989 speech, the then Party Secretary, Nguyen Van Linh, had

108

Adam McCarty

remarked that "the private sector will terminate its role when it is not longer effective" (Vo Nhan Tri and Booth 1992). While this may be dismissed as party rhetoric and most observers consider the present reform process to be beyond serious reversal, nor in any danger of such, it nevertheless adds to the uncertainty concerning the direction of the reform process. Rhetoric aside, the reforms of the previous two years have continued to set up the conditions for a competitive market economy. A banking decree in October 1990 established an autonomous central bank and increased the pressure on commercial banks to be "self-accounting", although in an environment of continuing bail-outs, inadequate accounting procedures and an ineffective commercial legal system, banks can hardly be expected to operate solely on commercial criteria. Statutory organizations are being established, along with an insurance law, to release the state from direct insurance responsibilities. The law on foreign investment was amended again in 1990. The taxation system has been completely revamped. New taxes include the minerals tax, income tax, a special consumption tax, agricultural tax, capital tax, and property tax. A land tax is also expected, although whether this will combine with or replace the agricultural production tax is unclear. For SOEs an important change in 1991 was the replacing of the single target "contribution to the budget" with a taxation regime. A turnover tax ranging from 1 to 10 per cent of the value of sales is now the main tax. Also, the total capital possessed by the state-run sector (including fixed and working capital) was inventoried and valued at current prices of 1 January 1990, to determine the levels of capital and property taxes to be levied. A profits tax, normally of 50 per cent, also applies. A business law (including bankruptcy legislation), a private business law, and a joint-stock company law were introduced in 1991 or are expected soon.ln April1991, for example, the Law on Private Enterprises came into effect. According to this law: The state . . . will protect the ownership of the means of production, the right to inherit the capital and other assets of private enterprises as well as the right to free enterprise in compliance with the law. (Yo Nhan Tri and Booth 1992, p. 11)

5. Industrial Renovation in Vietnam, 1986-91

109

The first years of the 1990s may be viewed therefore as a period of consolidation and continuing adjustment to the radical reforms of 1989. In this regard the government has sought to diversify its sources of revenue and to increase the commercial orientation of the banking and industrial sectors. It is no easy process, and certainly the promulgation of appropriate laws is only the first step in changing established relationships and ways of doing business. This period will prove to be a test of the central government's ability to generate confidence in the reform process and in its ability to create the necessary legal and institutional framework to support a competitive market economy. The ability of the central government to impose its will upon the economy has always been limited in Vietnam, as it is in many developing countries. The inability to enforce hard budget constraints on SOEs and to substantially reduce the budget deficit may be interpreted as signs of this "weakness". This consideration, along with the continued ideological confusion, does not engender confidence in the government's ability to make reality match its promulgations. Concerns about increasing conservatism, which was certainly evident in the run-up to the Seventh Party Congress in June 1991 add further to doubts. On the other hand, the events of 1989 showed that the ability to take tough decisions about political economy issues does exist, and there is no reason to doubt that it still does. Faced with high and growing inflation rates the government may well prove capable of implementing and making stick the necessary fiscal restraint and reduced subsidization of SOEs. An important question to ask then is how successful has the "renovation" process been by the end of its first five years? This is the question, but with the focus on the industrial sector, that I was addressing in conducting interviews in Hanoi last year. Undoubtedly, the removal of central planning and related policy reforms have greatly increased the competitiveness and productivity of the industrial sector. I wanted to discover how much had been achieved; how much had changed; what biases and discriminations remained; what changes to product quality, diversification, and differentiation had occurred; how auto-

110

Adam McCarty

nomous were directors now; what control did they have over employees; had forms of ownership changed? These and other questions relating to the contemporary characteristics of the industrial sector in Vietnam are addressed in the following section.

2. Characteristics and Environment of the Contemporary Industrial Sector in Vietnam 2.1. Finance and Banking

Of the four commercial banks, the Agricultural Development Bank of Vietnam (ADBV) and the Industry and Commercial Bank of Vietnam (ICBV) are the largest, each controlling about onethird of all deposits and loans in the system, while the Bank for Foreign Trade of Vietnam (BFTV) gave out 16 per cent of loans in 1989, and the Bank for Investment and Construction of Vietnam (BICV) only 6 per cent (International Monetary Fund [IMF] 1990). There are also about six shareholding banks, urban and rural co-operatives, and housing banks; however, their contribution to the overall picture is small. For industrial enterprises the major lender is the ICBV, followed by the BICV. The ICBV collects deposits and lends predominantly to public sector enterprises. Only about 2 per cent of its loans are for over one year. Some lending to private borrowers began in 1990 but soon proved unsuccessful. Interest rates are determined by the central authorities. Each commercial bank must deposit required reserves with the State Bank of Vietnam (SBV), for which monthly interest at 1.5 per cent is received. This is the same rate at which they can borrow from the SBV up to a prescribed quota limit, after which it increases to 2.4 per cent. 3 In 1989 household deposits made up 56 per cent of total deposits in commercial banks, with enterprise deposits making up the rest. 70 per cent of household deposits are for three-month terms (4 per cent), while 78 per cent of enterprise deposits are in current accounts (0 per cent interest). There are three main categories of lending rates. About 7 per cent of total bank credit is advanced by the BICV at 0.8 per cent per month for purposes identified in the budget. About 80 per cent is granted to priority state and locally managed enterprises

111

5. Industrial Renovation in Vietnam, 1986-91

at monthly rates of interest which vary between 1.8 and 3 per cent (see listing below). The remainder is advanced to "nonpriority" sectors, including the non-state sector, at about 4.5 per cent but reportedly more. Lending Priorities

1. For technical improvements and rationalization of production 2. For food and foodstuff trading; salt, fertilizers, and pesticide production and trading; books and teaching material distribution; lending to remote areas 3. For medical and pharmaceutical production and trading, shipbuilding, and machine-tool industry 4. Agriculture, forestry, fisheries, mining industry, and construction 5. Transportation and post 6. Trading, including imports and exports 7. Tourism and services

Monthly Nominal Interest Rate

1.8

2.1

2.3 2.4

2.7 2.9 3.0

Such a discriminatory interest rate regime is bound to influence the pattern of development, for example, there is a clear bias against the services sector which is mainly covered by the last three categories. The ICBV lends for priorities 2 to 7. Some 20 per cent of their loans go to the non-state sector, which includes some jointventure projects. Since the banking reforms of October 1990, branch managers were given greater autonomy in lending decisions and had merely to elaborate an indicative "plan of balancing and using capital" rather than seek approvals for all lending activity every quarter from higher authorities {#2}. The BICV lends for priority 1 activity as well as the 0.8 per cent lending mentioned above. The importance of the latter funds is that they are long-term loans lent for between three and eight years {#5}, whereas nearly all other lending is for only three months and with heavy penalty rates for late payments {#26}.

TABLE 5.2 Results of Interviews with Manufacturing Enterprise Directors in Hanoi, 1991

Ownership Type

Main Product

Private Private Production group Co-op Co-op Co-op

Shoes Construction Miscellaneous plastic Chemicals Paper Miscellaneous machinery Construction Electrical goods assembly Electrical goods assembly Glass Electrical Shoes Clothing Clothing Furniture Rubber Ice Bicycles Electrical Candles Shoes Pharmaceuticals Machinery Glass items Rubber Machinery Machinery

Quan

HPC/private HPC/private HPC HPC HPC HPC HPC HPC HPC HPC HPC Central Central Central Central Central Central Central Central Central

No. of Employees 1986

1991

New Director since 1989?

If New from Female Here? Director?

13 30

30 100

No No

Yes No

4 120 20

16 80 196

No No No

No No Yes

200 500

70 80

No Yes

10

180

No

240 400 950 2,600 900 300 170 1,000 175 1,300 170 1,300 500 1,000 1,400 1,700 3,200 3,200 1,100

300 210 746 2,250 800 120 200 600 150 500 180 1,000 400 600 700 600 2,000 1,200 750

No Yes Yes Yes No Yes Yes No Yes No No No Yes No No No Yes Yes Yes

Total

22,502 14,058 (62 %)

y = 41%

HPC Central

7,795 13,570

y = 6/9 y = 4/9

5,576 (72%) 7,430 (55%)

HPC= Hanoi People's Committee, the provincial government of Hanoi province. Y =Yes. N =No.

