Vietnam Assessment: Creating a Sound Investment Climate 9789814345910

Citation preview

NC

The National Centre for Development Studies of the Australian National University provides an Australian focus for the study and evaluation of de~~~ velopment and aid issues. Its geographic focus is Asia and the South Pacific, reflecting Australia's substantial trade, investment and cultural links with its immediate region. Graduate teaching in the economics of development, development administration, and environmental management and development are at the core of the Centre's activities. The Centre also acts as an independent research body for the Australian Agency for International Development. In addition, the Centre pursues an active dissemination program working with governments, international organisations and the business community as well as other academic institutions to increase understanding of development issues. It welcomes thi s opportunity to publish jointly with the Institute of Southeast Asian Studies in Singapore.

S

I5EA5

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 modem 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 tenman Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer.

Creating a Sound nvestment Climate

dl

uiwah

db

ung

CURlON PRESS

------

1 STTM'E OF SOUTHEAST ASIAN STUDIES I NAJlONAL CENTRE FOR DEVELOPMENT STUDIES

Publi shed by In stitute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang, Singapore 119596 All ri ghts reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any mean • electronic, mechanical , photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. First publi shed in Great Britain in 1996 by Curzon Pres, StJohn's Studios, Church Road, Ri chmond , Surrey , TW9 2QA. England British Library Cataloguing in Publication Data: A CIP catalogue record for th is book is available from the British Library. First published in Australia in 1996 by the National Centre for Development Studies, Australian National University, Canberra ACT 0200 Australia. ~

1996 Institute of Southeast Asian Studies, Singapore

Th e responsibility for fa cts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters. Cataloguing in Publication Data Vi etn am Assessment: creating a sound investment climate I edited by Suiwah Leung. I. Vietnam--Economic policy . 2. Vietnam--Economic conditions . 3. Vietnam--Politics and govemment--19754. Investments, Foreign-- Vietnam . 5. Investments, Australian--Vietnam . 6. Legal services--Vietnam. I. Leung, Suiwah. II . Title: creating a sound investment climate. sls96-59606 1996 DS559.912 V66 ISBN 981-3055-54-5 (soft cover, !SEAS, Singapore) For Europe and North America, a soft-cover edition (ISBN 07007-06062) is published by Curzon Press. For Australia, a soft-cover co-edition is published by the National Centre for Development Studies, Australian National University. Typeset by International Typesetters Printed in Singapore by Prime Packaging Industries Pte. Ltd.

Contents

List of tables List of figures Foreword Contributors Acknowledgments

VI

viii

ix xi xiii

1

Introduction Suiwah Leung

1

2

Economic developments and prospects Le Dang Doanh

6

3

Policy reform and the microeconomic environment in the agricultural sector Nguyen Tri Khiem

21

4

Politics of the reform of state institutions in the post-socialist era Thaveeporn Vasavakul

42

5

Foreign direct investment in Vietnam Nguyen Tuan Dung

69

6

Foreign investors in Vietnam: An Australian case study Elizabeth Maitland

90

7

Providing legal services in Vietnam: A practitioner's viewpoint Bui Kim Chi

Index About the Editor

107

115 123

List of tables

2.1 3.1 3.2 3.3 3.4 3.5 3.6 3.7 5.1 5.2 5.3 5.4 5.5 5.6 6.1 6.2 6.3 6.4 6.5 6.6 6.7

Structure of GDP by sector, 1986-94 Major features of policy regimes Area and value of crops, 1991- 94 Labour utilisation in rice production, 1989-92 Wage rates by type of rice-farming operation in Red River and Mekong Deltas, 1989-94 Chemical fertiliser and pesticide use in agriculture, 1985- 93 Domestic and border prices of urea, 1986-94 Rural income distribution by region, 1989-92 Investment incentives in Vietnam and Indonesia Investment incentives in ASEAN countries Foreign investment projects approved and implemented, 1988-95 FDI by sector FDI by investment category Leading investors in Vietnam Foreign investment in Vietnam by country of origin Firms' responses by industiy group Firms' responses by firm size Firms' motives for investing in Vietnam Length of negotiating period Position in firm of negotiator Type of technology transferred

9 22

24 30 31 33 34

37 72

74 76 77 77

78 91 92 93 97 98 98 99

vii

list of tables

6.8 6.9 6.10 .11

Vinta Finns' Firms'

partn r

100 100 102 103

List of figures

2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3.1 3.2 3.3 3.4

Growth and inflation, 1986-95 Growth in Vietnam and Eastern Europe during reform Inflation in Vietnam and Ea tern Europe during reform Inflation and growth in Vietnam and Eastern Europe GOP growth in Vietnam and China during reform Inflation in Vietnam and China during reform FDI and ODA in Vietnam, 1988-95 State and non-state sectors' share of GOP, 1987-95 Change in size of landholdings for individual farm households in Mekong Delta, 1989-93 Change in size of landholdings for individual farm households in Red River Delta, 1990-93 Land prices in Phuoc Thoi village, 1989-95 Average per capita income in rural households,

1990-93

7

8 9 10 11 11

13 17 26 27 29 36

Foreword

In 1990 the Australian National University's Research School of Pacific Studies convened a major conference on current conditions in Vietnam, and each year since then has held a Vietnam Update Conference. This has rapidly established itself as one of the leading international conferences of its type on contemporary Vietnam. In engaging leading scholars to explore major policy issues relating to Vietnam, the Update Conference provides an invaluable focus for academic research, with direct spin-offs for policy development processes both in Australia and Vietnam. At the same time, it serves to inform the broader Australian community of important recent events and trends in what is an increasingly significant-and rapidly changing-regional neighbour. It also provides a unique opportunity for interchange between groups with diverse backgrounds and differing perspectives. The Update Conference enables academics, business people, public servants, aid workers and others with an interest in Vietnam to engage in wideranging and thought-provoking dialogue on political, social and economic issues of concern to both Vietnam and Australia. From the outset, the conference organisers have encouraged the participation of scholars, commentators and officials from Vietnam . Indeed, in any one year up to half of the conference participants are Vietnamese. This effort has not only maximised the quality of the discussions at the Update Conference, but also facilitated the establi hment of important and productive links between Vietnamese and Australian scholars and institutions. Vietnam Assessment : Creating a Sound In ves tment Climate is an important contribution to the understanding of Vietnam's development prospects. Vietnam is confronted with critical choices about its future. The papers in this volume help chart the challenges and opportunities facing Vietnam as it continues on its path of economic tran formation .

X

Foreword

In introducing this selection of papers from the 1995 Vietnam Update Conference, I am also pleased to note the inclusion of papers from the second Vietnam Economic Re earch Project Workshop, an initiative of the National Centre for Development Studies. It is aimed at producing and publishing quality research on the Vietnam economy through a teaching and research program conducted with postgraduate students drawn from the National Economic University and the Central Institute for Economic Management in Hanoi, and the University of Economic in Ho Chi Minh City. The contribution of papers to this volume is an excellent indication of the Project's success.

Trevor Kanaley June 1996

Contributors

Bui Kim Chi is a lawyer from the Vietnam Ministry of Water Resources, seconded to the Melbourne office of Deacons Graham & James. This law firm is a member of an international network that has branches in Australia, the Asia-Pacific region and the United States. It has had representative offices in Hanoi since 1992 and in Ho Chi Minh City since 1994. Le Dang Doanh is President of the Central Institute for Economic Management (ClEM), a key economic thinktank within the Ministry of Planning and Investment in Vietnam . The ClEM offers policy advice, and has recently been involved in the drafting of several pieces of economic legislation. Mr Doanh is a prominent commentator on developments in the Vietnamese economy and frequently expresses his own position on economic matters. Suiwah Leung is Director of Graduate Studies in Economics of Development at the National Centre for Development Studies at the Australian National University (ANU) . She is also Convenor of the Vietnam Economic Research Project, which is in part funded by a grant from the Australian aid agency, AusAID. The Project promotes research on the Vietnamese economy by scholars and researchers at the ANU and various institutions in Vietnam . The three Vietnamese institutions to which the ANU is specifically linked through the Project are the Central Institute of Economic Management, the National Economic University in Hanoi and the Economic University of Ho Chi Minh. Elizabeth Maitland is a lecturer in the Department of Business Development and Corporate History at the University of Melbourne. Her chapter in this book represents part of her PhD research on Australian investment in India, Indonesia, Vietnam and the Philippines. Ms Maitland conducts extensive fieldwork in Australia

ii

rti ip

tiv •ly in

Acknowledgments

A number of individuals and institutions contributed directly and indirectly to this book. As the volume is a collection of papers from the Vietnam Update Conference and the Vietnam Economic Research Project, I would like, first of all, to acknowledge the work of the contributors. I thank them for their patience and forbearance in the numerous rewrites and updates which are part of the editing process. I would also like to acknowledge the financial assistance given to both the Vietnam Update Conference and the Vietnam Economic Research Project by the Australian Agency for International Development (AusAID). Furthermore, I am indebted to the DirectorGeneral of AusAID, Mr Trevor Kanaley, for writing the Foreword to this book, and to other AusAID officers for their support. The financial assistance of the Australian Department of Foreign Affairs and Trade (OF AT) in the initial stages of the Vietnam Economic Research Project, and of the Ford Foundation to the Update Conference, are also gratefully acknowledged . Likewise, the International Monetary Fund (IMF) provided financial support to enable its former Resident Representative in Vietnam, Dr Erich Spitaller, to participate in the Conference. Both Dr Spitaller's contribution and the IMF's support are gratefully acknowledged. The assistance of the international law firm, Deacons Graham & James, in advertising the Update Conference is also much appreciated. The Vietnam Economic Research Project links the Australian National University (ANU) to three major institutions in Vietnam: the National Economics University in Hanoi (NEU), the University of Economics in Ho Chi Minh City (UEH), and the Central Institute of Economic Management (ClEM) in the Ministry of Planning and Investment in Vietnam. I would like to thank the respective Heads of the three institutions for their participation in the Conference, and for their support throughout the Project. A special vote of

xiv

Acknowledgments

thanks is due to Mr Le Dang Doanh, President of the ClEM, whose advice and support have been invaluable. At the ANU, I would like to thank Professor Ron Duncan, Executive Director of the National Centre for Development Studies, Professor Ross Garnaut, Convenor of the Economics Division, and other colleagues in the Economics Division, for their advice and guidance throughout the production of this book. Dr Hal Hill, Head of the Indonesia Project at the ANU, kindly acted as one of the readers. The prompt and insightful comments of both the readers of the manuscript are much appreciated. At the organisational end, the assistance of Dr David Marr, Professor Ben Kerkvliet, Ms Bev Fraser and other colleagues in the Research School of Pacific and Asian Studies of the ANU are gratefully acknowledged. I am particularly indebted to Ms Billie Headon, Administrator of the Vietnam Economic Research Project, for her excellent organisation of the Conference and the Project Workshop. Without Billie's dedication and commitment, this book would not have been possible. A special vote of thanks goes to my editorial assistant, Ms Beth Thomson, whose professionalism is highly valued and appreciated. Finally, I would like to thank my husband, Ronald Dean, for his support and help throughout the years, and in particular, during the more stressful periods in the production of this book. Suiwah Leung June 1996

1 Introduction Suiwah Leung

This volume comprises a selection of papers presented at the Sixth Vietnam Update Conference and the Second Vietnam Economic Research Workshop, both held at the Australian National University in November/December 1995. The theme of the volume is 'creating a sound investment climate in Vietnam'. Although its economy has made a decisive turnaround this decade, Vietnam is still one of the poorest countries in the world. In terms of GDP per capita, it ranks 151st among the world's 174 countries, although, according to the UNDP's Human Development Index, it is in 121st place. Even at the current growth rate of 9.5% per annum, it will still take Vietnam 15 years to reach the standard of living presently enjoyed by Indonesia, and 28 years to reach that of Thailand. Macroeconomic reforms and structural adjustments over the past 10 years, together with successful resource exploitation, have certainly brought impressive results, including sustained rapid growth and moderate inflation levels. However, rapid growth has also meant that most of the excess capacity in capital equipment and infrastructure created under central planning has been utilised. Continued growth of 9-10% per annum would thus require higher rates of investment than in the past. A sound investment climate is essential for the fulfilment of Vietnam's ambitions to catch up with other rapidly growing countries in the Asia-Pacific region. Four themes emerge from the following chapters as necessary components of a sound investment climate. First, Vietnam must continue to provide a stable macroeconomic environment. Second, it must persist with its agenda for microeconomic reform. Third, there must be greater clarification of its laws, particularly in relation to property rights. In this regard, the administration of laws affects

2

Agenda for microeconomic reform

The political will to undertake microeconomic reforms is less certain. Le Dang Doanh argues in Chapter 2 that, in order for Vietnam to maintain real growth of 10% per annum, it will need to invest

Introduction

3

about 30% of its GDP annually. Net domestic savings, however, are only about 6-7% of GDP. The financial sector is dominated by state banks, the majority of whose loans go to unprofitable state-owned enterprises (SOEs). Reform of the financial sector is essential for boosting domestic savings, but the apparent commitment on the part of the government to the SOEs makes such reforms politically controversial. Furthermore, the chapter points out that 98% of foreign joint ventures are currently with enterprises in the state sector. This has the potential to create large state monopolies backed by foreign capital, and obstruct the efficiency gains necessary for Vietnam to maintain rapid growth with low inflation. This point is brought out vividly in the examples given in Chapters 3 and 4. Nguyen Tri Khiem cites the fact in Chapter 3 that the import of agricultural inputs is dominated by several SOEs in joint venture with foreign firms, and that the marketing costs of these enterprises are estimated to be at least 10% higher than those of private traders. In Chapter 4 Thaveeporn Vasavakul discusses examples in the construction industry where projects commissioned by SOEs have tended to cost 20-30% more than those in the non-state sector. Microeconomic reforms are indeed necessary to maintain economic growth and a healthy investment climate. While Nguyen Tri Khiem assesses the rate of rural-urban migration as not yet giving cause for alarm, it has the potential to increase rapidly. To maintain political stability, the development of labour-intensive manufactures in the cities would then be necessary to absorb the labour force from the countryside. This, in turn, would require reform of the international trading regime and the structure of importing industries-fundamental elements of structural reforms to create a sound investment climate in Vietnam. Clarification of laws

The importance of property rights for the investment climate is emphasised throughout the book-both the legal recognition of property rights and the administration of the laws themselves. The granting of long-term leases (or land use rights) in 1988 to farm households is identified by Nguyen Tri Khiem in Chapter 3 as the main impetus behind land improvement and development resulting in rapid agricultural growth between 1988 and 1992. The prohibition on transfers of land use rights until 1993, when the Land Law was enacted, was not a major impediment to this process as extra-legal

4

Suiwah Leung

transfers were already taking place. On the other hand, the requirement since 1993 that such transfers be authorised by the local People's Committees has opened the way for part of the gains in land improvement to be drained away to the middle and lowerranking cadres in local committees, rather than accruing to the farmers themselves. The 1995 reform of the People's Committees in an effort to impose greater central control, as discussed by Thaveeporn Vasavakul in Chapter 4, could indicate the government's commitment to restore to the farmers the economic rent accruing from land improvements, thereby improving the investment climate in the countryside. It remains to be seen whether the 1995 public administration reforms do indeed bring about a restoration of economic rent to the economically productive units, or merely become a basis for the transfer of rent-seeking from lower-ranking provincial to higher-ranking cadres in the central ministries. The issue of property rights is identified by Nguyen Tuan Dung and Elizabeth Maitland in Chapters 5 and 6 as a crucial factor affecting foreign direct investments. In particular, the way property rights in intangible assets, such as management knowhow and technology, are protected frequently determines the contractual form of the investments-whet her a wholly owned subsidiary, joint venture or some other arrangement. Finally, the urgent need for further clarification of the Civil Code covering rights over real estate and personal property is emphasised in Chapter 7 by Bui Kim Chi, particularly as commercial activities continue to grow at a rapid rate in Vietnam.