Yes

No No No

Yes Yes Yes

No Yes No Yes No Yes No Yes No No No Yes No No No No No No No

8Y/3N

y = 26%

Yes Yes Yes No No Yes

No

y = 4/9 y = 1/9

5. Industrial Renovation in Vietnam, 1986-91

113

About 10 per cent of BICV customers went bankrupt in 1991, although this led to extended loans rather than closures. The problem of only having access to short-term loans was a recurring one. One senior Vietnamese economist argued that this was because the banks were exploiting their oligopolistic position to circumvent the interest rate ceiling restrictions, that is, giving only a four-month loan for a production cycle that would certainly take much longer ensures that penalty rates will apply and that the real interests paid back will be higher {#58}. Many private and co-operative industrial enterprises do not borrow at all from banks "as the interest rate only encourages smugglers" {#42}. There seems to be only a minimal informal credit market. Money could be borrowed from friends, but this normally constituted an investment and joint ownership rather than a loan {#4}. Also, even at 4.9 per cent per month, loans were difficult to get from banks and the procedures complicated. "The time required to get a loan depends on 'personal relations' and the weather of the banking system" {#6, #8}. Private enterprises and co-operatives face almost the same conditions in applying for loans, with the exception that before 1991 the co-operatives had first to go through their local government or union branch to get permission. Now they can go direct to the banks {#10}. The BFTV, also known as the Vietcombank, is proving the most troublesome and problematic of the financial institutions. Legally, it lost its monopoly over foreign trade financing business in 1990,. while the function of managing foreign exchange has been taken over by the State Bank. However, how much that legal change has broken the monopoly remains in doubt and, for the moment, or at least in Hanoi, the control of Vietcombank over formal dollar flows seems quite secure. The Vietcombank official whom I interviewed declared that "this bank will dominate foreign exchange transactions for the next five years". He also said that all export companies were forced by legislation to keep their dollars in the Vietcombank and that these could only be withdrawn upon presentation of an import licence. An official at another bank said that if importexport companies wished to withdraw their dollars from the Vietcombank without an import licence (which were difficult and

Adam McCarty

114

expensive to obtain) then they had to sell 40 per cent of the dollars to the Vietcombank at the official exchange rate which would enable them to access the remaining 60 per cent for use or sale to other enterprises {#2}. Problems of delayed and restricted payments to trading companies from Vietcombank often carry on to the producing enterprises themselves. Some of the trading companies, however, have no one to blame but themselves. Teximex, for example, owes US$800,000 to Dong Xuan Knitwear for exporting 1.1 million items to Russia, but it cannot pay and even owes Vietcombank 60 million dong. "Producers have to bear all the losses in these matters" {#2}, which would imply that a hardening of the budget constraints facing production enterprises can only be feasible if those facing the trading companies, the banks, and indeed all other enterprises are hardened simultaneously. Products in demand can be sold on the domestic market for dollars with which to buy imported inputs. The Hanoi Thong Nhat factory sold fans for US$400,000 to South Vietnam in the first six months of 1991 {#43}. Another alternative is just to buy dollars from enterprises which earn them from exports {#22, #26}. However, sometimes dollar shortages have proven to be a binding constraint for production activities. A UNDP report into the pharmaceutical industry concluded that the main reason for the low capacity utilization is the nonavailability of foreign currency to meet the import cost of pharmaceutical chemicals. (Perrson et al. 1987)

Finally, poor transactions-clearing facilities and accountkeeping are features of all the banks. An improvement in these would also set the stage for the general introduction of more standard accounting practices throughout the economy, something that would seem to be desperately needed in Vietnam, in order to introduce an effective and more equitable fiscal system. (Brabant in Ronnas and Sjoberg 1991, p. 226)

2.2. Taxation

In 1991 a taxation regime replaced the previous targeted "contribution to state budget" for industrial enterprises. By the

5. Industrial Renovation in Vietnam, 1986-91

115

middle of that year there were four taxes in effect, these were a turnover tax, a profits tax, a special consumption tax, and an export-import tax. There was also a tax on fixed capital being used by state enterprises, but at 0.2 per cent per month and calculated on historical costs this was insignificant. Another three taxes were expected to be introduced soon: an income tax, a natural resources tax, and a land tax. A law on "using state capital" was being drafted which, combined with a stock-take of state assets, was to form the basis for a more realistic fixed capital (excluding land) tax. Further, a finance official remarked that a tax on housing was being considered. It should be noted that fixed capital, housing, and land taxes are charges for the "use right" of state-owned assets. A variety of fees were also in existence, including those for beginning a business, killing animals, and an internal transport fee. Of the above, the turnover tax was by far the most important. It was charged on the value of products sold and ranged from 1 to 10 per cent depending on the product (consumption goods for the domestic market and services faced the higher rate). Profits were taxed at 50 per cent; so, as one director put it, "We try not to make profits" {#11}. Producers must pay the special consumption tax, which is also high, but which applies to only six goods (including alcohol [70 per cent], cigarettes, fire-crackers, and incense sticks) and replaces the turnover tax for these items. The export-import tax is supplemented by a number of quotas. There are quotas on major export items like rice, other agricultural commodities, metal, oil, and seafood. In 1991 a quota on motorbicycle imports and bans on cigarette and motorcar imports were imposed. There are also two different tariff structures: one for state enterprises and one for non-state enterprises. The confusion of the foreign trade taxation regime is in part because it is controlled and implemented by the Customs Office, where the temptations for distortionary practices may be more prevalent than in the Taxation Department. In the context of continuing subsidization it is not surprising that payment of the new taxes are open to negotiation as the previous "contribution" targets were. Some directors remarked that they did not pay the fixed capital tax {#14}. A director of an

116

Adam McCarty

enterprise making uniforms said that their taxes "depended on higher levels, but generally they were 'crossed out' nowadays" {#26}. It is hard to judge how comprehensively the new tax regime has been implemented. Apparently, something like 30 per cent of taxes for turnover, interest, and special consumption are not being collected (Do Due Dinh 1991). The impression I gained was that the new regime had been accepted and that most enterprises were paying their taxes. Yet this is only a superficial impression for the inadequacies of accounting methods and auditing would suggest many opportunities for evasion. As an ICBV employee noted: If you see only the paper you cannot see anything. Enterprises

keep two [accounting] books, one for themselves and one for higher levels. {#2}

There are also a variety of quasi-legal or illegal fees that enterprises are paying. In particular there are the "voluntary" contributions to local governments (district and suburban), to the police, and to the owning ministry or department of the enterprise. Although they do not seem to be substantial, they did not stop one C(H)perative director complaining that because they have two locations they have to pay "double phuong and police security fees" {#6}. A problem with the "voluntary" fees is that they must be drawn from the profit fund of state enterprises and hence cannot be written off as legitimate expenses. Payments for permissions are commonplace. These can be required from owning ministries or departments, the local governments, the police, banks, or the enterprise unions. Many of the permissions required seem little more than archaic leftovers from the previous central planning system and simply impose additional costs, in terms of time wasted as much as money, for enterprises struggling to become competitive. Indeed, apart from lucrative permits such as export quotas, permission payments do not seem to be extortionary and may even be viewed as a justifiable supplement to public servants whose wages may be only US$20 per month and a fraction of private sector equivalents. The important point to note is the potential

5. Industrial Renovation in Vietnam, 1986-91

117

that these administrative arrangements have to facilitate extortionary situations and rent-seeking behaviour. Thus profitable enterprises can find themselves squeezed by those institutions from which they require permissions. However, these institutions are generally those which have some form of ownership claim on the enterprise and so one response to the problem is to formalize the ownership and profit-sharing arrangements by forming a joint-stock company. By this process, profitable enterprises are induced into joint-ownership arrangements with partners from the government and banks and so forth, a phenomenon clearly evident in the fast-growing electrical goods assembly industry in Vietnam. Taxation of the private sector is limited and haphazard. Private activity, particularly services and trading, has grown rapidly in recent years. Between 1986 and 1990 the private sector share of trade rose from 45.6 to 64.1 per cent (Do Due Dinh 1991). This is most probably an underestimate as something like 33 per cent of private business operations are not registered and they "rarely report their activity and never correctly" {#62}. In Hanoi in 1990, a check on 41,036 business licences led to 29,580 fines. Also in Hanoi, over the six months to the end of June 1991, 228 billion dong in taxes were collected, but only 19 billion dong of this came from the private sector in which an estimated 66 per cent of all economic activity takes place {#60}. 2.3. Foreign Trade and Investment

Vietnamese exports increased by 87.4 per cent in 1989 compared with 1988 and by a further 12.5 per cent in 1990, thereby turning a US$298.6 million trade deficit in 1989 into a US$72 million surplus the following year. On 1 January 1991, a new trading arrangement came into effect between Vietnam and the Soviet Union. All trade was to be conducted in "hard" currency (dollars) and total bilateral trade was to be cut to less than US$1 billion for that year. In 1990 Vietnamese exports to the Soviet Union had covered only slightly over 50 per cent of imports and total trade had been US$3.3 billion (Far Eastern Economic Review [FEER], 21 February 1991).

118

Adam McCarty

The impact of this dramatic change in the trade pattern in 1991 was particularly pronounced in the state industrial sector which had relied heavily on Soviet subsidized inputs and export contracts, while the agricultural sector suffered from shortages of fertilizers and pesticides. To some extent adjustment had already commenced: by 1990 the value of dollar imports had increased by 71 per cent on their 1988level, while rouble imports had fallen by a third (Do Due Dinh 1991). In 1990 the Soviet Union delivered only 85 per cent of the oil and steel and 60 per cent of the cotton that it had promised Vietnam. Nevertheless the changes, particularly the sharp increases in certain inputs, came as a great shock to many enterprises (oil products and steel trebled in price in early 1991). In 1991 something like 60 per cent of contracts with the Soviet Union and other Eastern bloc countries were cancelled. Some state enterprises lost their only customers overnight and were forced to scour the domestic market, diversify their production, or shut down. One footwear enterprise which I visited said that production had fallen by 70 per cent that year and showed me a warehouse full of canvas shoes and wellington boots that they could not sell {#24}. Countervailing, or at least lessening, the impact of declining Soviet trade have been two developments: the increase in smuggling over the past few years, and the increasing competence and competitiveness of import-export companies. In 1990 over half of all goods available in the markets were smuggled (Vo Nhan Tri and Booth 1992). Two-thirds of the estimated 1,500 billion dong of smuggled goods came from Singapore and Thailand, the remainder from China. The increase in smuggling was also increasing the competitive pressures as the variety of new and substitute products on the domestic market increased. 4 Nearly all official foreign trade must go through state-owned import-export companies, although large SOEs {#35} and some other enterprises, notably profitable joint ventures, are increasingly getting permission to trade directly. All enterprises can apply for permission to trade directly, but this costs US$5,000 and there is no certainty about getting any or all the fee back if

5. Industrial Renovation in Vietnam, 1986-91

119

permission is not granted {#7}. Recent years have witnessed an erosion of the monopolistic influences wielded by many of the import-export companies. Many enterprise directors claimed to have full autonomy in deciding which of these companies they can operate through. However, extortionary stories were also common. One foreign observer remarked: By law the import-export companies are allowed to get 1.5 per cent of sales for their service, but they normally get much more and in some cases as much as 40 per cent. (Morten 1991)

Rates greater than about 5 per cent were not likely to be very common, and most directors whom I interviewed quoted rates below that (a private enterprise director quoted 2 per cent {#42}). One clothing exporter previously paid 7 per cent to their agent, Teximex, but "due to complaining", that had been reduced to 1 per cent {#38}. Another said that their fee had risen from 1.5 to 2.3 per cent in 1991 {#43}. Some monopolistic relations have prevailed, but they seem to be exceptions rather than the rule. A common problem that enterprises have with the exportimport companies are the long delays before payments. Three months was normal {#24}; most waited between two to six months {#2}. In 1988 one private enterprise was waiting for between nine months and one year for payments from its export agent (Hoa Bin Fine Handicraft Factory 1988). Others never get paid. Foreign investment in the Vietnamese industrial sector has been quite limited. The foreign investment law is "one of the most liberal in all Southeast Asia" (Economist, 19 December 1987). However, uncertainty about the long-term policy direction, 5 a continuing American embargo, considerable bureaucratic delays, and discriminatory pricing policies 6 have deterred many potential investors. As of June 1991 there was a total of US$2.1 billion of approved investments in Vietnam (FEER, 5 September 1991). Over half of this was going into oil exploration and hotels, and only some US$400 million had already been invested. About twothirds of the projects are located in South Vietnam, most of these

120

Adam McCarty

in Ho Chi Minh City. Approvals amounting to US$450 million were being directed through 103 projects in the industrial sector. Many of these were from Taiwanese investing in Ho Chi Minh light industrial activity, especially in clothing and textiles. In the North, foreign investment has been negligible, and the most important source of foreign funds for industry comes from aid agencies. The assembly of electrical goods, particularly television sets, is the exception. In this area foreign companies have formed joint ventures with Vietnamese partners for a variety of reasons: for the Taiwanese, simply to sell their poor-quality parts; for the Japanese, to establish their brands through some early market penetration (Panasonic, JVC); and for others, such as South Koreans, to have items assembled cheaply for re-export back to their country. The director of one enterprise claimed that they put together car stereos for a South Korean company at US$1.80 each when it was costing US$5 in Thailand {#31}. 2.4. Labour

Although the industrial sector produced 24 per cent of the value of national income in 1989, it employed only about 11 per cent of the social labour force. 7 The total number of employees had peaked at 2,946,000 in 1988 before falling by 14 per cent to 2,531,400 in 1989. It is unlikely to have risen since then. Of that total in 1989, 31 per cent or 782,000 persons were employed in the state sector, with about even numbers in the heavy and light industrial areas. The official statistical tables issued by the Vietnamese authorities make a distinction between productive employment (cong nhan vien san xuat) and productive workers (cong nhan san xuat) in the state sector. The latter category excludes those in the "non-productive sector" of enterprises, that is, those not directly involved in the production of physical goods. These indirect workers constituted 17.8 per cent of total state industrial employment in 1988, down slightly from 18.6 per cent in 1980. This seems to be quite a high proportion of such workers. One cooperative director said that the number of management staff in

5. Industrial Renovation in Vietnam, 1986-91

121

state enterprises was set at 10 per cent by regulation, and an advantage of non-state enterprises was that they could keep theirs down to about 1 per cent {#8}. Also, as a recent UNIDO report noted: This preponderance of indirect workers is particularly remarkable in as much as these enterprises usually have no commercial, marketing or research departments of their own, and for the most part support only rudimentary maintenance and accounting sections. (UNIDO 1991, p. 38)

A typical characteristic of centrally planned economies is that their industrial enterprises are grossly overstaffed. In fact, if one is to hypothesize an objective function for these agents, the need to produce a minimum surplus sufficient to satisfy their excessive number of workers is probably closer to the mark than profit maximization (with greater surpluses merely being expropriated). Labour productivity is therefore very low by international comparison, although higher than the national average due to the intensive nature of investment in the sector. 1987 figures show gross industrial production per employee in the state sector to be 51,300 dong. 8 In the heavy industry sector it was only 30,800 dong, less than half of the 72,900 dong produced per employee in the light industry sector. There was a more startling contrast between centrally managed enterprises (112, 100 dong) and locally managed enterprises (40,000 dong). This substantiates reports that the gross inefficiencies of many managed enterprises have been a major cause of their closures since 1989. Since 1989, directors have been gaining increasing autonomy over their work-forces. State sector industrial employment had been falling since 1987, the most substantial declines beginning in 1989 when the state introduced a lump-sum payment scheme to induce further entrenchments. The central authorities seem to have been persuaded in this period that a lower staffing level was necessary for increased competitiveness whereas previous policy seemed to be a matter of imposing as many employees upon the director as the enterprise could possibly support. 9 Some quantitative results based on interviews conducted with twenty-seven enterprise director are shown in Table 5.2.