Redefining the 'leading role of the state' The lack of a private corporate sector in Vietnam is recognised in Chapter 2, in which Le Dang Doanh argues that political support for the state sector has resulted in discrimination against the private sector. The inflow of foreign investments and official development assistance into the state sector has resulted in state sector output increasing as a percentage of GDP. In order to give full opportunity to the entrepreneurial energies of the domestic private sector, there needs to be a reconsideration of the role of the state in economic development, and effective legal reforms to protect private property rights. It is to be hoped that public administration reform, discussed by Thaveeporn Vasavakul in Chapter 4, is a manifestation of the changing role of the state. The establishment of a civil service based

Introduction

on merit and

5

rving

certai nl y

enhance reforms in th

political

A ian

2 Economic developments and prospects Le Dang Doanh

Vietnam has moved into a new period of growth and development, succes fully putting behind it the longlasting recessions and economic crises of the 1970s and 1980s. It has made several decisive steps towards international economic integration, joining ASEAN in June 1995, estab lishing diplomatic relations with the United States in the arne month, and signing a framework cooperation agreement with the European Union. During the first decade of economic reform (1986-95), the Vietnamese government put the main pillars of a market economy in place and established the freedom to engage in business activities according to the rule of law . Macroeconomic stability is being realised, setting the main preconditions for industriali ation and modernisation in the years to come. This chapter briefly discusses Vietnam's initial period of transition from a centrally planned to a market-based economy, reviews the country's recent economic performance, and examines the program for structural change and microeconomic reform. It then focuses on the challenges ahead, assessing Vietnam's prospects for catching up with other co untries in the rapidly growing Asian region.

Macroeconomic stabilisation Vietnam's transition towards a stable, market-based economy has been described as 'one of the more dramatic turnarounds in economic hi tory' (Dollar and Litvack 1994, p. 1). Figure 2.1 illustrates the significance of this statement. Within the space of one decade, Vietnam' inflation rate fell from several hundred percent per annum to an average of about 12% over the past four years, while

Economic developments and prospects

7

FIGURE 2.1: Growth and inflation, 1986-9sa %(log scale)

%

1,0 0 0 . - - - - - - - - - - - - - - - - - - - - - - - - . 1 0 9 8

GOP (RHS) 7

100

6

5 4

•,

10

3 2

~4---+--r--4---+--r--,_--+---r--,_-LO

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

a As measured by changes in real GDP and the CPl.

Source: Unpublished data from Central Institute for Economic M anagement, Ministry of Planning and Investment.

real GOP maintained its upward trend, reaching 9.5% in 1995. Unlike the economies of the former Soviet Union, Vietnam passed through the initial years of transition without experiencing a major economic recession (Figure 2.2) and with its inflation rate generally trending downwards (Figure 2.3). Developments in the early 1980s created a favourable environment for the market-oriented reforms to follow (Leung and Vo Thanh 1996; Dollar and Ljunggren 1995). By 1992 Vietnam and China were outstripping other transitional economies in their progress towards non-inflationary rapid growth (Figure 2.4). As Figures 2.5 and 2.6 show, Vietnam was able to achieve this outcome without sacrificing even short-run real growth-unlike China, which experienced episodes of recession during its postreform period. It is this that has given impetus to its hopes of becoming one of the next generation of 'tigers' in the Asian region. In assessing the prospects of such a development, let us turn to Vietnam's recent economic performance.

Le Dang Doanh

8

FIGURE 2.2: Growth in Vietnam and Eastern Europe during reforma (% )

10.-----------------------------------------,

5

t-4

t-3

t-2

t- 1

t+2

I I

-5 \

-10

·.. \ ..

..

: t+3

t+4

'··· ......

,.~· /

.

-15

-2 0L-------------------------------------------~

Poland

Bulgaria

Former Czechoslovakia

Former Soviet Union

Hungary

V ietn am

Note: t =first year of reform . In Vietnam, t = 1986; in Eastern Europe, t = 1989. a As measured by changes in rea l GOP.

Source: As for Figure 2.1.

Recent economic performance

In the five years from 1991 to 1995, Vietnam achieved average real GDP growth of 8.2% (9.5% in 1995). This represents the longest period of sustained growth in Vietnam's recent history. Table 2.1 shows the structure of GDP from 1986 to 1994 by sector. The agricultural sector record ed average growth of 4.5% in the five years to 1995, with crop production reaching a record 27.4 million tons. As a result, Vietnam h as not only become self-sufficient in food and crops, but is now the world 's third largest rice exporter with

Economic developments and prospects

9

FIGURE 2.3: Inflation in Vietnam and Eastern Europe during reforma (% log scale) 1,0 0 0 . - - - - - - - - - - - - - - - - - - - - - - - - - - ,

100

-.

I

----;

10

I I·

t+1

'

t+2

t+4

t+3

I

'

0.1~-----~---------------~

-

- --

-·-

Pol and

Bulgaria

Former Czechoslovakia

Former Soviet Union

Hungary

Vietn am

Note: t =first year of reform. In Vietnam, t = 1986; in Eastern Europe, t = 1989. aAs measured by changes in the CPl.

Source: As for Figure 2.1.

Structure of GOP by sector, 1986-94

TABLE 2.1

(%) Sector

1986

1987

Agriculture Industry Services

38.0 28.9 33.1

40.6 28.4 31 .0

Source: As for Figure 2.1.

1988 1989 46.3 24.0 29.7

42 .1 22.9 35.0

199.0 1991 1992

1993

1994

40.7 22 .5 36.9

37.1 25.4 37.5

35.4 26.6 38.0

39 .2 23.1 37.7

38.6 24.3 37.1

Le Dang Doanh

10

FIGURE 2.4: Inflation and growth in Vietnam and Eastern Europe Change in real GOP(%) 15

+ China 10 +Vietnam

5

Hu ngary +

-5

•

-10

Czech Republic

-15

Ukraine

Romania + Russia +

- 20+-----------+-----------~--------~-----------4

1

10

100

1,000

10,000

%change in CPI (log scale)

Source: As for Figure 2.1.

annual exports of some two million tons. Coffee, rubber and cashew nuts have become important agrarian export products in recent years. Prod uction of meat, vegetables and fruit has also increased rapidly to meet growing domestic demand. Production in the industrial sector has risen rapidly because of higher investments in energy, oil and processing generally, and because of increased competition in consumer goods. With the exception of a few subsectors, such as machines and machine tool production, all areas of industry are operating at full capacity. The country will therefore need to make huge capital investments in the industrial sector if it is to expand industrial production and enhance its competitiveness. In public finance, comprehensive reform of the taxation system has brought about a large increase in government revenue, by as much as 38% per annum over the last five years. In 1995, government

Economic developments and prospects

11

FIGURE 2.5: GOP growth in Vi etnam and China during reform (%) 1 6 .-------------------------------------------~

14 12 10

8 6 Vietnam

4 2

0 +-~-+-+~~r-~--+-~---r--+-~--~--~-+--~

t+ 1 1+2 1+3 1+4 1+5 t+6 1+7 1+8 1+9

-2 -4 -6 ~------------------------------------------~

Note: t =first year of reform . In Vietnam, t = 1986; in China, t = 1979. Source: As for Figure 2.1.

FIGURE 2.6: Inflation in Vietnam and China during reform (% change in CPI, log scale) 1,000 .-------------------------------------------~

100

10

t+2

1+3

t+4 . t+S

t+6

t+7

1+8

t+9

0~------------------------------------------~

Note: t = first year of reform . In Vietnam, t = 1986; in Chin a, t = 1979 . Source: As for Figure 2. 1 .

12

Le Dang Doanh

revenue is estimated to have risen by 30% over 1994, thereby covering all the government's current expenditure and contributing the equivalent of about 10% of total expenditures to public savings. However, total government expenditures, averaging 45% per annum, have outstripped the increase in revenue, due principally to increased public investments in recent years. Budget deficits have been kept at acceptable proportions of GOP (3.6% in 1994 and 3.8% in 1995), while growth in domestic credit fell from 51% in 1994 to 40% in 1995. Vietnam's commitment to fiscal discipline and inflation control therefore appears to have been realised. On the external front, Vietnam's economy has become more open. Exports grew at an average rate of 20% during the period 1991-95, with the share of exports in GOP rising from 5.6% in 1987 to 26.4% in 1991 and 31.9% in 1995. While the share of manufactured exports in total exports has been increasing steadily, it remains modest compared with that of other economies in the region. The bulk of Vietnam's exports is still comprised mainly of crude oil, unprocessed agrarian products and minerals. Imports, meanwhile, have been increasing faster than exports; the share of imports in GOP rose from 13.7% in 1987 to 31.6% in 1991 and 40.3% in 1995. The resultant deficit has been financed to a large extent by foreign direct investment (FOI) and to a lesser extent by overseas development assistance (OOA) (Figure 2.7). FOI has risen continuously since 1988. By the end of 1995 approximately 1,500 licences for FOI projects had been granted; these had a total registered capital value of US$16 billion, of which US$6 billion had been realised_! In 1995 alone, registered capital from FDI reached US$7.5 billion, a 187.5% increase over 1994. Projects financed through FOI provide 65,000 jobs and constitute 27% of total investment implemented in Vietnam over the last five years. The remainder is made up of domestic private investment (30%) and 'state investment' (43%), including OOA credits, soft loans, public investments financed by the government, and the investments of state-owned enterprises (SOEs). Infrastructure has gradually improved, contributing substantially to the economy. Power supply and transport facilities have been expanded, and capacity to handle outgoing telephone traffic has increased nearly thirtyfold over the past decade.

1Registered capital means the value of projects approved as distinct from realised . Chapter 5 of this volume estimates that approximately 30% of registered capital gets realised.

Economic developments and prospects

13

FIGURE 2.7: FDI and ODA in Vietnam, 1988-95a

(US$ million)

1988

1989

1990

0

FDI

1991

1992

•

1993

1994

1995

DA

aFigures for FDI are realised invested capital ; those for ODA are actual disbursements. Figures for 1995 are estimat s. Source: As for Figure 2.1.

On the social front, unemployment in urban regions fell from 13% in 1989 to 6.2% in 1994 (Ministry of Labour, War Invalids and S cial Issues). Vietnam creates about one million n w jobs annually, managing to absorb nearly all young people ntering the labour market. Living standards have generally improv d . Consumption per capita rose by an average of 3.1% p r ann urn in 1991-95. Reflecting the general progress cau d by conomic r form, the poverty rate fell from 50% in 1989 to 19.9% in 1993. 2 The gap between rich and poor, and between fast developing urban areas and slower growing rural regions, has b en widening. GOP per capita in Ho Chi Minh City stands at US$912, compar d with only US$120 2These are General Statistical Office (GSO) estimates. W rid Bank estima tes, based on international living standards, put the rates significa ntly higher.