122

Adam McCarty

Only four of the eighteen directors of enterprises owned by the Central Committees and HPCs said that the number of employees had increased since 1986. Overall, the average employment level was only two-thirds of the 1986 level, and most of the departures had been in 1989. It should be noted that I gained the distinct impression, from talking to both directors and former state employees, that it is the worker who makes the decision to leave or stay. I heard of no instances of workers being forced to leave from enterprises that could otherwise have supported them. Real wages in state enterprises have been decreasing for some years now. Increasingly, enterprises are setting wages and other benefits according to their ability to pay rather than according to official scales. This development seems to have been fundamental in leading many employees to leave state enterprises and to undertake better-paid, yet riskier, private sector employment. 10 At the same time disparities in wages paid between enterprises and between managers and workers seem to be increasing. Regulations apparently limit the monthly worker's wage to 300,000 dong and managers to no more than three times that of workers {#26}; however, in-kind payments and other forms of non-monetary remuneration make these regulations ineffective. In particular, the building of houses for employees of profitable enterprises is a common practice and has helped fuel the present building boom in urban areas. In practice, some workers were earning 1 million dong per month in mid-1991, which was about US$150 {#65}. Of course, in the vast majority of floundering state enterprises wages were nowhere near this level, with many workers receiving only about 100,000 dong (US$15) monthly and few other benefits. Few directors claimed they had the ability to sack workers, though one remarked that legislation expected in late 1991 was going to give that authority {#39}. Recruitment too was restricted by the demands of pension arrangements and by "requests" from various authorities. A director of an electric fan factory said that "like most [directors], I want hundreds more to leave" {#43}. Another, a director of an engineering plant with 750 employees, remarked that "there are too many, and we would only employ 200 if we had the right" {#12}. It would seem then that over-

5. Industrial Renovation in Vietnam, 1986-91

123

staffing and low employee skills remain important constraints on the renovation of the state industrial sector. Indeed, control over the labour force (including numbers of "indirect" stafO appears to be the most distinct advantage which non-state enterprises have over their state counterparts. They also did not have to pay a percentage, about 15 per cent, of the total wage bill into a state-administered pension fund. Cooperatives seem to have developed their own complex retirement packages for their workers, based loosely around official regulations, their own interpretations of what is fair, and their capacity to pay {#10, #8}. Employment in the state industrial sector can be expected to continue declining over the immediate future, and growth in the non-state sector will not compensate for this decline for some years. In an environment of high and rising unemployment and a labour force growing at 3.4 per cent each year, it is hardly surprising that the authorities are showing reluctance to further tighten the budget constraints of SOEs. However, the state industrial sector employs less than 5 per cent of the total labour force and the continuing cost of subsidizing this sector is an important cause of the problem of spiralling inflation.

2. 5. Infrastructure All land is officially owned by the state and economic agents can only secure the "right to use" land, not ownership as such.U State enterprises are generally allocated land as they require it {#35} and until recently have paid no taxes for it. However, on 1 August 1991 a land tax came into effect. This tax has differing rates for rural, urban, and central city areas and while they are not inconsequential, they nevertheless undervalue the shadow price for land in the open market. It seems a sensible means of raising revenues; it is difficult to evade and should induce enterprises to be more efficient in managing this resource. One director, for example, remarked in June 1991, that they were trying to dispose of a vacant block to avoid having to pay taxes on it later that year {#26}.

Acquiring land from persons already holding the use right

124

Adam McCarty

involves a time-consuming and expensive process. In urban areas this involves purchasing the building, which can then be used or demolished as desired. When the state acquires some land from users it does not actually "buy" it because technically it already owns it, but rather it pays for "damages to individuals" for moving them on {#21}. The present "users" do not necessarily require documentation to prove use right. Squatters' rights seem to be respected so long as the local authorities verify a reasonable period of occupancy. There is some confusion on this issue though. An official of the Hanoi Real Estate Company (the only one in Hanoi and owned by the Hanoi People's Committee said that squatters could now "buy their land [use right]" at market prices (40 per cent discount for state servants; 50 per cent for army widows and disabled veterans) {#21}. This would suggest that the "damages to individuals" payments are substantially below market values, yet this does not always seem to be the case as the example below illustrates. The director of a HPC-private joint-venture enterprise whom I interviewed had moved his operation to a new site in 1990. The land had been bought from the occupying peasants by the HPC for the price of "twenty-five years of production paid in advance". Apparently, the land was producing only 5 tonnes per hectare of rice but they were paid at the rate of 7 tonnes per hectare and at market prices. Sometimes, he said, the cost is fifty years of production {#30}. This appears to be an extraordinarily high price to pay for the land; the opportunity cost of leaving must surely be much less to the peasants. For state enterprises, acquiring new buildings would be relatively expensive were it not for the availability of cheap longterm credit from the BICV for this purpose (in 1990, state investment outlays in building and assembly work totalled 12.6 billion dong, which was 70 per cent of total investment outlays). State investment outlays also continue to fuel purchases of machinery and equipment when there is already an excess of installed capital stock (see Table 5.3). Although less than half of the levels in the early 1980s, state investment in machinery and equipment remains substantial. In 1990 investments in this area rose by 25 per cent to over 3 billion dong. 12 The "investment

5. Industrial Renovation in Vietnam, 1986-91

125

hunger" evident in the planned economy therefore prevails into the 1990s as enterprises seek to obtain cheap BlCV and local government funds for the installation of new capacity. The proportion of total state investment outlays managed by local governments had fallen steadily from a peak of 70 per cent in 1986 to 41 per cent in 1989; however, in 1990 it rose again to 56 per cent. Thus the ability to direct the pattern of state investment lies to a large extent in the hands of local authorities who "have found that they control adequate resources for them to carry out rather independent investment policies" (Fforde in Ronnas and Sjoberg 1990, p. 23). The installed capital stock is old as well as large. Most of the large-scale industrial technology in the North dates from the 1970s, coming predominantly from former socialist countries. In the South, Western technology from the 1960s still dominates (Fforde and de Vylder 1988, p. 110). Only one-third of the twentyseven manufacturing enterprise directors I interviewed claimed to have acquired any new machinery since 1986. The Hanoi Machinery Factory Number One, the largest in Vietnam, has 10,000 pieces of machinery, half of which are over thirty years old and "few had been imported since 1972" {#14}. A 1989 UNIDO survey of eighteen textile and four knitting factories in Vietnam found that 25 per cent of spindles used and 64 per cent of weaving machines were over twenty years old (44 per cent and 95 per cent, respectively, were over ten years old), which led them to conclude that "the principal hindrance to an efficient operation of the textile industry is the obsolescence of much of the equipment it employs" (UNIDO 1991, p. 81)_13 A compounding problem is the extreme heterogeneity of the Vietnamese capital stock. Almost all of it has been supplied through bilateral aid programmes, with each donor tending to deliver its own national products (Fforde and de Vylder 1988, p. 111). On my visits I saw machines and equipment that were produced in France prior to World War II as well as items from almost every former country of the Council for Mutual Economic Assistance (CMEA), most of which was "obsolescent and inefficient, and only capable of producing comparatively low-quality products" (UNIDO 1991, p. 46). There were also machines from

N 0>

TABLE5.3 Construction: State Investment Outlays, by Type of Outlays, Degree of Management, and Sector, 1976, 1980, 1986-90 (In million dong at comparable 1982 prices)

1976

1980

1986

1987

1988

1989

1990

12,808.3 8,195.9 3,603.5 1,008.9

15,959.1 8,023.8 6,662.8 1,272.5

20,559.1 14,978.9 2,957.5 26,622.7

16,019.6 11,973.8 2,425.6 1,620.2

16,795.3 12,591.6 2,603.5 1,600.2

16,300.0 11,600.0 2,500.0 2,200.0

18,100.0 12,579.5 3,131.3 2,389.2

8,033.6 4,774.7

11,741.7 4,217.4

12,101.1 8,458.0

9,403.9 6,615.7

10,795.2 6,000.1

11,600.0 4,700.0

11,600.0 6,500.0

11,022.3 1,786.0

14,406.1 1,553.0

16,699.5 3,859.6

12,786.6 3,233.0

14,384.5 2,410.8

13,900.0 2,400.0

15,500.0 2,600.0

Type of outlays

Total Building and assembly work Machinery and equipment Others Degree of management

Central Local Sector

Productive Non-productive SouRCE: So Lieu Thong Ke 1976-90.

:t..