14

Le Dang Doanh

for rural regions. With 80% of the population living in rural regions and 78% of the labour force engaged in agriculture, the disparity in living standards is attracting government attention, particularly in the area of regional planning. Growth centres in the south (Ho Chi Minh City, Dong Nai, Song Be, Baria, Vung Tau), in the north (Hanoi, Hai Phong, Quangninh) and in central Vietnam (Quangnam, Danang, Dung Quat) incorporate plans for industrial zones and improved infrastructure , with the goal of attracting foreign and domestic investment. Structural change and international economic integration Vietnam's legal framework has changed dramatically with the promulgation of the Constitution in 1992 and the passing of nearly 100 laws since then. These include the Civil Code in 1995, the Labour Code in 1995 and the Bankruptcy Law in 1993. The authorities are currently reviewing legislation covering such areas as commercial law and FDI, thereby building the foundations of a legal envi ronment for the operation of a market economy. There is still, however, quite a way to go. Some legislation lacks clarity and precision, resulting in different interpretation s and inconsistent application and enforcement. The Land Law, for example, permits SOEs but not private sector companies to use land as a contribution to capital in joint ventures and as security for bank mortgages. There have been few cases of bankruptcy, surprisingly, given the poor financia l condition of some SOEs. Instead, the government has favoured rescue operations, including tax holidays, frozen debt and preferential credit for SOEs. FDI still enjoys higher tax holidays than domestic investment, creating unequal competitive conditions. Clearly, there is considerable room for further legal reform as the country addresses the inequities in the present system. In the wake of reform and modernisation, the banking sector has grown substan tially. The fou r state-owned commercial banks dominate the sector with 84% of the total volume of credit, while the 43 joint stock commercial banks, in spite of rapid expansion, hare the remaining 16%. The banking sector is capitalised at 48,000 billion dong (US$4.35 billion). This represents only 29% of GDP, a very low level by regional standards. Much therefore remains to be done. In recent years, Vietnam's planning system has been reshaped to concentrate on long and medium-term planning, regional settlements, and macroeconom ic policies aimed at controlling inflation and

15

u tai.ning conomic growth . In line with public admin istration tate r form and the treamlining of ministries from 11 to five, th Planning Committe was m rged with th State Co mmitte for Coop ration and lnv tment to form the Mini try of Planning an d Investment. This agency is charged with approving the large t ODA, FDI and public investment projects, coordinating multilateral and bilateral aid funds, and s upe rv ising mo t of the 26 sta te programs on economic and ocial d evelopment. The str amlining of ministries will, it is h oped, strengthen the role of the s tate in stablishing law and order as the basis for the workings of a market conomy . Other aspects of public administration reform include th promulga tion of the Law on Admini trative Tribunals, th introduction of a civil ervice h ierarchy, and the requirement that civil ervant pass a public exam ination . Th e tablishment of a ci vil rvic represents the firs t s tep towards d veloping a group of prof sionals dedicated to the management of the economy and the country rather than to promoting the econ omic interests of SOE in competition with th privat sector . There is still a long way to go, and th hape of public administration reform will depend crucially on how th e 'leading role of th e state' is redefined as economic development continu . Aft r ten years of economic reform, Vietnam has mov d irr v rsibly to a new stage in its development. Businesses ar n ow free to condu ct their affairs according to the rule of law in an in r asingly multi ec toral eco nom y . The government ha s establish d the main pillars of the m a rket mechanism ' under the tate ' guidanc ', d eveloped and diversified Vietnam ' s international economic r lations, and integrated the country's economy into the r gional and world conomies. It is not clear, however, tructural reforms undertaken so far will prove wh th r th uffi i nt to allow Vietnam to realise its goal of catching up with it A ian neighb urs.

Agenda to the year 2000 and the challen~es ahead a! of doubling GDP per capita b the year 2000 o ver With th a rl 1 0 , the government has formulated the 1 I in th f 11 win tar ts f r 1 6-2000. •

GDP i tar

ted t grow at an a erage r.ate of 9- 10% per annum, wing at 4-5%, industr at 14-15% and

16

• •

• • • •

•

•

Le Dang Doanh

Inflation is to be kept below 10% p er annum. Exports are targeted to grow at a h igher rate of between 24 and 28% per annum, to reach an exp ort per capita figure of US$170 (compared with US$67 currently). Population growth is to fall to 1.8% per annum by the year 2000. Unemployme nt in urb an areas is to be reduced to 5%, and underemploym ent in rural areas to below 20%. The poverty rate is to be reduced to 10%, w ith life expectancy to reach 70 years. Consumption per capita is targeted to increase by 5% annually, so that by the year 2000 individual consumption should be 150% higher than in 1990. Budget deficits are to be no h igher than 4.5% of GDP, and budget revenue is to constitute between 22 and 24% of GDP. Average domestic savings are to reach 31% of GOP by the year 2000. Approximatel y US$20 billion w ill be raised abroad to finance Vietnam's growth and development. Of this, US$7 billion will come from OOA and US$13 billion from FDI.

In short, in the next five years Vietnam aims to superimpose on its existing economy a second layer th at is considerably m ore sophisticated and technologicall y skilled . The challenges in achieving this goal are considerable. Until recen tly, Vietnam could achieve g rowth at a relatively low incremental capital-outpu t ratio (ICOR) of between 2.5 and 2.8 because it was able to exploit cap acity created during the years of central planning. However, as noted earlier, most of this existing capacity is now being fully used, and so the ICOR needs to rise to at least 3 for the economy to expand further. To achieve GDP growth of 10% per annum, Vietnam will need to invest 30% of GDP in capital acc umulation. But domestic savings are very low. In 1995, domestic savings in gross terms constituted 16% of GOP; net domestic savings were only about 6-7% of GOP. This w as clearly insufficient to finance investment of 27.5% of GDP in 1995, let alone projected investment needs of about 30% of GOP. The country's domestic financial institutions are rud imentary and unable to mobilise the huge amount of private savin gs n eeded , estimated at US$3-5 billion. In tackling this problem, Vietnam clearly needs to pursue financial sector reform and to set up the institutions of a capital

17

Economic developments and prospects

FIGURE 2.8 State and non -state sectors' share of GOP, 1987-95

(%) 1995 1994 1993 1992 1991 1990 1989 1988 1987 0

10

20

0

30 ta t

40

so •

60 on - ta t

70

80

90

100

sc tor

Source: As for Figur 2.1.

mark t. In the curiti market, such as a st ck x hang it inv tm nts by selling meanti.m the governm nt plans t state bonds in international mark Effici ncy and productivity ar 1 w, and comp titi nisin danger of being swamp d by monopol isti c I m nt . This i a o iat d with ctor to gr w at lh xp n of th nonthe t nd ncy for the sta t hare of GOP state s ctor. As Figur 2.8 h w , th tat f 1989 but ha initially fell after th reform since 1992. Although SOE dominat in electricity, tel communications, cern nt, low. Ev n th most coffee and sugar, their profitability t nd efficient enterprises-in light indu try- had a profit rati of only 5.6% in 1994. A high proportion of SOEs are involv d in private sector activities, uch a r tail trad e and the hospita lity indus try, i till in the many using outdated equipm nt. quitisation of pilot stage and is r s tricted to a few mall, n on- r pr sen tative

18

Le Dang Doanh

enterprises. As mentioned earlier, the administration of the Land Law and of a number of other laws favours the SOEs. They receive preferential credit from state-owned banks; as much as 70% of the total volume of credit provided by the banks goes to SOEs. As a result, the bulk of foreign joint ventures are with SOEs, contributing to the recent growth of the state sector. It is not surprising, then, that the private sector remains small in size. The registered capital of all 22,000 registered private enterprises is only 18% that of the SOEs.3 Private businesses face difficulties in obtaining access to land, credit and subsidised loans. Suffering from a lack of confidence in their long-run business expectations, they tend to undertake very short-term operations, sometimes involving large-scale tax evasion. There is a real danger that inefficient state monopolies, which are heavily involved in joint ventures with foreign companies, may stifle the growth of the domestic private sector. Given that small to medium-sized enterprises were the driving force behind the growth of manufacturing industries in the Asian 'tigers', the current trend in Vietnam for the state sector to expand poses a serious problem (Riedel and Corner 1995). At a more fundamental level, Vietnam now needs to define the 'leading role of the state' in economic development. Does this mean that the state should be actively involved in economic production, or rather that it should set a framework and policy environment in which the private sector can operate? If the state is to be involved in production, then the efficiency and productivity of SOEs will need to improve considerably. If it is to set the parameters for private enterprise, then it will need to abolish discriminatory practices against the private sector and develop an environment in which the domestic private sector can flourish. The ownership of land, especially industrial sites, needs to be clarified, as does the ownership of other resources. Corruption and smuggling must be stopped. The financing of education and health care also needs reform. These issues affect a number of interest groups and require new policy directions. The development of responses will shape the process of public administration reform and, indeed, will profoundly affect the course of Vietnam's economic development in the corning century.

Yrhere are over 1.1 million unregistered household businesses.

Economic developments and prospects

19

Conclusions

Within the course of a decade, Vietnam's economy has made a decisive turnaround to demonstrate sustained growth in recent years. This has formed the basis for the country's greater engagement with the world community, and has paved the way for it to embark on a new program of industrialisation and modernisation. However, Vietnam enters this new phase in an extremely weak competitive position. It also faces the danger that its economy will be stifled by inefficient state monopolies in joint venture with foreign firms. Reform is entering a new stage in which the emphasis will be on institution building and development. Mobilising domestic resources through the expansion of domestic savings, increasing investment in human resources, and achieving efficiency gains through greater competition in the national economy will all be of vital importance. Vietnam needs to maintain the momentum of economic integration in the regional and world economies while providing a competitive investment environment. The key to securing high but sustainable growth rates in the coming decades will lie in keeping the inflation rate low. Inequalities of income between groups and regions must be addressed. Vietnam will also need to carry out greater structural change and continued macroeconomic reform if it is to realise its goal of catching up with its rapidly growing Asian neighbours. These tasks, while undoubtedly complex, can be achieved if Vietnam succeeds in harnessing the creativity of its people and obtaining the cooperation of the world community.

References

Dollar, David and Jennie Litvack (1994), 'Macroeconomic Performance and Poverty Reduction', in Household Welfare and Vietnam's Transition to a Market Economy, World Bank. Dollar, David and Borje Ljunggren (1995), Macroeconomic Adjustment and Structural Reform in an Open Transition Economy: The Case of Vietnam, Paper presented to a conference on Participation of Reforming Economies in the Global Trading and Financial System, UNU /WIDER, Helsinki, 26-27 May. Leung, Suiwah and Vo Thanh (1996), 'Vietnam in the 1980's-Price Reforms and Stabilization', in Banca Nazionale Del Lavoro Quarterly Review, forthcoming.

20

Le Dang Doanh

Riedel, James and Bruce Comer (1995), Transition to Market Economy in Vietnam, Paper prepared for the Asia Foundation Project on Economies in Transition: Comparing Asia and Eastern Europe, March.

3 Policy reform and the microeconomic environment in the agricultural sector Nguyen Tri Khiem

The incentive structure provided by policy and institutional reform in the agricultural sector resulted in rapid productivity growth in the late 1980s and early 1990s. The process of reform began in 1981 with the introduction of the product-based contract system, whereby agricultural production in excess of state quotas could be sold on the open market. From 1988, input as well as output markets were liberalised. Of particular significance was the household responsibility contract system, introduced in April1988, under which farm households were able to secure tenure over their land through longterm leases. This reform was further strengthened by the enactment in June 1993 of the Land Law (Party Resolution No. 5), which permits land use rights to be exchanged, transferred, inherited, leased and mortgaged. Nguyen Sinh Cue (1995) and others have documented these policy regime changes extensively. The main features of the changes are summarised in Table 3.1. The impact of the reforms was most pronounced in the food crop sector (Pingali and Vo-Tong Xuan 1992; Nguyen Tri Khiem and Prabhu Pingali 1995). Rice output grew by 3.14% per annum in 198188, rising to 5.02% in 1988-92 before falling back to 4.30% in 1992-94. Rice yields grew by 3.23% annually in 1981-88, 3.14% in 1988-92 and 3.35% in 1992-94. It is not certain, however, that agricultural output will continue to grow at a high and sustainable rate, or that the benefits of growth will be shared equally throughout the rural population. Indeed, the impact of the reforms on farmers' and consumers' welfare, on national income distribution and on regional development are of great interest to government and analysts alike.

m

22

TABLE 3.1 Major f atures of policy regi m s

Until 1981

1981-88

A

Type of system

Work-bas d antra t syst m

Product-bas d contract system

ousehold r ponsibility contract sys m

Agricultural produ tion

Colle tivis d

p rtly d coli ctivised

Fully decollectivised

Land

ontroll d by ooperative; c ess to land restricted

Allot! d to individual farm households; insecur tenure

Long-term leases to individual farm householdsa

Farm de isions

Made by planning department; centralls d

Made by planning authorities with ut account of market forces

M deby individual farm households

Farm operations

arried out by cooperative

Carried out jointly by cooperative and households

Carried out by individual farm households

Farm income

Based on hours of work in cooperative

Based on hours of work and output above quota

Based on total output after paying land tax and contributions to local funds

Inputs and output

Controlled by govern ment; low output price; poorly timed supply of inputs

Partly controlled by government: fully controlled input supply; partly controlled output market

Fully liberalised

Impact

No incentive

Some incentive

Full incentive

Growth rate of rice output

0.46%

3.14%

5.02% (1988-92)

Level of ri ce self-sufficiency

Food shortages; rice imported

Food shortage in 1987-88

Self-sufficient; rice exported

r1988

arenure was further secured by recognition of the right to transfer, exchange, lease, inherit and mortgage land under the Land Law of july 1993.

Policy reform and th microeconom i environment in agricultur

23

n th Thi chapter analyse the impact of the reform un it. on producti microeconomic environment facing the hou hold The analysis focuses particularly on farmer ' product choice a nd input decisions, drawing on panel data collect d from two ts of sample farm households-in the Red River D Ita in the north and the Mekong River Delta in th outh. The data were coli cted in th four consecutive years from 1990 to 1993 in the former region, and in the five consecutive years from 1989 to 1993 in the latter region. The chapter discusses the impact of the reforms on income distribution before asses ing the challenges and prospects facing the agricultural ector.