§3

~

~ ~

5. Industrial Renovation in Vietnam, 1986-91

127

Japan, Taiwan, Sweden, the former West Germany, Switzerland, Italy, China, and Thailand. Also, a significant minority of machines were made in Vietnam. Such diversity, often to be found in a single factory, led to many problems such as trying to match differing machine capabilities, inadequate technical knowledge, and poor supplies of spare parts. Sometimes new equipment can prove as problematic as old. A UNDP report notes that in one pharmaceutical enterprise "the bottle packing machine is technically too advanced for Vietnamese conditions resulting in operating and maintenance problems" (Perrson et al. 1987). That Vietnam has an extremely old and heterogeneous capital stock goes a long way in explaining the poor capacity utilization rates in industry, but to these considerations two others should be added: poor integration and co-ordination of industrial development (both before and after the removal of central planning), and restricted access to inputs. Under the central planning system the binding constraint on production was the quantity of inputs that could be obtained through the rationing system. This is a problem that has continued to some extent (one estimate is that 30 per cent of inputs are still being sold at subsidized prices to state enterprises (D.O. Trung in Vo Nhan Tri and Booth [1992, p. 16]), and is particularly pronounced when imports requiring hard currency are involved (Ruijs 1991, p. 87). The 1987 UNDP report into the pharmaceutical industry, for example, concluded that "the main reason for the low capacity utilization is the non-availability of foreign currency to meet the import cost of pharmaceutical chemicals" (p. 1). The inadequacies of the Vietnamese central planning system and the resulting poor integration of the industrial sector are also to blame, as the same UNDP mission observed: Sometimes the mission found that equipment badly needed in one factory are standing idle in another factory. The mission also noted that all factories were having many different machines delivered from many different suppliers for the same type of operation. In such a situation the problem of spare parts is not only a question of availability of foreign currency, it is also a logistical problem and a problem of knowledge of all these machines. (p. 12)

128

Adam McCarty

Recent additions to capital stock continue to be haphazard and are often acquired from aid programmes and the substantial capital stock of the Vietnamese state industrial sector therefore continues to be characterized by its age - old - and by its heterogeneity. And problems of "investment hunger", poor technical knowledge, and spare parts will continue for some time. However, it also seems that these problems are less pronounced than they were before the period of "renovation", and as the economic environment becomes less subsidized and more competitive one can expect rises in capacity utilization and productivity. 2. 6. Management

The directors of industrial enterprises in Vietnam are well accustomed to shocks and experiencing fundamental changes in their economic environment. A brief period of development upon unification of the country was quickly followed by severe input shortages after the invasion of Cambodia. The response, a period of regulatory "fence breaking" and an increase in "outside activities", was formally accepted by the authorities when the Three-Plan System was introduced in 1981. Increasingly, enterprise directors gained experience of market negotiation and exchange through their second and third Plan activities. 14 After a resurgence of centralizing tendencies in the mid-1980s, the period of "renovation" brought increasing autonomy along with declining subsidization. In 1989 directors received their biggest shock yet when dramatic cuts in subsidized inputs and the credit squeeze hardened their budget constraints, while at the same time the market "flipped" from being supply-led to one responsive to customer demands. Central government enterprises were "bailed out", but most cut back staffing levels and sought to adjust to the new conditions. Many locally managed industrial enterprises and co-operatives closed down. And in 1991 the pressure was accentuated as subsidized inputs from the CMEA countries ceased and a new taxation regime was introduced. With such a history of dramatic changes to the "rules of the game" and experience of "outside" dealings, the "flip" to a

5. Industrial Renovation in Vietnam, 1986-91

129

customer-driv en market economy in 1989 was something taken in their stride by many directors. A foreign observer noted at the time that "in general the speed with which they [the directors] seemed to be starting to think and act like businessmen rather than bureaucrats was remarkable" (Wood 1989, p. 567). However, not all could surmount the new obstacles, particularly in those enterprises unable to increase output prices. Of the twenty-seven manufacturing enterprise directors whom I interviewed (Table 5.2), eleven (41 per cent) had been newly appointed since 1989 (interestingly, six were women, which is probably a much higher proportion than in Western industrial sectors). 15 Only three of those eleven new appointees had come from outside the enterprise in question, the others having been vice-directors or branch managers. Formal training of directors in CMEA countries had been going on for some time. I met a group of five 1986 graduates of a four-year East German management degree; two were working in factories, one was in a research institute, another worked in a photograph-pr ocessing shop, and one was unemployed. In 1985 the HPC initiated a one-year management course, with UNDP assistance, for their experienced directors and apparently about 60 per cent of present directors have completed it. However, the attractions of cost-benefit analysis and cost accounting were hard to perceive while the rationing system prevailed, and it was not until 1989 that the foreign advisers to this course "reported a sudden surge of interest in these techniques for increasing sales and analysing and reducing expenditures" (Wood 1989, p. 567). Trying to quantify the contemporary significance of the private sector in Vietnam is a task fraught with problems. Official aggregate statistics rarely give a breakdown of the non-state sector, which includes private as well as co-operative operations. And where numbers describing either of these sub-sectors do exist, they have to be treated as only vague approximation s. Vietnamese economists estimate that about 40 per cent of all business in Vietnam is conducted through black-market channels (FEER, 27 June 1991), and a 1990 survey found that only 72.8 per cent of industrial co-operatives and 54.2 per cent of private industrial enterprises had official permission to conduct their

130

Adam McCarty

businesses {#65}. With such staggering omissions from official coverage, not to mention the significant reporting biases of recorded non-state enterprises, one can only be very sceptical about official statistics on the sector. This scepticism must also extend to calculations of national aggregates such as the gross social product where, for example, much of the recent growth and increasing relative significance of the non-state sector is not accounted for. Consequently, growth rates in recent years may seriously understate actual growth in the economy. 16 According to official figures, the private and co-operative sectors constituted 23.2 per cent and 45.7 per cent of total gross social product, respectively, in 1988 (So Lieu Thong Ke 1991). Together they also came to 69 per cent of industrial sector employment (So Lieu Thong Ke 1976-90). The non-state industrial sector in Vietnam in 1989 employed 1,749,375 persons (exactly!) in 356,522 establishment s. 12,698 of these establishment s were co-operatives and production teams, 9,203 were combined cooperatives, only 1,284 were private enterprises, and the remaining 333,337 were "small industrial households and individuals"Y Precise definitions of the various ownership forms that comprise the non-state sector are elusive, and seem to be becoming increasingly so. The state sector is fairly clearly delineated. Central government means control by Hanoi departments. Local governments comprise three levels: provincial or city, suburban, and district. In Hanoi province, for example, there is the Hanoi People's Committee as the senior local authority, twelve rural and four urban suburbs, and numerous district authorities (eightythree in Hanoi city). All of these can own or "guide" enterprises, although it seems that the small district governments were not very involved in this activity. A significant number of the suburban and district enterprises ceased operations after the 1989 reforms, but apparently even still "75 per cent of suburbowned companies are unprofitable, 35 per cent of province ones, and 15 per cent of state-owned" {#54}. A related form of ownership, and grouped with the state sector in aggregate statistics, is that of enterprises jointly owned by the state and private individuals. These are not too numerous at present, at least in Hanoi, and are confined to the more lucrative areas of production

5. Industrial Renovation in Vietnam, 1986-91

131

such as electrical goods assembly and some textile and clothing activity. The emergence of "red barons" (party persons and senior officials who use their positions to stake a personal claim in profitable enterprises)1 8 is not yet a widespread occurrence and, on the contrary, there is considerable wariness about senior identities becoming involved in business activity. Before 1989, as noted above, industrial co-operatives were treated in much the same way as state enterprises and after being "left to float" in that year they were suddenly faced with the same discriminatory environment as private enterprises. In many cases the distinction between the two forms of ownership is vague and unimportant. In most instances still, co-operatives have management boards and members voted for their director every two years and receive reasonable pensions upon departure. However, many smaller co-operatives, and certainly most "production groups" appear to be little more than private enterprises in disguise: directors have full authority over employment and remunerations and shareholders are the managers, often a single family or an individual. When I visited one of these purported co-operatives my question as to how to distinguish it from a private enterprise led to an hour of confused semantic debate {#6}. Private enterprises have full production autonomy within the constraints and biases of the existing economic environment. These, as we have seen, are considerable: higher interest rates and difficulty in accessing funds; higher input costs (for example, electricity); no subsidized or free buildings or land; continuing exploitation and suspicion from local authorities; and, of course, no "bail-out" facilities. 3. Conclusion