Product markets and the choice of crops Until 1989, farmers were unable to choose what crops or non-crop agricultural products to grow on a particular piece of land. After the April 1988 reforms, in which land use rights were allocated to individual farm households in the form of long-term leases, the decollectivisation process took on new momentum . Progress wa faster in the south than the north, and came later to areas where the collectives were very strong. The response of farmers to policy reform and market liberalisation has been quantified by Pingali and Yo-Tong Xuan (1992) and Nguyen Tri Khiem and Prabhu PingaH (1995), u ing the production function approach. They found that policy reforms had had a positive impact on farm productivity and on farmer ' investment decisions. Diversification of production, although still at an early stage, was observed in the crop sector. This is apparent in Table 3.2, which shows the shares, in both value and planted area terms, of food grains, industrial crops and vegetables in the period 1991- 94. The relative share of grains is declining in value as well a in land area planted. ln absolute terms, the area of land planted with food grains decreased from 5.9 million hectares in 1988 to 5.3 million hectares in 1992; rice-farming land, meanwhile, shrank from 4.3 to 4.1 million hectare . Total production of food grains continu to incr ase despite the decline in land area planted, due to higher ropping intensities. D mand in export and urban market ha ncouraged farmers to di ersify to higher-value cash crops and indu trial crops. The con ersion of rice-farming land to other use and the c untry' large-scale exp rts of rice in recent years ha e gi en rise to

Nguyen Tri Khi m

24

TABLE 3.2 Area and va lue of c rops, 1991 - 94

(%) 1991

1992

1993

1994

Crop area Food grainsa Industrial crops b Vegetables

79. 1 7.1 4.5

79.4 6.9 4.3

78.4 7.2 4.6

78.2 7.4 4.7

Crop valu Food grainsa Industrial raps b Vegetables

67.6 14.1 8.2

62 .1 15.4 9.1

na na na

na na na

Mainly ric and maize. bRubber, coff , cocoa, etc. na = not avai lable. 3

Source: General Stati sti ca l Office (1995), Vietnam Statistical Yearbook 1994, GSO, Hanoi; Nguyen Sinh Cue (1995).

concern that Vietnam will be unable to maintain its food selfsufficiency. The government has responded by regulating crop choice decisions more closely . An ordinance promulgated in early 1995 decreed that rice-farming land could not be converted to non-rice uses permanently, although diversification on a seasonal basis would be permitted. Farmers circumvent this regulation by growing non-rice crops in raised beds and rice in the furrows. Conversion of ricefarming land to non-rice uses is also discouraged by the imposition of higher taxes on land used for higher-value crops and enterprises. Very high taxes are imposed on the conversion of land to nonagricultural uses. A further hindrance to crop diversificatio n lies in the lack of specialised knowledge and of market instruments in Vietnam to manage price fluctuations . Farmers currently bear all the risks associated with changes in prices. They are therefore less inclined to plant high-value crops, w h ich typically have greater price variability than traditional staples such as rice. The sh ortage of

Policy reform and the microeconomic environment in agriculture

25

transport and storage facilities also contributes to price variability and hence affects farmers' choice of crops. A new trend in farm production is 'contract farming' , whereby companies, either wholly state-owned or in joint venture with foreign enterprises, contract out agricultural production to local farmers . This type of contractual arrangement is to be expected with the commercialisation of agriculture. However, in the case of Vietnam, the company (usually a joint venture export company) must deal with provincial officials, who in tum subcontract production to individual farmers. Disputes about profit sharing, leading to inability to fulfil the contract, have at times resulted in the failure of the venture. Commercialisation can, of course, stimulate investment in agriculture and bring about improvements in produce quality. The rice export sector is a good example. Attractive foreign exchange premiums, as well as profits derived from exporting high-grade rice, prompted investments in the upgrading of milling facilities. This in tum resulted in considerable improvements in the quality of exported rice. The proportion of high-quality rice (5% broken) in the total volume of rice exported by Vinafood, the country's largest exporter, increased from 10% in 1989 to 80% in 1993. The liberalisation of markets for agricultural products can, then, lead not only to a greater diversification of products, but also to improvements in product quality in response to market demand . Further advances in market infrastructure as well as proper dispute resolution mechanisms will be needed for Vietnamese farmers to take full advantage of the commercialisation of farming. Factor markets Land

Until 1981, land was managed by agricultural cooperatives . Individual farm households received their inputs from the cooperatives and produced a planned quota of output. The income of farm households was proportional to their contribution of labour to the cooperative. In addition, 5% of land in each cooperative was allocated to farm households to meet their own consumption needs. Even before 1981, land management differed greatly between regions, with the south being far less collectivised than the north. Generally speaking, under the collective system of land management there was little incentive for farmers to invest in land conservation and improvement.

Fl i UR H

I

. 1 h ng in iz of landholdin for ind ivid u I farm h u hold in M kon D It , 1989- 9 a

rM

~~-----------------------------------------.

•

• •

2

•

·.- ·.- .... •. •

0 r•

• •

_.._ .-•

•

•

•

•

•

•

-

•

.. ..

• • •• • ...• •• --••• • •

.

-..

•

·2 .J

10

0

5

on

s mpl

•sa Cisions on product choice and input utilisation, drawing on data for the Red River and Mekong Deltas for 1989-93. Since 1989, farmers have been diversifying away from food grains to higher-value cash crops in terms of actual land area planted . Output o f food grains has, however, risen, due to higher cropping intensities and increased fertiliser use. Commercialisation of agricultural production has lx.>en hindered by the need for compani to deal through provincial government offices rather than having direct access to farmers . The provision of long-term land leaseholds in 1988 h s promoted land conservation and improvement. Land transfer based on longterm leases was already in existence in the south before the 1993 Land Law officially sa nctioned it . Regulations and taxes discouraging the accumulation of land have had a negative impact on economies of scale and on the mechanisation of agriculture. Furthermore, the power of People's Committees to arbitrate land disputes, and of local governments to determine land zoning, have provided 1ignificant opportunities for corruption and land speculation. Reforms in the agricultural sector have a lso aided the development of a rural labour market. Wage rates in the south are almoat double those in the north, spurring the drive there tow ards increased mechanisation. Labour continues to migrate to urban areas, although so far not at an alarming rate. If rural income grow th falters, then the rural-urban drift can be expected to gain pace. The development of labour-intensive manufacturing industries in towns would then be necessary to absorb the excess labour force. In line with greater investments in land, the use of fertilisers and pesticides has increased significantly since 1989. These inputs are currently imported by only 15 SOEs. Greater compe tition is

40

Nguyen Tri Khiem

needed at the wholesale and import levels in order to keep farmers' costs at world competitive levels. At the same time, it is argued that average income in all regions of the countryside has increased since 1989, although the distribution of income has become more skewed. In short, Vietnam's agricultural sector has made significant gains from reforms aimed at liberalising internal markets, although growth through intensive cropping and fertiliser use is beginning to show diminishing returns. Future growth in rural production and incomes will need to come from greater crop diversification, commercialisation, and efficiency gains through lower input prices and greater responsiveness to market demand. This would imply further liberalisation of Vietnam's international trade regime as it relates to agriculture.

References

Cassman, K.G. and P.L. Pingali (1995), 'Intensification of Irrigated Rice Systems: Learning from the Past to Meet Future Challenges', Geofournal, 35 (3), pp. 299-305. Dao Cong Tien (1995), Socioeconomic Indicators of the Mekong Delta, Paper presented to a seminar on Rural Development Strategies for the Mekong Delta, Cantho, August. Dao The Tuan (1995), Report of KX.08.05 Project, National Integrated Rural Development Program. David, Cristina (1994), 'Agricultural Price Policy', in FAO (ed.), Agricultural Policy Analysis for Transition to a Market-Oriented Economy in Vietnam, Selected Issues, FAO Economics and Social Development Paper 123, Rome, pp. 61-111. Hayami, Yujiro (1994), 'Strategies for the Reform of Land Policy Relations', in FAO (ed.), Agricultural Policy Analysis for Transition to a Market-Oriented Economy in Vietnam, Selected Issues, FAO Economics and Social Development Paper 123, Rome, pp. 1-59. Nguyen Sinh Cue (1995), Vietnam Agriculture 1945-1995, Statistical Publishing House, Hanoi. Nguyen Tri Khiem and Luu Due Hai (1995), Marketing Channels and Marketing Margin of Fertilizers and Pesticides in the Mekong Delta, Paper presented to a seminar on Rural Development Strategies for the Mekong Delta, Cantho, August.

Policy n!form and the microeconomic environment in agriculture

41

Nguyen Tri Khiem and Prabhu Pingali (1995), Supply Responses of Rice and Three Food Crops in Vietnam, Paper presented to the final workshop of the international cooperative resea.r ch project on Pro;ections and Policy Implication of Medium and Long-Term Rice Supply and Demand, Beijing. 23-26 April. Pingali. P.L. and Vo-Tong Xuan (1992), 'Vietnam: Agricultural DecoUectiviz.ation and Rice Productivity Growth', Economic DePdoprnDtl and Cultural Chang~. 40, pp . 679- 718. World Bank (1994), 'Vietnam: Financial Sector Review, An Agenda for Financial Sector Development', Report No. 13135-VN, World Bank. Washington DC, 15 September.

4

Politics of the reform of state institutions in the post-socialist era Thaveeporn Vasavaku/*

Political reform that took place in Vietnam after the official endorsement in 1986 of the policy of economic renovation (doi moi) focused on two major domains . The first of these was the redistribution of power among major political institutions: the Vietnamese Communist Party (VCP), National Assembly, Presidency, cabinet government and government bureaucracy, and People's Courts. The second was reform within each political institution. The 1992 Constitution, which replaced the Constitution of 1980, epitomised the new distribution of power. It recognised the VCP as a rather than the leading political force in the state and society. It also granted the National Assembly and its Standing Committee greater legislative power, while allocating substantial administrative and executive authority to the Offices of the Presidency and the Prime Minister. 1 The state administrative system was a main target of reform of political institutions. This aspect of the *I would like to thank Pham Thu Thuy for help in gathering Vietnamese language-materials available at the Australian National University's Menzies Library, the Vietnamese Studies Centre at the National University of Hanoi for facilitating my fieldwork in Hanoi in November 1995, Harold Crouch, X.L. Ding, Suiwah Leung, Carlyle Thayer and William Turley for their comments on an earlier draft, and Beth Thomson for editorial assistance. I am responsible for any remaining shortcomings. 1The 1992 Constitution replaced the Council of State with the Presidency, and the Council of Ministers with the cabinet government. For a detailed discussion of the 1980 and 1992 Constitutions, see Marr and Thayer (1993) and Vasavakul (1995) .

Reform of state institutions in the

posl~alisl era

43

reform touched on relations among and within government agencies, the central-local government relationship, and relations between the government bureaucracy and society. Specific measures instituted in the 1990s have included the merger and reorganisation of ministries and subministerial agencies; the simplification of administrative procedures; the strengthening of law enforcement mechanisms; and the improvement of procedures for handling citizens' complaints. This chapter explores the VCP's reform of state institutions, focusing particularly on developments that have taken place in the 1990s. I argue that, examined from a political perspective, the reform of state administration can be interpreted as a reaction to the fragmentation and departmentalisation of the state apparatus that occurred following the disintegration of the central planning system in the 1980s. The emphasis on administrative reform signalled the VCP's intention to undercut this development through the recentralisation of the state administrative system . While this move should improve the central government's political credibility in the eyes of government officials, the Vietnamese public, and foreign donors and investors, it is also aimed at tightening the VCP 's political grip on the state administrative system and regulating more closely the socioeconomic activities of Vietnamese society. The unfolding of plans for reform and their implementation has reflected and will continue to reflect the power struggle between the VCP and state agencies, among state agencies, and between the state bureaucracy and society.

The political consequences of dismantling central planning Any examination of the current round of reforms of state institutions needs to begin with a discussion of the political economy of the prereform socialist bureaucracy . In a socialist system, the Leninist party in power is committed to creating from above the preconditions for socialism-socialism being identified with rapid socioeconomic industrial transformation. The party follows the principles of central planning-identifying needs, distributing production resources, determining output targets and performance indicators, and balancing production and supply-relying on state bureaucracies to function as accumulators, managers and allocators. As accumulators, the bureaucracies mobilise resources, emphasising those favourable to the accumulation of the means of production. As managers and aUocators, they are actively engaged in the operation

44

Thaveeporn Vasavakul

of economic enterprises and in the determination of incomes and employment conditions.2 Little research has been done on the workings of the bureaucracy in the Democratic Republic of Vietnam {1945-76) and the Socialist Republic of Vietnam {1976-present).3 Recent writings by Vietnamese technocrats advocating the reform of state administration are our main source of sketches on the nature of the bureaucracy during the socialist period . According to these writings, central planninginterpreted by the political leadership as being synonymous with extensive and intensive state intervention into every aspect of the socioeconomic, political and cultural life of society-gave birth to a colossal and highly segmentalised state administrative machine. At the central government level, for example, the number of ministries and ministerial-level agencies increased from 12 in 1945 to 19 in 1955. In 1959 there were 20 ministries, four state committees, one state bank and six organisations under the Council of Ministers. By 1981 this had risen to 27 ministries, six state committees and 28 organisations under the Council of Ministers. In 1987 there were 28 ministries and ministerial-level organisations and 26 organisations under the Council of Ministers.4 This burgeoning of administrative agencies was apparent at the local government level as well. There are three administrative tiers of local government: municipalities (thanh pho) and provinces (tinh); precincts (quan) in urban areas and districts (huyen) in rural areas; and urban quarters (phuong) and rural communes (xa) . At one point, the average number of local administrative units reached 40-50 for each municipality and province, 20--25 for each precinct and district, and about nine for each quarter and commune (Tran Cong Tuynh 1995, pp. 11-12). Writings by the technocrats also reveal the extent to which, under central planning, politics and economics were enmeshed. Government agencies at every level were entitled to own industrial and agricultural enterprises of varying sizes. This system gave rise 2

For a detailed discussion of state socialism, see Harding (1984), Stark and Nee (1989) and Nove (1980). 3 For general information on the political institutions of the Democratic Republic of Vietnam, see Foreign Languages Publishing House (1974) and Elliott (1976). On the Socialist Republic of Vietnam, see Thayer (1992). 4 See To Chuc Nha Nuoc (1995a, p . 5) and Van Tat Thu (1995). Van Tat Thu contrasts these figures with Malaysia's 24 ministries and single Office of the Government and Japan's 13 ministries and two ministerial-level agencies.

Reform of state institutions in the post-socialist era

45

to a network of government offices 'cum owner and manager', generally called bo chu quan by the Vietnamese and translated into English as 'line' ministry. These agencies, found at every level of government, oversaw and directed the operations of their enterprises, administratively and economically. While in theory aU state-owned enterprises (SOEs) were also under the supervision of 'functional' government agencies (bo chuc nang)-such as the Ministry of Finance and its local offices for financial matters, or the Ministry of Labour and its local offices for matters related to wages and employment-the 'functional' agencies had to deliver their administrative orders to SOEs through the 'line' ministries. The power and authority of the 'Line' ministries thus exceeded that of 'functional' government agencies . The 'line' ministries not only directed the production activities of the SOEs but also served as sanctuaries or advocates for ent:e rprises in conflict with a 'functional' government agency (Nguyen Dinh Bich 1995). Under central planning, the political power of the state rested mainly on its ability to dai.m property rights, control and allocate economic resources, and attain out·put targets. Any political challenge to state power was re adily detectable in the way in which state assets were managed and the extent to which production targets were fulfilled . At the level of state bureaucracy, politics tended to be vertically confined and characterised by a tug of war between state planners and ministerial official.s, ministerial officials and managers of production units, and managers and workers. In the industrial sector, the issu und e r contention were the allocation of investment capital, input quotas , production targets, and workers' wages and soci.a l benefits. In the agricultural sector, the issues included the long-term mechanis ation of agriculture, investment funds, procurement quotas, agricultural prices and agricultural taxes.5 The economic crisis that followed the reunification of Vietnam in 1975, combined with popular resistance to the VCP's economic policy, compelled the party to rethink its socialist (."Conomic agenda. In August 1979, the Sixth Plenum of the Fourth Central Committee officially allowed production units to engage in economic activities outside the central planning system. The Sixth National Party Congress, which met in 1986, officially called for the abolition of 5White'• (1985) di~~eua•ion of agricultural price policy to some extent addreues this aspect of Vietnamese politica.

46

Thaveeporn Vasavakul

central planning and the coexistence of state and non-state economic sectors under a new policy of economic renovation (doi mor). In 1989, a comprehensive economic reform plan was launched, marking the end of the central planning system (Fforde and Goldstone 1995, pp. 6-9). The new economic order that emerged in the 1980s was one in which state cadres in the middle levels of government (rather than the state planners at the top) gradually became the agents for mobilising and allocating resources. It was at this level that capital accumulation took place, with economic benefits also trickling down to lower levels (Fforde 1993; Beresford 1995). Since party cadres held key positions in state institutions, members of the VCP became the chief beneficiaries of the new order. One such group was the directors of profitable and economically viable SOEs. 6 A second group comprised state officials at all levels of government: at the central level, they were in ministries responsible for key production sectors (energy, transportation, forestry, industry and commerce); locally, they were in key positions in all three tiers of local government (Thayer 1988; Elliott 1992). Finally, the endorsement in 1986 of the concept of a multisectoral economy gave rise to new economic groups and economic activities in the non-state sector. Economic reform in the 1990s further fostered the horizontal relationship between state and non-state sectors, with this alliance referring to both actual exchanges between the sectors and the increasingly mixed nature of state and non-state capital.

The new politics The demise of the central planning system and the rise of a new market-based economic order gave rise to a new pattern in Vietnamese politics. With diminishing resources coming from the centre and with the relaxation of some aspects of administrative control over production activities, the existing vertical administrative and economic ties disintegrated . Politics during the period of transition from central planning was characterised by high local autonomy devolving on middle-level cadres, the expansion of

6

Fforde and Goldstone (1995, pp. 100-17) identify the Vietnam People's Army as another beneficiary. A March 1990 decree allowed the military to use its land assets, transport facilities, personnel and physical infrastructure to conduct business ventures. Military-affiliated enterprises were engaged in supplying spare parts for oil and gas production, power, construction, textiles, electric fans, bicycles and electrical appliances. See also Thayer (1994).

Reform of state institutions in the post-socialist era

47

horizontal connections, and the bypassing of existing rules and regulations imposed by the central government. The policy-making process gradually switched from a top-down approach featuring negotiations among Politburo members at the top, bargaining b~tween planners and production units, and mobilisation of the masses at the local level to achieve policy implementation, to an approach characterised by initiatives from middle-level units. These cadres solicited endorsement for projects from high-ranking officials, whose support in turn was conditional on the potential for success. They also succeeded in integrating parts of the state and nonstate sectors by allowing some trickling down of economic benefits. The collapse of the central planning system created an administrative vacuum that then allowed state cadres at all levels to use their administrative positions to mobilise and reallocate incoming resources. These government officials became the main actors in the process of law-making and law implementation in their areas. The increasing economic and political power of these middlerange cadres undercut the hierarchical authority structure developed during the socialist period. The weakening of the organised hierarchy was often characterised using such terms as 'departmentalism', 'mandarinism', 'bossism' or 'provincialism', with abuses of state power and alienation from the masses seen to be its main features. This was manifested in the inability of the central government to regulate relationships among government agencies, between government agencies and businesses, and between government agencies and society. lntragovernmental relations: the case of the construction industry

The main feature of the new relationship among government agencies was that middle-level government agencies joined forces to advance economically at the expense of the central government. This practice, while serving to mobilise and allocate resources among government agencies, both challenged the existing formal authority structure and drained the central government's financial resources? A case in point was the state-funded constru'c tion sector, one of the booming and profitable industries of the economic reform period. In this sector, the new politics was manifested in the realms of

7The discussion in this section is drawn from a series of articles published in the Nlwn Dan [People] newspaper, on 5, 6, 9 and 10 January 1995.

48

Thaveeporn Vasavakul

fundraising, 'door opening' to obtain construction project approvals, and bidding. Three factors were identified as necessary for successful fundraising: personal connections (quen), such as friends and relatives in fund distribution agencies; a position (the) that could be exploited to raise funds; and skill in exploiting the reputation of prestigious endorsers of the project (van dung nhan danh). In the realm of 'door opening' to obtain project approvals, government agencies generally recognised that in addition to obtaining the approval of high-ranking officials, they needed to enlist the support of middle and low-ranking officials. Bureaucrats achieved this by establishing reciprocal relations with a number of government agencies. According to the Nhan Dan newspaper, the head of a Project Management Commission responsible for construction recounted that although he managed to obtain permission from the municipal authorities to construct a building on a 7,000 squaremetre block of land, he was also required to obtain legal approval from local authorities in the area where the construction would take place. In the realm of bidding, although a law promulgated in 1992 on the management of state-funded construction projects required interested construction companies to bid for projects as a means of encouraging competition in price and quality, there was in practice little free competition among bidders. In some cases, the government agency concerned selected the bidder offering the largest kickback. In others, the bidding process turned into a competition among the powerful 'networks' (the manh cua mot duong day nao) backing each bidder. There were also cases in which bidding failed to produce a clear winner because all the bidders were 'knights with equal power protected by an equal size of umbrella' (vo si ngang the, ngang o). The new political practices found in the state-funded construction sector attested to the formation of informal networks in the .government apparatus. These not only undermined the hierarchical authority structure in the state administrative system but also drained central government resources. Success in the realms of fundraising, 'door opening' and bidding depended heavily on the amount of 'relations money' (tien quan he) paid to smooth the way for business transactions. According to many press commentators, such payments could absorb 20-40% of construction funds. Statistics published in Nhan Dan in January 1995 show that construction

Reform of state institutions in the post-socialist era

49

projects commissioned by government agencies often cost 20-30% more than those initiated and carried out by the non-state sector. Government agencies and businesses: the case of violations of the Dyke Protection Laws

The relationship between local government agencies and businesses can be characterised as increasingly beneficial to both parties at the expense of the central administration. The most recent case in point is seen in the lack of a coordinated response from government agencies in Hanoi to violations of the Dyke Protection Laws, 8 which prohibit construction within 25 metres of a dyke wall. Dyke protection was the responsibility of municipal People's Committees in urban areas and of provincial People's Committees in rural areas (Oai Doan Ket, [Great Unity] 4-10 March 1995, p. 6) . From 1990, when the West Lake section in Ba Dinh precinct, Hanoi, was designated a tourist area, villas and mini-hotels were constructed within the construction-free zone. The precinct authorities requested the demolition of the first such villa built in 1990 only 10 metres from a dyke wall. The owner responded by lodging a petition with the Office of Popular Aspirations attached to the National Assembly. At the end of 1990, the head of this office, bypassing the precinct administration altogether, suggested to the Hanoi municipality People's Committee that the owner be penalised financially rather than being forced to demolish his house. This was endorsed by both the law enforcement agencies of Ba Dinh precinct and the Hanoi municipality in April 1993, on the grounds that it would be impossible to demand the demolition of all the houses that had been built within the construction-free zone (Nhan Dan, 2 February 1995). The decision to impose financial penalties in exchange for continued operation (phat cho ton tai) helped legalise the violations (Nhan Dan, 19 April 1995; Tap Chi Cong San 1995a). The situation was not dealt with in any meaningful way until Prime Minister Vo Van Kiet intervened in early 1995, requesting the Chairperson of the Hanoi People's Committee, the Minister of Water Resources, the Minister of Construction and the Minister for the Interior to deal promptly with

8Hanoi has 151 kilometres of dykes protecting it and three provinces in its vicinity from flood waters. The section in question is 4.3 kilometres long and runs from Nhat Tan commune in Tu Lien district to Yen Phu quarter in Ba Dinh precinct.

50

Thaveeporn Vasavakul

the violations (Nhan Dan, 12 and 24 February 1995, 11 and 17 March 1995; Dai Doan Ket, 25-31 March 1995, p. 1). The paralysis of government agencies in Hanoi could be attributed to the success of real estate investors in cultivating and exploiting their relationships with government officials. According to the Dai Doan Ket newspaper, the violations were only able to continue because of such connections with key local and high-ranking state officials (Dai Doan Ket, 11-17 March 1995, p. 6). The head of the Party Committee in Yen Phu quarter was quoted as saying that the violators had powerful 'umbrellas' whose protection allowed them to violate not only the Dyke Protection Laws but also land and taxation laws. But it could also be argued that the failure of government agencies in Hanoi to enforce the law stemmed from the lack of an administrative and legal framework to help foster collective action. Tap Chi Cong San [Communist Review], a party journal, criticised the lack of coordination and uniformity among government agencies, citing this as justification for strengthening the central leadership. It praised the Prime Minister's directive as serving to unify the actions of state agencies at different levels and to clarify the responsibilitie s of individual officials and organisations.

Government agencies and society The move away from central planning and the emergence of a market-based economic order gave rise to new forms of conflict between government agencies and society. This problematic relationship was characterised first and foremost by a lack of adequate administrative and legal ties between the state and the various sectors of society. The disintegration of the socialist administrativ e framework in the 1980s left a void that was not filled immediately by the establishment of a new administrativ e regime. The lack of clear administrativ e procedures, and the complexity of procedures inherited from the socialist era, gave state officials the opportunity to pursue financial gain and discouraged large sections of the population from following official registration procedures. Letters to newspapers give a picture of the complexity of household registration procedures inherited from the pre-reform period (Nhan Dan, 17 January 1995), while newspaper reports on the provinces highlight the difficulty of obtaining a land use title. While the Land Law recognised the right to transfer land, in prac-

Reform of state institutions in the post-socialist era

51

tice in many provinces land had to be turned over to local authorities before it could be redistributed. The fees charged for this service were high by rural standards, though varying according to the size of the land (Nhan Dan, 18 April 1995). As a result, the majority of Vietnamese changing their place of permanent residence, conducting land transactions, or buying and selling property or goods tended to do so without seeking formal administrative authorisation. The problematic relationship between government agencies and society was precipitated by the increasing autonomy of state economic agencies, some of whom were reported to be accumulating economic assets at the expense of their workers. Dai Doan Ket (19 September 1995, p . 1) reported a case in which the manager of a foodstuff processing factory in Dong Da precinct, Hanoi, conspired with local authorities to seize and transfer land illegally. Factory workers who complained were dismissed. Rising antagonism between law enforcement agencies and the individual give another indication of the deteriorating relationship between government and society. In the 1990s, local police officers were accused in a number of instances of violating the rights of individuals. In early 1993, for example, a Hanoi policeman killed a young man carrying 50 million dong (about US$5,000). Subsequent investigations indicated that he had deliberately executed him. 9 Police violations of citizens' rights were also seen in the way in which local police officers treated detainees, with newspapers questioning several cases of so-called 'suicide' at police headquarters. Between 1993 and 1995, Dai Doan Ket publicised the case of a man in Ben Tre province in southern Vietnam who died while in police detention (Dai Doan Ket, 15-21 January 1994, p . 6). Nhan Dan reported a similar case that took place in Hanoi in November 1994. Newspapers accused the head of the local Party Committee and the chairperson of the local People's Committee of conspiring to conceal the truth and failing to punish the police chief in charge of the case (Nhan Dan, 27 May 1995; Dai Doan Ket, 3 June 1995, p . 6). The nature of the conflict between government agencies and different sectors of society was reflected in petitions (khieu nai) and letters of criticism (to cao) lodged by citizens in the early 1990s. The right of Vietnamese citizens to lodge petitions and letters of 9The

case was reported in several issues of Dai Doan Ket (15-21 January 1994, p. 6; 26 February-4 March 1994, p. 6; 12-18 March 1994, p . 6).

52

Thaveepom Vasavakul

criticism was recognised by the 1959, 1980 and 1992 Constitutions.1° Petition lodged between 1992 and 1994 were concerned firstly with onontic, social and administrative problems in such areas as land, hou ing, compensation, taxation, veterans' affairs, retirement and administrative regulations. A second group raised business-related i u es, such as wages, hours and conditions. A third group raised concerns about law enforcement agencies and the security apparatus, specially matters related to false charges, illegal arrests and unfair treatment and trial (Thong Tin Cong Tac Tu Tuong 1995). Statistics collected by the Office of State Inspection between 1992 and 1994 indicate that two groups were the main targets of criticism. The first was cadres at the commune, quarter, precinct and district levels, who were the subject of about 400fo of letters of criticism. Reasons included bribery, waste and unfair distribution of la nd . The second group targeted was directors of state enterprises, for accounting errors, wasting money and benefiting personally from the signing of certain contracts. This group comprised 250fo of cases. Government agencies were far from efficient in redressing popular grievances. Some state officials allegedly took bribes in re turn for official inaction (Nhan Dan, 16 March 1995). Others appear simply to have been indifferent to complaints until ordered to respond (Dai Doan Kd, 13 May 1995, p. 1). Government agencies we re at times unable to decide which of them should take responsibility for investigating a grievance. There were even cases in which responsibility was assigned to the very agency under attack, which then mobilised its local networks to quash the case through inaction (Dai Doan Kd, 19 September 1995, p . 1). The Vietnamese people responded to government inefficiency in handling economic grievances in a number of ways. Petitioners tended to send copies of their complaint to many organisations, bypassing the lower echelons as much as possible. Many drew attention to their plea by staging a protest or stopping an official's car in order to deliver the petition (Nguyen Kim Thoa 1995, p . 45). Most people relied on a combination of strategies in coping with abuse of power, ranging from cultivating ties with state officials to igno ring legal and administrative requirements altogether. The ladc of an administrative and legal framework to connect the state and society during the post-central planning era, and the 10 A Uiw promulgated in 1981 and rrvised in 1991 confirmed these righta. The d isc:ulaion in thl.s and the following paragraph draws on NPJY8t Kim Thoa

(1995).