There are a variety of interesting theoretical and practical issues relating to the development of the Vietnamese industrial sector. This section relates some of these issues to the growing literature on economies in transition. On the subject of ownership and property rights there is a growing literature of developments presently occurring in former socialist countries. Trends, such as the emergence of the "red

132

Adam McCarty

barons" mentioned above, are only in their formative stages in Vietnam at present. Clarity of property rights appears to be highly correlated to the profitability of enterprises, and it is in the more lucrative activities that the first examples of what may be termed "spontaneous privatization" is occurring. The need for appropriate commercial law and legislation, and to establish "the rules of the game" are much discussed. Vietnam has already gone a long way in promulgating these; however, putting them into effect is an entirely different and more demanding challenge. Vietnam today is an economy still adjusting to huge changes in its internal terms of trade and economic environment in recent years. In such a context the need for the government to instil faith in its directives and authority is crucial. Confidence-building, in the state and in the direction of reforms, is what is required at present. The continued ideological confusion and the historical weakness of central authority in Vietnam make this task a formidable one. The task of confidence-building becomes all the more difficult when one considers that the already limited authority of the central government may be in decline as regional disparities in economic performance develop. Discussion of this "regionalism" normally focuses on North-South comparisons, with much justification, although possibly a more insightful approach from the perspective of researching industrial development is to compare coastal and inland areas. As in China, it is the coastal areas that have been able to exploit the new economic freedoms more effectively. Coastal cities like Nha Trang, Haiphong, and particularly Danang have, apparently, been growing extremely rapidly since 1989 as well as Ho Chi Minh City. There are a number of developments of concern in the industrial sector. Integration of production activity, both horizontally and vertically within industrial sub-sectors, is giving rise to some monopolistic relationships. While trade monopolies are in decline, production ones are possibly becoming more prevalent. The old institutional structure helps create and reinforce monopoly creation. Enterprise unions 19 and "guiding" departments sometimes use their waning but still substantial authority to uphold barriers to entry in various industries. Without an

5. Industrial Renovation in Vietnam, 1986-91

133

effective commercial framework, much business is done by word of mouth, thus relying on trust, expectations of future dealings, and the acknowledged "clout" of your senior bureaucratic and political supporters (a kind of political underwriting or "insurance"). In such a context, and when permissions and support are required to access cheap capital, receive some of the remaining subsidized inputs, and get "bailed out", then significant rent-seeking activity by bureaucratic and political intermediaries must continue. Corruption (however one wishes to define it) has always been substantial, but with such dramatic changes in the fortunes of individuals and enterprises, and with the prevailing atmosphere of uncertainty, it (at least reported corruption) appears to be on the increase. The production of counterfeit products is also causing problems. Poor-quality cigarettes, bicycles, electric fans, and even candies are being sold as more popular and better-quality brands. Inability to enforce even basic brand and label property rights will be detrimental to the development of high-quality productive activity (for the domestic market). There are also, thankfully, numerous positive developments under way. Product diversificatio n, for example, is clearly increasing. The "flip" to customer-driv en demand has seen a variety of old products disappear and new and better-quality items introduced to the market. The rise in imports of consumer goods has also increased competition leading to quality improvements. Internal trade has become increasingly free since 1979 when the restrictions were appalling. "Regionalism" has seen the rapid industrial growth concentrate upon the coastal cities which are also relatively isolated from the heavy bureaucratic hand of Hanoi. In Hanoi, which may prove to have never been a "natural" location for industrial activity, industry is on the decline and foreign investment minimal. However, being the centre of government, the industrial sector in Hanoi enjoys a certain "political bias" (analogous to the sort of "urban bias" mentioned by development economists) and consequently has disproportionate access to finance and "bail-out" facilities. The flow of information is increasing. In centrally planned economies commercial information seems to be hoarded with an intensity

134

Adam McCarty

that is hard for outsiders to comprehend. Interaction and exchanges between enterprises is extraordinarily limited, and this is also true of research institutes and government departments. The legacy of this is a continuing distrust of exchanging information and an excessive attitude to secrecy. The nature, role, and ways of information exchange in such economies would make a fascinating topic for research. The situation is gradually changing for the better and advertising, though limited, is becoming evident. Continued "soft" budget constraints have retained the worst aspects of the Vietnamese industrial sector, while encouraging the development of the private sector and state enterprise initiative have brought out the best aspects. In a contemporary international context the prevailing restrictions and impediments to successful productive activity in Vietnam are still substantial, particularly for the private sector. However, in historical context, compared with the extraordinary restrictions in place before the introduction of doi moi, the contemporary industrial environment is much freer and effectively "liberated". It is this dramatic increase in relative freedoms since 1986 that has generated the increased competitiveness and efficiency of the industrial sector. With inflation soaring, the outlook for the industrial sector in the 1990s is mixed. The coastal cities should continue their strong growth, particularly with injections of foreign capital. A variety of significant impediments to improved performance are already well recognized and being acted upon. Efforts are made to improve the banking system, the foreign exchange system, to reduce the government budget deficit, and to decrease subsidization of state-owned enterprises. How far achievements in these areas will go is uncertain, depending largely on developments in the political economy. A tendency by some Vietnamese economists to favour an import-replacing protectionist trade strategy is also a matter of concern. A major test in this period will be that of the government's ability to introduce the legal and institutional framework necessary to underpin a dynamic market economy. The political dimensions of this task are all too evident: reduced party control, the closing of numerous bureaucratic rentseeking avenues, establishing an independent judiciary, letting

5. Industrial Renovation in Vietnam, 1986-91

135

people get rich. Even given the will, the ability of the central governmen t to enforce it is questionabl e. Can the first five years of doi moi be called a "success"? I would argue that it should be, and primarily so because of the dramatic achieveme nt of effectively dismantling the centrally planned system in 1989. This was something that other socialist economies in transition had failed to achieve by then (although, admittedly, the proportion s of their economies under central control were larger). Thus the removal of the two-price system and the "flip" to customer demand began a period of radical restructurin g within the industrial sector. Certainly, subsidizatio n continued, but at reduced levels and only after the initial "shock therapy" of early 1989 had begun to bite too much. The worst of local governmen t enterprises closed down. Central enterprises reduced staffing levels and began responding to customer demands. The private industrial sector did not flourish as hoped, and certainly not at rates comparable with private service sector growth. Continuing strong biases ensured that most private industrial activity remained informal and peripheral in nature. This and other problems remain, but the important point to note is that Vietnam is now a mixed-market economy by any reasonable definition. It is an economy with gross distortions , corruption, rent-seeking, and inadequate "rules of the game", but then how much can one expect from five years of peaceful transition? The first firm steps down the road have been taken and whether Vietnam now pauses or strides forward again remains to be seen.

136

Adam McCarty

APPENDIX Record of Industry Interviews, Hanoi, 1991 No.

Date

#1 #2 #3 #4 #5 #6 #7 #8 #9 #10 #11 #12 #13 #14 #15 #16 #17 #18 #19 #20 #21 #22 #23 #24 #25 #26 #27 #28 #29 #30 #31 #32 #33 #34

31/7 25/8 25/8 24/8 2/8 25/8 21/6 14/8 13/8 14/8 30/7 5/8 29/7 1/8 24/7 25/7 24/7 31/7 8/8 6/8 22/7 25/7 25/7 23/7 8/7 11/8 3/5 3/8 18/7 22/7 30/7 30/7 29/7 1/8

Name of Organization

Scientific Institute of Statistics Branch of Industrial and Commercial Bank Precise Mechanical Production Shoe Production Team (private) Branch of Investment and Construction Bank Phuong Dong Four Co-operative Thong Nhat Bicycle Enterprise HX Paper Co-operative Women's Institute Chemicals Co-operative Hanoi Ice Company Electrical Engineering Plant Hoankimex X/M Company Hanoi Machinery Factory No. 1 Department of Home Trade, HPC Institute of Finance Unimex Hanoi X/M Company Alcohol and Beer Company, HPC New Technologies Union, HPC Central Institute for Economic Management Real Estate Agency of Hanoi, HPC "Go! Star" Rubber Factory Electric Light Factory Thong Nhat Rubber Factory Furniture Factory Hanoi Cotton Enterprises Institute for Urban and Rural Planning Union of Food and Drink, HPC HN Housing Construction Company HN Electronic Company HN Electronic Company HN Vegetable Union Vietcombank Industry and Commercial Bank of Hanoi

137

5. Industrial Renovation in Vietnam, 1986-91

No.