Reform of state institutions in the post-socialist era

53

widespread abuse of administrative power by local officials, indicated that the central government had failed not only to establish new ties with different sectors of the society but also to guarantee the economic rights to which citizens were entitled under the new economic order. Guidelines for the reform of state administration

The market-based, multisectoral economy that replaced the socialist central planning system brought with it new politics whose basic features pervaded transactions among and within government agencies and between the government and society. The practices outlined so far were not isolated instances of individuals or government agencies acting independently; they were collectively orchestrated events that generated and reinforced multilayered formal and informal, vertical and horizontal, public and private networks. Such practices posed a challenge to rules, regulations and laws promulgated by the central government, incapacitating it economically and administratively. The new politics undermined the political credibility of the VCP and the central government in the eyes of the rank and file and the public. The Eighth Plenum of the Central Committee, which met in January 1995, marked a major turning point in administrative reform. General Secretary Do Muoi, in his opening speech, announced the need to build a clean and effective state apparatus. He criticised the inefficiency of the administrative machine, singling out lack of expertise and the deteriorating morality of state officials for particular criticism. He accused officials of forming power blocs, of acting like mandarins, and of being corrupt, bossy and alienated from the people (Nhan Dan, 26 January 1995). Do Muoi emphasised the need to create a law-abiding state apparatus and eliminate bad elements from the state. He recognised that reform would be a difficult task because it would attack the interests and habits of powerful blocs and individuals. The Eighth Plenum endorsed the reform of state administration, announcing the following five basic guiding principles (Tap Chi Cong San 1995b; Nhan Dan, 21 March 1995). •

The socialist state is the state of the people, by the people, for the people, based on the worker-peasant-intellectual alliance. It is committed to guaranteeing the people's democratic rights,

54

•

•

•

•

Thaveeporn Vasavakul

while maintaining social order and exercising control over all actions which violate the national interest. State power is united, although power will be delegated to and coordinated by state agencies exercising legislative, executive and judicial authority. State agencies act on the basis of democratic centralism. The central government will unite and centralise the management of state activities, while encouraging responsibility, flexibility, sensitivity and creativity at all levels. State power is based on socialist legality . The state will administer society through law, using administrative combined with educational measures to raise legal awareness and obtain popular support for the legal process. The state is under the leadership of the VCP.

Aspects of the reform of state administration Administrative reform focused on the following three areas: reform of s tate institutions; reform of administrative procedures; and building an effective civil service . The reform measures were intend ed to undermine certain features of the new politics, in the nationa l interest. They also had the effect of neutralising, if not dismantling, the political power blocs that had emerged during the period of transition from socialism. Reform of state institutions

The first task was to reorganise state institutions. Concrete policy m easures to achieve this goal included reducing the number of a dministrative units at different levels, separating the economic and administrative functions of the state, and reorganising centrallocal government relationships.

Reducing the number of administrative links The move away from central planning in the 1980s meant that state agencies had to withdraw from the many management aspects that they had assumed during the socialist period. This resulted in a reduction in the number of, as well as the merger of, administrative ' links' or 'intermediaries' (dau moi), a process that began in earnest in the early 1990s. At the central government level, the number of ministries and ministerial-level organisations fell from 28 in 1987 to 27 in 1992 and 22 in 1995, while the number of organisations under the

Reform of state institutions in the post-socialist era

55

Council of Ministers/ government was reduced from 27 in 1987 to 22 in 1992, rising to 26 in 1995 (Van Tat Thu 1995, p . 11; Tuoi Tre [Youth], 12 October 1995). The streamlining of existing institutions extended to the subministeriallevel. By 1989, about 44% of offices at the departmental level had reportedly been closed (Turley 1993, p. 329). Vietnam currently has 53 provinces and municipalities, 574 districts and provincial towns, and 10,000 communes, quarters and district towns. The 1989law on local government reduced the number of provincial administrative offices from 40-50 to between 17 and 22 per province. At the district level, the number of offices fell from 2025 to 10-15. At the commune, quarter and district town level, the number of administrative units was reduced from seven committees and two stations to one office and one station. The size of People's Councils was also affected, falling from 100-120 to 60-100 representatives at the provincial and municipal levels, from 60 to 40-45 at the district/precinct level and from 45 to 30-35 at the commune/quarter level. The size of People's Committees at all levels was reduced from 7-19 to 5-15 members (Tran Cong Tuynh 1995). The revised law on local government promulgated in 1994 further reduced the size of People's Committees to 9-11 members at the provincial level (up to 13 in the cities of Hanoi and Ho Chi Minh); 7-9 at district/precinct level; and 5-7 at commune/quarter level. Exact numbers were to be based on population size (Vu Due Dan 1995). The final sector of the state machine that underwent streamlining was state enterprises. In 1992, the Council of Ministers decided to reduce the number of SOEs from over 12,000 to approximately 7,000----of which 5,000 were scheduled to be corporatised, sold to the private and joint venture sectors, or dissolved. 11 Separating economic and administrative functions

The second set of reform measures involved the separation of the economic and administrative functions of state institutions, that is, the separation of SOEs from their 'line' ministries. The issues under debate were the relationship between S0Es and their 'line' and 'functional' ministries (especially the Ministry of Finance and the Ministry of Science and Technology); the management of SOEs; and

11 In

fact, little progress has been made: 7,000 SOEs have been reformed, but about 25% of them are operating at a loss (Le Hong Tien 1995, p . 37).

56

Thaveeporn Vasavakul

the degree of autonomy to be granted to state enterprises (Nguyen Dinh Bich 1995, p . 35). The central government's reorganisation of SOEs in key economic sectors can be seen as a preliminary move to address these issues. In March 1994, the Prime Minister announced the establishment of experimental 'economic conglomerates' (tap doan kinh doanh), beginning with the electricity and coal sectors, both of which were under the jurisdiction of the Ministry of Energy. SOEs in each of these sectors were merged to form the Union of Electricity Enterprises of Vietnam (Tong Cong Ty Dien Luc VietNam) and the Union of Coal Enterprises of Vietnam (Tong Cong Ty Than Viet Nam). Under regulations issued in early 1995, the two unions officially became state-owned economic conglomerates, each comprising several member enterprises. Under the almost identical model developed for each sector, the Ministry of Energy retained its ownership rights over the unions, though with its role delimited to state management functions . These ownership rights were to be exercised through a Management Council (Hoi Dong Quan Ly), whose role it was to oversee member enterprises' use and development of resources allocated by the state. A general director, assisted by vice-directors and reporting to the Management Council, was responsible for executing production p olicies. Power to inspect the legality of financial and commercial ac tivities was del egated to a Board of Inspection. The financial section of each union was organised as a bank, under the guidance of the State Bank. Electricity-related enterprises were grouped into two categories: those with centralised accounting, and those with independent accounting. The former group comprised production and wholesale d is tribution enterprises: 12 key electricity generation companies, four wholesale distribution companies, and the National Centre for Directing Electricity. The latter group consisted of retail distribution enterprises: namely five electricity companies, two research and d esign companies, four electrical assembly companies, an electrical appliance company, an electrical information company, and an electrical finance company (Dang Tran Thuc 1995). In 1995, several other large economic conglomerates were established and organised along the lines of this experimental model. The general director of their management councils was appointed by the Prime Minister (To Chuc Nha Nuoc 1995b, p. 53).

Reform of state institutions in the post-socialist era

57

The reform measures of 1994 and 1995 reflected the leadership's attempt to curtail the role of 'line' ministries, while improving and consolidating the performance of key SOEs. Many technocrats recognised that the model adopted for the organisation of economic conglomerates had shortcomings, and believed that further reform was necessary. However, they also viewed this as a move not only towards increasing efficiency, but also towards circumventing the growth of nepotism and fiefdom in the administrative apparatus (Nguyen Dinh Bich 1995, p. 36; Dang Tran Thuc 1995, p. 21).

Reshaping central-local government relations The final set of concrete measures for the reform of state institutions involved the redefinition of the central-local government relationship . Each of the municipal/provincial, precinct/ district and urban quarter/rural commune levels of government had a corresponding People's Council (Hoi Dong Nhan Dan) and executive People's Committee (Uy Ban Nhan Dan). The People's Council was elected directly by Vietnamese voters; it in turn would select members of the executive People's Committee to take charge of daily administrative affairs. The need for local government reform was reflected in difficulties with the 1989 law on local administration. According to Vietnamese technocrats engaged in administrative reform, the law left unclear certain aspects of the central-local relationship. For example, it did not state clearly who the People's Committees and People's Councils were supposed to represent, treating People's Councils both as state agencies and as popular representative organs in local areas, and People's Committees both as the executive arm of People's Councils and as local state organisations. Furthermore, the 1989 law did not distinguish clearly between the responsibilities of chairpersons of People's Committees and those of committee members. This encouraged and sustained 'collective leadership', which, in practice, made it impossible to hold any member accountable. Finally, the law failed to clarify which agency was to oversee the operation of local specialised units responsible for education, health care, culture, finance and labour: whether it was to be the People's Committees of different levels of government, or the central ministries. As matters stood, local specialised units were under the jurisdiction of both. What happened in practice was that the units tended to move into the orbit of the central government when they disagreed with the directives of the People's Committee,

58

and into the orbit of the People's C mmitt wh n th y di agr d with central mini try dir ctives (Tran ng Tuynh 19 5, p . 12}. The revised law on local admini tr tion, promuJ ated in 1994, aimed to integrat local government int the y t m of tate administration to form a unified state app r tu . It tr at P pl 's Committees at all levels a the 1 cal r pr ntative of th central government. At th pr cinct/district and quarter/ commune levels, the People's Committe is elected by it c rre p nding P ople's Council with the approval of the cha irper on f th higher-level People's Committe . The executive P ople' ommitt at th municipal/provinc ial level, its chairp r n and vic -chairp r on are nominated by the corre ponding P opl ' unciJ with approval from the central government.l2 People's Committees repr sent the c ntral government and implement its decisions. They al e ecute re lutions of the corresponding People's Council. Peopl ' C mmitt e ar entitl d to promulgate laws which implement the deci ion of high-ranking state organs and People's Councils, and can d vi m thods to carry out these decisions. People's Committ at th district and commune levels report to the corresponding People' Council and to the higher-level People's Committee, while provincial People' Committees answer to both the corresponding Pe pie's Council and the central government.l3 The revised law grants membership of e ecutive People's Committees to those in charge of finance and planning, reflecting an attempt to link national and local development policies (Vu Due Dan 1995). It divides provincial specialised unit into three types of organisation according to jurisdiction: thos serving local objectives under People's Committees; those responsible for specialised tasks as determined by the upper echelons of the central government; and those handling both sets of tasks, under the central government in the area of specialisation but under the People's Committee in the

12

0ne article on the organisation of local governm nt goes so far as to uggest that provincial chairpersons should be drawn from any part of the country. It claims this would help reduce factionalism, provincialism and nepotism and would also reduce corruption. The article suggests that provincial chairpersons and their families live at a government house and receive a salary based on the province's size and population (Nguyen Ty 1995, p. 18). 13 See Vu Due Dan (1995), and Clauses 43-45 of the 1994 revised Jaw in Chinh Tri Quae Cia (1995, pp. 96--8).

Reform of state institutions in the post-socialist era

59

areas of personnel, salary, recruitment and so on (Tran Cong Tuynh 1995). Finally, the 1994 law delegates some authority, previously exercised collectively by the executive provincial People's Committee, to the chairperson. This person is entitled to submit a list of proposed members of the People's Committee to the People's Council, which then selects the actual members. The chairperson can endorse the selection of lower-level People's Committees, and can suspend or recommend the abolition of policies implemented by lower-level People's Committees if they conflict with existing laws. The chairperson also has the authority to dismiss the chairpersons and vice-chairpersons of lower-level People's Committees.14 In sum, the 1994 revi ed law on local government signals a move to strengthen the central government's control over local government. It makes provincial People's Committees the major link between the central government and lower local government agencies, and gives the chairpersons of provincial People's Committee more power and authority to deal with local affairs and s upervise the implementation of policies at lower lev Is. The chairperson is also the person held mainly accountable for any problems that may occur at the provincial and the local level. Reform of administrative procedures

The second major thrust of administrative reform was to improve administrative procedures. Particular emphasi s wa placed on simplifying adminis trative procedures and abolishing unnecessary procedural steps. In 1995, attention focus d on the following seven areas: budget allocation and the distribution of basic state investment funds; foreign direct investment; immigration; the issuing of construction permits and certificates recognising construction land use rights; imports and exports; the establishment of companies and commercial registration; and the handling of citizen petitions. Simplifying government- business relations

The major strategy that emerged in 1995 was to reduce the number of administrative and economic intermediaries. To ease the problems of administering state investment capital in the construction sector, for example, the General Department of Investment and Dev lopment and its provincial and local agencies were placed under the Ministry 14 See

Clause 52 in particular of Chinh Tri Quae Gia (1995).

60

Thaveeporn Vasavakul

of Finance. This would allow the head of an investment project to deal with one agency rather than at least three (the Bank of Investment and Development, Office of Finance and State Treasury) (Nhan Dan, 25 March 1995). It was proposed to eliminate administrative procedures for all export products except rice and coffee, and for cement, iron, fertiliser, cars, motorcycles, sugar and petrol in the case of import products. For restricted products, the government set up a system in which intermediaries were assigned import and export responsibilities (Nhan Dan, 23 March 1995). In the area of customs regulations, administrative procedures for the inspection of non-commercial goods were rationalised in several major respects (Nguyen The Nghia 1995, p. 14). Goods already approved for import or export by other government agencies no longer had to be inspected by customs. These included such items as cultural artefacts or books that had been inspected by the Ministry of Culture and Information, and pharmaceuticals that had been inspected by the Ministry of Health. The requirement that goods be inspected and permits issued by municipal and provincial customs offices before reaching the point of exit was also abandoned; these tasks are now carried out at the point of exit only. In addition, the practice of granting inspection or tax exemptions to certain groups was banned. These examples show the central government's resolve to reduce the number of administrative intermediaries and delegate distribution, allocation and taxation power to selected administrative units. They also indicate a shift of power toward the central government and its 'functional' ministries.

Redressing economic grievances The reform of administrative procedures is also aimed at consolidating the economic rights of Vietnamese citizens from a legal and administrative perspective. The central government has tried to improve procedures for handling petitions and letters of criticism. Prior to 1990, these were lodged with the headquarters of major central government organisations, including the Central Party Office, the National Assembly, central and local government agencies, the People's Courts and the People's Prosecution Office. Since 1990 they have been received at central offices set up in Hanoi and Ho Chi Minh City, which had on their staff representatives from five institutions (the National Assembly, government, VCP, Office of State Inspection and Central Committee for Inspection) (Dai Doan Ket, 1 July 1995, p. 1).

Reform of state institutions in the post-socialist era

61

Yet improvement has been slow. Although government directives require that key officials at all levels be available during office hours to listen to citizens' complaints, in general only low-ranking staff members have been on hand, many of them reportedly unqualified for their work (Dai Doan Ket, 13 May 1995, p. 1). The central offices in Hanoi and Ho Chi Minh City do not have the capacity to follow up on cases, especially those originating in the provinces. At the local level, authorities appear indifferent to citizens' concerns, with records provided by the office in Hanoi showing that provincial agencies managed to solve only about 1012% of cases sent back to them by the National Assembly division alone. Laws on the handling of petitions exacerbate the problem by designating high-ranking officials to examine complaints and act as arbitrators in cases involving their own organisations. The 'umbrella' system then steps in to protect state officials and prevent any thorough handling of popular grievances (Dai Doan Ket, 1 July 1995, p. 1). Writings on the reform of state administration suggest several measures that could help improve procedures. First, cadres at all levels need to understand that the filing of petitions and letters of criticism is a recognised right of the people. Second, the process of 'meeting with the people' (tiep dan) needs to be enforced through compulsory office hours for key officials and the creation of an effective system to respond to and follow up on petitions (Vu Van Chien 1995). Finally, regulations on the lodging of pe titions and letters of criticism lodging need to be unified. At present a wide range of laws contains stipulations on petitions and letters of criticism-including the revised law on petition-filing promulgated in 1991, the Land Law, the Law for Environmental Protection and the Taxation Law-and each of these sets down different procedures. For example, while the 1991 Petitions Law designates the Office of State Inspection as the principal agency responsible for handling petitions and letters of criticism, the Land Law of 1993 designates district and provincial People's Committees as the main agencies. As a result, petitioners have tended to send their complaints to a number of agencies, a practice that has slowed down the processing of petitions. Some Vietnamese technocrats advocate the building of an entirely new system to handle popular grievances. They suggest establishing administrative courts, which would be independent of judicial courts and other state organisations, as a way of solving the

62

Thaveeporn Vasavakul

problem of 'umbrella' protection by high-ranking officials of other officials in the same organisation (Vu Van Chien 1995; Dai Doan Ket, 19 September 1995, p. 2) . They point out that existing judicial agencies are unable to intervene in administrative matters; People's Courts at any level cannot suspend or abolish administrative orders or decisions, even those that are clearly illegal (Pham Hong Thai 1995, p. 38). The lack of an independent agency to settle administrative disputes has generated interest in the concept of administrative courts. The courts would handle petitions related to administrative practices as well as conflicts between state agencies I officials and Vietnamese citizens. They would examine the legality of administrative decisions and practices, dissolving those that conflicted with existing laws (Dai Doan Ket, 10 June 1995, p. 6) and could compel administrative agencies to carry out their administrative responsibilities.

Building an effective civil service The final sphere of administrative reform deals with the building of a new civil service system. This is not an easy task. Although Ho Chi Minh did sign a civil service code in 1950, the concept of a 'civil servant' failed to develop in Vietnam (Tran Bach Dang 1995, p. 4). Under socialism, the personnel of mass organisations (such as youth groups and women's organisations) and state cadres were all funded by the state and considered to be civil servants. The need for a new civil service system has become apparent with the shift in the role of the state to macro management based on law; state cadres do not as yet have sufficient specialised and legal knowledge to execute such management. There is a shortage of qualified young cadres in the state sector, exacerbated by the lack of continuity in the civil service corps which makes it difficult to stabilise state performance. Some state cadres were trained under the socialist system, with its overemphasis on politics and class background, and have not been able to catch up with the new demand for specialised technical knowledge (Thang Van Phuc 1995). The first task in designing a civil service system is to put in place a civil service code. Such a code would clarify the status and responsibilities of civil servants, and differentiate them from other types of personnel. It would define recruitment and training procedures, clarify rules on promotion and penalty, and set down management practices. The code would also cover the organisation of

Reform of state institutions in the post-socialist era

63

office activities, the working styles of civil servants, the relationship between upper and lower echelons, and performance review procedures (To Tu Ha 1995). The general definition of a civil servant is a person working in the public (or state) sector and paid by the state. Civil servants are Vietnamese citizens, are recruited through examination and hold a permanent position, work in a public office, hold a specific rank (ngach), and receive a salary from the state budget. Yet there are competing definitions on the composition of the civil service. Under one definition, state administrators, now totalling 168,000, are considered to be civil servants. A second definition includes educators, teachers, health workers and researchers in addition to state administrators, to bring the number of civil servants to about 900,000. A third definition includes the first two categories as well as workers attached to mass organisations. There is no consensus as to which definition should be used (Thang Van Phuc 1995). The second task in designing a civil service is to set up a system of administration which would define the jurisdiction over civil servants of the central government, ministries, departments and provinces. This would also involve constructing a new salary system and instituting a recruitment process based on examination. A major change would be to allocate tasks on the basis of such an examination system (Thang Van Phuc 1995). The third task is to retrain cadres in specialised areas, administrative procedures and foreign languages. A survey of the province of Ha Bac in northern Vietnam, for example, indicated that the percentage of staff requiring retraining was 38% at the provincial level, 57% at the district level and 86% at the commune level (Nguyen Ty 1995). Political impl ications of the refo rm of state insti tutions

State administrative reform is characterised by the reorganisation of government agencies at all levels through the reduction of administrative units, the streamlining of adn:inistrative procedures, the relocation of administrative decision-making power to selected key central and local units and officials, and the reorganisation of the civil service system. The reform is a major move to attack the vested interests of a group of party members cum state officials who had developed entrenched interests in the decentralised economic system, while strengthening the grip of the central government through the

64

Thaveeporn Vasavakul

recentralisation of the state apparatus. The reform measures have served to neutralise or dismantle many of the features of the new politics that developed in the 1980s. They have established a degree of hierarchy in the government apparatus, allocating decisionmaking authority to the Prime Minister and his Office, key central economic ministries, some subministerial administrative intermediaries and provincial authorities. They have undermined existing power blocs and networks within the state apparatus and between state and non-state sectors. They have also served to promote the property rights of Vietnamese citizens and alleviate administrative abuses. The strengthening of the state administrative system should not, however, be viewed as a transfer of power from the VCP to the state, but rather as a new form of the state-society relationship under the leadership of the party. It indicates the determination of the VCP to redress administrative aberrations which could, in the long run, undermine its political legitimacy, and to build the post-socialist state into a leading political force. Because the administrative reform eroded the economic and political power base of middle and low-ranking state officials cum party cadres, it was met with resistance in some quarters. Violations continue in such areas as housing, budgetary management, imports and exports, implementation of social policy, aid management and cooperation with foreign investors. Major economic scandals remain unresolved, with some officials arrested for economic and administrative crimes subsequently being released (Nong Thon Ngay Nay [Countryside Today], 5 September 1995, p. 1). Administrative reform will continue to reflect the ongoing tug of war, involving bargaining and compromises, resistance and shows of force among the parties concerned. This process will provide further insight into the nature of political reform, the process of state formation, and the changing relationships among government agencies, and between government and society, in post-socialist Vietnam.

References

Beresford, Melanie (1995), 'Interpretation of the Vietnamese Economic Reforms 1979-1985', in Researching the Vietnamese Economic Reform: 1979-86, Australian-Vietna m Research Project Working Paper Series No. 2, Sydney, pp. 1-16.

Reform of state institutions in the post-socialist era

65

Chinh Tri Quoc Gia (1995), Cac luat to chuc nha nuoc [Laws on the organisation of the state], Chinh Tri Quoc Gia, Hanoi. Dang Tran Thuc (1995), 'Nganh dien luc thuc hien doi moi to chuc quan ly' [The electricity sector implements the reform of management organisation], To Chuc Nha Nuoc, 1 (9), pp. 20-21. Elliott, David (1976), Revolutionary Re-integration: A Comparison of the Foundation of Post-Liberation Political Systems in North Vietnam and China, PhD dissertation, Cornell University, Ithaca NY. - - (1992), 'Vietnam's 1991 Party Elections', Asian Affairs, 19 (3), pp. 159-68. Fforde, Adam (1993), ' The Political Economy of "Reform" in Vietnam-Some Reflections', in Borje Ljunggren (ed .), Th e Challenge of Reform in In dochina, Harvard Institute for International Development, Cambridge MA, pp. 293-326. Fforde, Adam and Anthony Goldstone (1995), Vietnam to 2005: Advancing on All Fronts, Economist Intelligence Unit, London. Foreign Languages Publishing House (1974), An Outline of In stitutions of the Democratic Republic of Viet Nam, Foreign Languages Publishing House, Hanoi. Harding, Neil (1984), 'Socialism, Society and the Organic Labour State', in Neil Harding (ed.), The State in Socialist Society, St. Anthony's College, Oxford, pp. 1-51. Le Hong Tien (1995), 'Mot so van de ve doi moi doanh nghiep nha nuoc o nuoc ta hien nay' [Several problems in the current reform of state-owned enterprises], Tap Chi Cong San, 476, pp. 27-31. Marr, David and Carlyle Thayer (eds) (1993), Vietnam and the Rule

of Law: Proceedings in Vietnam Update Conference November 1992, Department of Political and Social Change, RSPAS, Australian National University, Canberra. Nguyen Dinh Bich (1995), 'Doi moi quan ly nha nuoc doi voi cac doanh nghiep nha nuoc' [Renovating state management of stateowned enterprises], Tap Chi Cong San, 482, pp. 34-7. Nguyen Kim Thoa (1995), 'Viec giai quyet don thu de nghi va khieu kien cua nhan dan' [On handling the people's recommendations and petitions], Tap Chi Cong San, 4, pp. 45-7. Nguyen The Nghia (1995), 'Cai each thu tuc hanh chinh: mot van de buc thiet hien nay cua cai each mot buoc nen hanh chinh nha nuoc' [The reform of administrative procedures: an important aspect of the reform of state administration], To Chuc Nha Nuoc, 2 (11- 12), pp. 12-14.

66

Thaveeporn Vasavakul

Nguyen Ty (1995), 'Mot soy kien ve cai each bo may chinh quyen nha nuoc o dia phuong' [Several opinions on the reform of the local state apparatus], Quan Ly Nha Nuoc, 11, pp. 14-18. Nove, Alec (1980), 'Socialism, Centralised Planning and the OneParty State', in T.H. Rigby, Archie Brown and Peter Reddaway (eds), Authority, Power and Policy in the USSR, St. Martin's Press, New York, pp. 77-97. Pham Hong Thai (1995), 'Ve tai phan hanh chinh va toa an hanh chinh' [On administrative litigation and administrative courts], Quan Ly Nha Nuoc, 10, pp. 3~9. Stark, David and Victor Nee (1989), 'Toward an Institutional Analysis of State Socialism', in Victor Nee and David Stark (eds), Remaking the Economic Institutions of Socialism : China and Eastern Europe, Stanford University Press, Stanford CA, pp. 1- 31. Tap Chi Cong San (1995a), 'Chung quanh viec xu ly vi pham phap lenh ve d e dieu o Yen Phu-Nhat Tan (Ha Noi)' [On the handling of the violations of the Dyke Laws in Yen Phu-Nhat Tan (Hanoi)], Tap Chi Cong San, 475, pp. 3~9 . Tap Chi Cong San (1995b), 'Thong bao Hoi Nghi Ian thu tam BCHTU Dang (Khoa VII)' [Communique from the Eighth Plenum of the Central Committee (Seventh Congress)], Tap Chi Cong San, 2, pp. 3-4 . Thang Van Phuc (1995), 'Thuc hien che do cong vu-cong chuc moimot nhiem vu cap bach cua cai each mot buoc nen hanh chinh nha nuoc' (Realising the new civil service system-an urgent task in the reform of state administration], To Chuc Nha Nuoc, 1 (9), pp. 1:>-16. Thayer, Carlyle (1988), 'The Regularization of Politics: Continuity and Change in the Party's Central Committee', 1951-1986', in David Marr and Christine White (eds), Postwar Vietnam : Dilemmas in Socialist Development, Cornell Southeast Asia Program, Ithaca NY, pp. 177-93. - - (1992), Institutional Change: Background to the Vietnamese Economic Reforms, Paper presented to the Conference on Indochinese Development, Macquarie University, Sydney, 13-14 November. - - (1994), The Vietnnm People's Army under Doi Moi, Institute of Southeast Asian Studies, Singapore. Thong Tin Cong Tac Tu Tuong (1995), 'Tinh hinh va ket qua giai quyet khieu nai, to cao trong thoi gian qua, nhung giai phap trong thoi

67

ian t i' [ itu tion and th r uJ titio and 1 tt f criti · m in th past and m future], Thong Tin Cong Tac Tu Tuong, 10, pp. 10-15. To Chuc Nfut Nuoc (1 95a), '50 nam xay dung bo may hanh chinh nha nu ', l 0 y ar of th building of tate admini tration], To Chuc Nfut Nuoc, 1 (9), p . 5. To Chuc Nfut Nuoc (1995b), 'Quy t Dinh cua chinh phu thanh Lap cac tap d an kinh d anh ua nha nuoc' [Government d isi n n th nati nwid ttin up of economic conglomerat ], To Chuc Nfut Nuoc, 1 (9), p. 53. T Tu Ha (1995), 'Xay dun g doi ngu cong chuc hanh chinh nha nu ' [Building a civil r ant corps], Tap Chi Cong Sa n, 13 (10), pp. 2-4. Tran B ch Dang (1 5), '50 nam nha nuoc ki u moi cua Viet Nam' [50 year of th n w typ f Vietnam state], To Chuc Nha Nuoc, 1 ( ), PP· 4-6. Tran ng Tuynh (1 95), 'Ooi moi to chuc chinh quyen dia phu ng d mba than l i c ng cuoc cai each hanh chinh' (R forming th rgani ati n of l al v rnment in order to guarantee victory in th r form f tat administration], Quan Ly Nfut Nuoc, 9, pp. 11- 14.

v

dministrati v

68

Thaveeporn Vasavakul

White, Christine (1985), 'Agricultural Planning, Pricing Policy and Cooperatives in Vietnam', Wo rld Development, 13 (1), pp . 97-114.