Name of Organization

Date ~-

~-~~-------"-~

#35 #36 #37 #38 #39 #40 #41 #42 #43 #44 #45 #46 #47 #48 #49 #50 #51 #52 #53 #54 #55 #56 #57 #58 #59 #60 #61 #62 #63 #64 #65 #66 #67 #68 #69 ----

13/8 7/8 7/8 23/7 21/7 6/8 5/8 5/8 7/8 15/7 18/7 12/7 21/8 10/8 24/8 20/5 9/5 10/6 23/4 18/4 25/4 27/4 1/5 8/5 10/6 17/7 19/8 25/7 26/7 24/4 10/5 24/8 4/6 2/6 10/6 --

Post and Telecommunication Equipment Factory Pharmaceuti cal Factory No. 1 XN Buiding Repairs XN Mua Dong Shoe Factory Women's Union Company Cosertour Bemes Roofing (private) T. Nhat Electrical Fan Enterprise Thuy Khue Tannery (government -owned HPC) XN Thay Tinh HN Cigarette Seller Smuggler Village Government, HN Hai Ha Candy Factory L.N. Quang, lWE ClEM, Seminar on Purchasing Power Parity Street Vendor Adam Fforde, SIDA - Interviewed by Joakim Le Trang, ClEM - Interviewed by Joakim Joakim/lngri d/Tuann Sida Institute of Economics Hotel Employee Central Institute for Economic Managemen t Institute of Trade Ministry of Finance (Institute) Institute of Market and Price Finance Department of HPC Scientific Union Institute of World Economy Institute of Economics Viettronics Hanoi Education Department Non-State Enterprises Union State Office -------

~~-

---

- - - -

-~~

- -

NoTE: The numbers in the first column that are quoted in the text are placed within braces; for example, reference to interview no. 69 is given in the text as {#69}.

138

Adam McCarty

NOTES 1. A fall in capital expenditure from 27 per cent of total expenditure in 1989 to 20 per cent in 1990 is another important reason. 2. Vietnam News Agency, 4 March 1991. Quoted in Vo Nhan Tri and Booth (1992, p. 12). It is not clear if the survey was conducted over the whole of Vietnam or just in Hanoi, or whether it was individuals or business persons who were questioned. 3. Unauthorized overdrafts are penalized at 5 per cent. These rates are for mid-1990 (IMF 1990) but from borrowing and lending rates quoted to me in 1991 they seem to have changed little. The rate for three-month household deposits, for example, was set at 4 per cent in March 1990, and was not changed until June 1991, when it dropped slightly, to 3.5 per cent. 4. The vast bulk of smuggling operates along "lines" which were established in the mid-1980s but have expanded considerably since then. The army has its own operations, sailors are in "lines" for luxury consumer goods, and the air force is regarded as a "safe line" for transporting gold and dollars. Trade between Ho Chi Minh City and Hanoi goes on the trains which are unloaded just before entering the cities. The "lines" transport legal as well illegal goods to escape local taxes and informal fees (not all the barriers to internal trade seem to have been effectively removed since 1987). Trade with China was formally accepted in 1991 although it had been growing rapidly for years before. Goods going into China include copper bars, dollars, seafood, dogs from Russia, fresh turtles, crabs, spare parts and even whole cars, and airconditioners (re-exporting from Hong Kong to avoid import tariffs is becoming increasingly common). Coming back from China are cigarettes, beer, bicycles, apples, medicines, and electrical goods. Apparently, the central police are harder to bribe than the local police {#4 7}. 5. The country is, after all, still officially "on the road to socialism". 6. Many costs, including electricity, water, building rentals, land-use rents and, most importantly, labour costs are fixed for foreign enterprises at levels well above domestic equivalents. The introduction of the income tax and the natural resources tax in 1991 were also primarily aimed at foreign enterprises. 7. It constitutes 40.6 per cent of the gross social product. Both these calculations certainly overstate the contribution of the industrial sector as there is a great deal of double-counting of intermediate

5. Industrial Renovation in Vietnam, 1986-91

139

products in calculating gross industrial production. Also, official calculations are at actual 1982 prices, which seriously undervalue agricultural produce. Nevertheless, it is fair to conclude that the labour productivity of the industrial sector is well above the national average, reflecting in part the intensive investment in the sector. 8. This is at constant 1982 prices (UNIDO 1991, p. 101). According to this table, labour productivity grew by 18.8 per cent from 1983 to 1987. 9. A joint venture between private investors and the HPC was established in 1984 to assemble and sell electrical goods. The director told of how the HPC gave them land and buildings without charge as well as "human capital" of 230 workers. "Of course we did not want them, but we did want the land and buildings" {#31}. 10. Two of my more informal interviews included a street vendor whose husband had recently left employment in a furniture factory, and a cigarette seller who had previously worked for a building company. In both cases they cited declining wages as the main reason for their moves. 11. "The difference between the right to long-term use of land and private ownership of land lies in the fact that the user may not on his own turn agricultural land to non-agricultural purposes, he cannot let it lie fallow or reduce the fertility of the soil. If necessary the state can take back the lands after paying some appropriate compensation to the user." (Nguyen Thanh Bang and Tran Due Nguyen in Ronnas and Sjoberg, eds. 1991, p. 191) Note that this distinction has meaning only in agricultural areas; in urban setting there is no substantive difference between owning or having the "use right" of land. 12. This is at comparable prices of 1982. Total state investment outlays equalled 21.7 per cent of the value of gross production by the state industrial sector in 1990 (at constant 1982 prices) and investments in machinery and equipment constituted 3.6 per cent. 13. This report also remarks that "some 60 per cent of the 868,00 spindles used by the industry are more than twenty years old playing a significant part in the sub-optimal rates of capacity utilization" (UNIDO 1991, p. 81). However, according to annexed Table A-17 (p. 108) only 218,000 (25 per cent) of 864,000 spindles have been "used for more than twenty years". 14. According to the vice-director of the Institute for Trade, "the second and third Plans dominated the first, from which material items

Adam McCarty

140

15.

16.

17.

18.

19.

were always being transferred. The statistics reflect only the first plan." {#59} A recent commentator on Vietnamese industry had argued that "enterprise directors do not suffer from losses" (Ruijs 1991, p. 50) but this is simply not true. "Losses", however, are more appropriately interpreted as an inability to support the allocated work-force rather than to produce monetary profits, at least up until 1989. Insights into the extent of omission can be obtained by examining official statistical series. For example, in 1988 reported employment in "private trade, alimentation and services" increased by only 12.1 per cent over 1987. However, over the same period the number of state restaurants and "services units" fell by 51 per cent, reflecting the substantial crowding-out that was occurring with the rapid growth of private sector service activity since late 1988. These figures are quoted in a brochure produced by the Organisation of the Central Council of Industrial Co-operatives of Vietnam, an organization established in 1990 to assist and represent the non-state industrial sector in Vietnam. Hungarian sociologist Elemer Hankiss argued in 1990 that a grand bourgeoisie was already evident in his country. This group included the "red barons", who exploited their party positions to take large stakes in new private companies, and the "green barons" of the agricultural co-operatives. Government bodies established to direct enterprise groups under the central planning system but are now, like the former Planning Department, looking for a new role.

SELECT BIBUOGRAPHY Atiyas, I. and S. Nagaoka. Tightening the Soft Budget Constraint in Reforming Socialist Economies. World Bank Industry Series Paper no. 35. Washington, DC: World Bank, May 1990. Beresford, M. Vietnam: Politics, Economics and Society. London: Pinter, 1988a. Calvo, Guilermo A. and Jacob A. Frenkel. From Centrally-Planned to Market Economies: The Road from CPE to PCPE. IMF Working Paper. Washington, DC, 1991.

5. Industrial Renovation in Vietnam, 1986-91

141

Do Due Dinh. "Vietnam 1991: An Update. Recent Developments in the Vietnamese Economy". Paper presented at a seminar on the Vietnam Update Conference, Australian National University, Canberra, 25 October 1991. Fforde, A "Major Policy Changes and Socio-Economic Development in Vietnam since Mid-1988". In Doi Moi: Economic Reforms and Development Policies in Vietnam, edited by Ronnas and Sjoberg, pp. 7-29. Stockholm: Swedish International Development Authority, 1990. Fforde, A and S. de Vylder. Vietnam: An Economy in Transition. Stockholm: Swedish International Development Authority, 1988. Hart, Oliver and John Moore. "Property Rights and the Nature of the Firm". Journal of Political Economy 98, no. 6 (1990). Hiebert, Murray. Far Eastern Economic Review (FEEK), various issues, 1990-91. Hoa Bin Fine Handicraft Factory (privately owned). "Report on Economic Activities". Mimeographed. 16 September 1988. International Monetary Fund. International Financial Statistics. Washington, DC, 1990. Johnson, Simon. Spontaneous Privatization in the Soviet Union. How, Why, and For Whom? Working paper 91. Tokyo: World Institute for Development Economics Research, United Nations University, September 1991. Johnson, Simon and Bakhtior Islamov. Property Rights and Economic Reform in Uzbekistan. Tokyo: World Institute for Development Economics Research, United Nations University, June 1991. Le Trang. "Renewal of Industrial Management Policy and Organisation". In Doi Moi: Economic Reforms and Development Policies in Vietnam, edited by Ronnas and Sjoberg, pp. 153-80. Stockholm: Swedish International Development Authority, 1990. Morten. "Industrial Reforms in Hanoi, 1991". Mimeographed. Institute of Economics, Hanoi, 1991. Nien Giam Thong Ke 1989 [Statistical yearbook 1989]. Hanoi: Statistical Publishing House, 1989. Perrson, H., C. Chari, and C. Ceizer. "Preparatory Mission on Pharma-

142

Adam McCarty ceutical Industry in Vietnam". Mimeographed. United Nations Development Program, 1987.

Ronnas, P. and 0. Sjoberg. Doi Moi: Economic Reform and Development Policies in Vietnam. Stockholm: Swedish International Development Authority, 1990. Ronnas, P. and 0. Sjoberg, eds. Socio-Economic Development in Vietnam: The Agenda for 1990s. Stockholm: Swedish International Development Authority, 1991. - the editors, "Summary of Discussion" on Overall Economic Strategy, pp. 54-58 - Nguyen Tuong Lai and Nguyen Thanh Bang, "A Development Policy for Human Resources", pp. 85-92 - Martin Godfrey, "Comments" on Scientific and Technological Developments, pp. 108-12 - David Dollar, "Comments" on Trade and Investment, pp. 131-36 - Robert Lipsey, "Comments" on Trade and Investment, pp. 141-45 - Eul Yong Park, "Comments" on Trade and Investment, pp. 146-49 - Zdenek Drabek, "Comments" on Financial and Monetary Policies, pp. 160-69 - Nguyen Thanh Bang and Tran Due Nguyen, "The Ownership System and Various Forms of Business Organizations in the Multi-Sector Commodity Market", pp. 190-97 - Wladimir Andreff, "Comments" on Ownership, pp. 198-208 - Jozef M. van Brabant, "Comments" on Ownership, pp. 209-30 - Jozef M. van Brabant, "Concluding Discussion", pp. 241-27 Ruijs, Odile. Essays on Industrial Development in Vietnam: With Special Reference to the Hanoi Bicycle Market. Netherlands: Tiburg University, June 1991.

So Lieu Thong Ke 1976-90 (Statistical data of the Socialist Republic of Vietnam, 1976-90). Hanoi: Statistical Publishing House, 1991. So Lieu Thong Ke 1991 (Statistical data of the Socialist Republic of Vietnam, 1991). Hanoi: Statistical Publishing House, 1992. Tran, Mark. "Hanoi Goes To Market". South, March 1990, pp. 334-37. United Nations Development Program (UNDP). Report on the Economy of Vietnam. Hanoi, 1990. United Nations Industrial Development Organization (UNIDO). Vietnam's Industrial Development: An Assessment. 1989.

5. Industrial Renovation in Vietnam, 1986-91

143

United Nations Industrial Development Organization (UNIDO). Vietnam: Industrial Policy Reform and International Co-operation. Industrial Development Review Series. Washington, DC, 1991. Yo Nhan Tri. Vietnam's Economic Policy since 1975. Singapore: Institute of Southeast Asian Studies, 1990. Vo Nhan Tri and Anne Booth. Recent Economic Developments in Vietnam. Australia: National Centre for Development Studies, forthcoming [ 1992]. Wood, A. "Deceleration of Inflation with Acceleration of Price Reform: Vietnam's Remarkable Recent Experience". Cambridge Journal of Economics 13 (1989): 563-71.

6

AGRICULTURAL DEVELOPMENT IN VIETNAM Issues and Proposals for Reform LE THANH NGHIEP

The renovation policy initiated in 1986 brought about diverse impacts to the different sectors of the Vietnamese economy. In general, it can be said that the effects of this policy change have been more vital in agriculture as compared with the industrial sector, and geographically more prominent in the South as compared with the North. Generally, these differences seem to be due to (1) the overwhelmingly large share of public enterprises which have continued to operate in industrial activities; and (2) the difference in the length of the periods that the populace in the North and South were under the administration of the previous centrally planned economic system. However, in agricultural and industrial activities in the South as well as in the North there have been positive signs of a rejuvenation since the new policy direction was announced and initially implemented. Despite the remarkable changes recorded since the government's announcement of its new economic policy, the agricultural sector presently is still lagging behind compared with members of the Association of Southeast Asian Nations (ASEAN) in terms of factor productivities and farm-income level. This chapter identifies the major issues that the Vietnamese agricultural sector 144

6. Agricultural Development: Issues and Proposals for Reform

145

is facing, and highlights some policy measures proposed to address these issues. 1. A Historical Review

A socialist economic system was introduced first in North Vietnam in 1954 and later to the whole country in 1975 following the fall of the U.S.-backed government in the South. Although the economic policy which reigned the country in the three decades prior to renovation (1954-85) had undergone modification and changes, and generated diverse impacts, a number of common features can be identified, revealing the characteristics of the socalled North Vietnam development model. In the field of agriculture, this model was composed of the following two strategic elements: 1. socialist agrarian reform; and 2. collectivization and promotion of large-scale agricultural production. In North Vietnam, 1 the agrarian reform scheme was carried forward from November 1956, aiming at the redistribution of land and other properties from landlords to peasant households. The movement towards agricultural collectivization started in 1954 and saw its implementation in three stages: grouping farmers into mutual-aid teams, promotion of elementary co-operatives, and transformation of elementary co-operatives into advanced cooperatives. At the stage of elementary co-operatives, farming activities were performed on a collective basis while co-operative members still received rent payment for their own land. When it came to the advanced co-operative stage, the ownership of all means of production was switched to co-operatives, and cooperative members were paid according to their labour contribution. Besides, a strong movement was launched to enlarge the size of agricultural co-operatives in the belief that large-scale production would increase productivity because of economies of scale. The policy measures taken in North Vietnam succeeded more in the socialist transformation and less in terms of production

146

Le Thanh Nghiep

and productivity growth. As many as 810,000 hectares of land were confiscated from landlords and redistributed to more than 2 million peasant households during a period of two years after the commencement of the agrarian reform programme. The targets of agricultural collectivization were also achieved in a surprisingly short period. As shown in Table 6.1, the percentage of farm households joining elementary C ~

~

HDI

Vietnam

Indonesia

Thailand

0.498

0.499

0.713

China

Range (for 160 countries)

"'1::0

~

(I>

0.614

0.048 to 0.993

l:::l (I>

GDP per capita 1985--88 (average) Life expectancy at birth, 1990

1,000 62.7

1,820 61.5

3,280 66.1

2,470 70.1

350 to 19,850 42.0 to 78.6

Adult literacy rate 1985 (%)

84.4

71.8

90.7

68.2

Years of schooling 1980 (average)

3.2

3.1

3.5

4.8

0.1 to 12.2

57.3

48.9

61.6

47.1

9.1 to 69.5

Educational attainment index

HDI rank (out of 160 countries) GDP rank GDP rank minus HDI rank

99 142 43

SouRcE: United Nations Development Program (199la).

98 117 19

66 73 7

82 133 51

13.3 to 99.0

.g 3(I>

::t s· $