5 Foreign direct investment in Vietnam Nguyen Tuan Dung

The growing share of foreign direct investment (FDI) in total net resource flows to developing countries has revived interest in the costs and benefits arising from foreign investment. The flow of FDI to developing countries in 1988 was US$19 billion; this was more than four times the total commercial lending of US$4.7 billion to these countries. By 1991, the amount had risen to US$35.9 billion. The share of FDI in total net capital flows into developing countries rose from 12% in 1987 to 37% in 1994 (UNCTAD 1995). The strength of economic growth and stability in Southeast Asian economies over the past two decades has demonstrated that outward-looking strategies, including foreign trade and investment policies, contribute to strong economic performance. FDI generates much-needed capital inflows and other substantial benefits, including the transfer of technology and labour skills, better use of idle resources and improved access to export markets. Developing countries now not only encourage FDI, but actively compete for it by removing regulations and offering incentives to foreign firms . Recognising the important role that FDI can play in developing a viable economy, the Vietnamese government promulgated a new Foreign Investment Law in 1987. It has since taken other steps to create a more attractive environment for foreign investment. In 1990, the law was amended to permit economic organisations in the private sector to engage in direct cooperation and investment with foreign organisations and individuals. It was amended again in December 1992 to create a more competitive environment for attracting foreign investment. In the eight years since the implementation of the Foreign Investment Law, capital inflows have increased significantly.

70

Nguyen Tuan Dung

Vietnam's foreign investment policy Investment incentives granted by host governments to foreign investors can be effective in in fluencing the location choices of foreign firms (Guisinger 1985). In this section, I compare Vietnam's foreign investment p olicies w ith those of other Asian developing countries, particularly Indonesia, considered to be a major competitor (Cuong 1993). Both countries are attractive destinations for FDI in resource development (especially oil and gas exploration and oil refining) and labour-intensive production using local materials and natura l resources. Indonesia's economic structure is similar to that of Vietnam: agriculture is the major economic activity. Table 5.1 summarises the main investment incentives in Vietnam and Indonesia. Whereas Vietnam is open to foreign investment in all economic sec tors except d efence-related industries, Indonesia excludes foreigners from investing in some economic sectors. Vietnam d oes not impose a minimum cap ital investment requirement, and allow s a maximum investment duration of 70 years for enterprises with foreign invested capital. Indonesia, too, imposes no minimum capital requirement, althou gh the maximum investment ·period allowed, at 60 years, is somewhat less generous than Vietnam's. Vietnam does not place restrictions on the share of foreign investment in the total equi ty of the investment: foreign investors can own up to 100% of any business. In Indonesia, the government allows foreign investors to hold 100% equity in some sectors, but requires some divestmen t after 15 years of commercial operation. In the case of joint ventures, the Indonesian shareholding at the time of the company's establishment must be at least 5%. N either country places restrictions on remittances of earnings, profits or dividends from in vestment. Foreign investors have the right to repatriate earnings (after payment of all taxes due), as well as profits derived from business operations, payments for the provision of technology or services, repayments of principal and interest on any loan, an d their share of invested or reinvested capital and of other legally owned money and assets.

Non-tax incentives Both the Vietnamese and the Indonesian governments guarantee not to nationalise or revoke the ownership rights of enterprises with foreign capital, nor to place restrictions on the right to control and manage enterprises. Both have signed investment guarantee and

Foreign direct investment in Vietnam

71

double taxation avoidance agreements with a number of countries, with the intention of reassuring foreign investors.

Tax incentives Tax incentives comprise tax exemptions (tax holidays), accelerated depreciation, investment allowances and reduced tax rates. Vietnam offers a generous fiscal incentives package consisting of a tax holiday of two years (followed by up to two years at half the regular tax rate), as well as a preferential corporate income tax rate of 10-15% for FDI in priority sectors (as against the standard rate of 21-25%). The standard withholding tax rate is 10%. To encourage reinvestment, Vietnam refunds profits tax to foreign investors reinvesting any part of their profits for a period of three years. There are no tax holidays for enterprises with foreign invested capital in Indonesia. The standard income tax rate for joint ventures in Indonesia is 35%, while the withholding tax rate is 20%. The Indonesian government does, however, offer accelerated capital depreciation rates that vary from 10 to 50% per year depending on the useful life of the assets. In Vietnam, a company with foreign capital is exempt from duties on machinery and equipment imports, raw materials, spare parts, and other inputs and components used either in the manufacture of exports or as a contribution to the total capital of the company. One constraint imposed by the government is that joint ventures earn sufficient foreign exchange to meet all their foreign currency needs . This requirement is a major obstacle to the implementation of potentially beneficial projects involving import substitution and infrastructure, but which have low foreign exchange earnings in the short term. Both Vietnam and Indonesia place strict controls on real estate acquisitions by foreign investors. Such investors may be granted the right to use land, but cannot become land owners. 1 In Vietnam, only

1The

Land Law, promulgated in 1993, stipulates essentially two types of land use rights or leaseholds: one for long-term purposes; and the other for rental purposes. Whereas Long-term leases are freely transferable, rental leases have many restrictions placed on them which severely limit their transferability. State-owned enterprises, households and individuals can obtain long-term leases, while non-state and foreign-owned enterprises are restricted to rental leases. Because of the limited transferability of rental leases, foreign investors often have to pay very high prices for the use of land .

72

Nguyen Tuan Dung

TABLE 5.1

Investment incentives in Vietnam and Indonesia

Incentive

Vietnam

Indonesia

Priority industries

Export-oriented production; labour intensive industries; industries earning foreign exchange

Export-oriented production; labourintensive industries; essential goods and services

All economic sectors Defence industry 70 years

Not all sectors Military industry plus 14 fields completely closed 60 years

None

None

Foreign investors can own up to 100% of any business; no restriction on foreign participation in equity Free transfer abroad of capital and profits; foreign exchange balancing requirements No private land ownership; Vietnamese partners in state sector can count land use rights as capital contribution

Foreign investors can hold up to 100% in some sectors; Indonesian share in joint ventures must be at least 5% Free transfer abroad of capital and profits

Restrictions on FDI Open to FDI Closed to FDI Max. duration of investment Lower limit on investment Ownership and foreign equity participation

Foreign exchange control

Alien land holding

Ownership rights not granted to foreign investors; Indonesian partners cannot count land use rights as capital contribution

Regulation of FDI

One-stop agency

One-stop agency

Forms of investment

100% foreign-owned company; contractual business cooperation; joint venture company

100% foreign-owned company; joint venture company.

Foreign capital and assets ca nnot be nationalised No guarantee against losses due to cu rren cy inconvertibility

Foreign capital and assets cannot be nationalised Some guarantees against currency inconvertibility losses under bilateral treaties

Non-tax incentives National isation Convertibility of currency

73

TABLE 5.1 (cont.) Investment incentives in Vietnam and Indonesi a In

ntive Investment guarant e agreement Entitl m nts in export processing zones

Tax incentives Tax holiday/ reduction Reduced income tax rate Reduced withholding tax rate Profits tax refund Taxation Corporate in orne tax rate Withholding tax rate Ace lerated depreciation Labour Minimum wage • Un killed labour • killed labour Working hours lnt llectual property righ

Vietnam

Indonesia

lnv stment guarantee and double taxation agreements with some countries Exempt from import export duti s; 4-year tax holiday; 10- 14% income tax rate; 5% withholding tax rate; no limit on foreign equity participation

Investment guarantee and double taxation agreements with some countries Exempt from import export duties; no tax holiday; 15- 35% income tax rate; 20% withholding lax rate; initial foreign equity partici pation up to 100%, to be reduced within 15 years in joint ventures to 95% or below

1-4 years tax holiday, with SO% tax reduction for next 2-4 years 10-20% of profits

None

5- 7%

None

Refund of profits tax on part of profits reinvested

None

10-25%

15- 35%

5- 10%

20%

None

10-50%

US$30-35/month US$35-50/month 48 hours/week

US$30-60/ month US$80-160/month 40 hours/week

Co ered b trademark, copyri ht and patent and regulations Ia

Covered by trademark cop right and patent laws

None

74

TABLE 5. 2 lnv tm nt Inc ntlv ountry

lndonesi

Malaysia

Tax ho lidays

Non

In ASEA N

untr

Import

t. riffs

Duly dr w f r . port production

k

5y ,

B

nded

zones

tn

~I

EPZs

Philippines

5- 8 years

Machinery exempt

Several EPZs

Si ngapore

5- l 0 years

Nearly all imports including FDI exempt

Several free trade zones

Thailand

3- 5 years

Machinery and selected raw material s exempt

2 EPZs

Vietnam

2 years followed by another 2 years at

Machinery and raw materials exempt for approved projects

2 EPZs; others planned

50% a Export processing zones.

Lower corporal r I for FDI in priority indu tri 100% foreign ownership allowed

Foreign direct investment in Vietnam

75

state-owned enterprises (SOEs) are permitted to use land use rights as part of their capital contribution to foreign joint ventures. This explains the overwhelmingly high proportion of joint ventures formed between foreign firms and SOEs, and the relatively low share of projects with 100% foreign ownership. As can be seen from Table 5.2, Vietnam's FDI incentives are comparable to those of other Asian countries. Vietnam offers less in the way of tax holidays than Singapore, Malaysia or the Philippines, but its corporate tax rates for FDI projects in priority industries are also lower. Unlike some other Asian countries, it does not grant any tax reduction for R&D expenditures by enterprises with foreign capital. In common with some of its Asian counterparts, however, Vietnam exempts such enterprises from duties on machinery and equipment imports, raw materials, and components used either in the production of exports or as a contribution to the total capital of the enterprise. The current investment environment

FDI began flowing into Vietnam in 1988 after the introduction of the Foreign Investment Law, and has increased rapidly since 1989 (Table 5.3). Following the 1990 revision of the law to clarify several provisions, the value of foreign investment projects approved for 1991 doubled. The upward trend continued in 1992 and has accelerated further since then. The structure, composition and distribution of FDI in Vietnam continue to change. Between 1988 and 1990, most FDI was directed at natural resource development, especially oil and gas (34% of cumulative FDI) and the tourism and service sectors (almost 24% of cumulative FDI). During this period, Western European firms dominated Vietnam's oil and gas industry. Asia's newly industrialising economies (NIEs) began to invest in manufacturing industry in late 1990. Only two years later, Asian FDI exceeded European investment, to make Asia the most important source of foreign capital for Vietnam. Foreign investment in manufacturing has' continued to increase since 1992. As Table 5.4 shows, at the end of 1995 manufacturing accounted for 44.3% of total invested capitat followed by services (42.8%) and hotels and tourism (35%). In contrast, foreign investment flows into oil and gas exploration and exploitation dropped from 12% in 1994 to 6.3% in 1995, while FDI in agriculture fell from 3.5%

Nguyen Tuan Dung

76

TABLE 5.3 Foreign inves tment projects approved and impl em ent ed, 1988- 95 Ratio Investment Investment Va lu e of Value of ca pit I implemented (%) projects proj cts approved revoked or co mmitted (US$ million) (6:5) (US $ million)cancelled (US $ million) (US$ milli on) (4) (6) (5) (3) (7)

Year

Number of projects

(1)

(2)

1988 1989 1990 1991 1992 1993 1994 1995

37 69 108 151 194 268 362 404

366 539 596 1,388 2,271 2,987 4,258 7,928

132 182 114 129 17 25 187 47 1

23 4 357 482 1,25 9 2,25 4 2,963 4,071 7,457

60 100 200 260 463 1,002 1,500 2,000

25.6 28.0 41.5 20.7 20.5 36.4 36.8 26.8

Total

1,593

20,333

1,257

19,077

5,585

29.2

Source: SCCI (1995), Foreign Direct In ves tments in Vietnam , SCCI, Hanoi .

to 1.7%. Export processing and industrial zones continue to expand . Of the 44.3% of FDI in manufacturing, approximately 57% is in light manufactures, incl uding export-oriented projects such as footwear, garments, electronics and food processing. The remaining 43% is invested in cement, steel, metallurgy, automobi les and other heavy industries. The maj ority of foreign investment projects in Vietnam are joint ventures, m ostly with SOEs or s tate agencies w ho contribute land . Joint ventures constituted 63.7% of all licensed projects and 69% of total investment in 1995 (Table 5.5). There h as been a growing preference among investors for 100% foreign-owned capital projects following the December 1992 amendments to the Foreign Investment Law and the ensuing regu lations of 16 April 1993 . These treat 100% fore ign-owned capital proj ec ts like joint venture projects for the purposes of investment incentives. Another reason for the increase in 100% foreign-owned enterprises is found in the financial and managerial limitations of Vietnamese partners. A t the end of 1992, 100% foreign-owned enterprises accounted for only 15% of projects

Foreign direct investment in Vietnam

77

TABLE 5.4 FDI by sectora

Sector

Number of projects

%

Invested capital (US$ million)

%

863 770 26 60 7

65 .1 58.1 2.0 4.5 0.5

8,613 7,990 86 202 335

47.8 44.3 0.5 1 .1 1.9

Oil and gas

21

1.6

1,130

6.3

Agriculture and forestry

34

2.6

305

1.7

Fisheries

23

1.7

62

0.3

361 44 237 18 62

27.3 3.3 17.9 1.4 4.7

7,711 1,060 6,300 250 101

42.8 5.9 34.9 1.4 0.6

General industry Manufacturing Housing development Export processing zones Industrial zones

Services Transport, communication, posts Hotels and tourism Finance and banking Other services

23

1.7

206

1.1

1,325

100.0

18,027

100.0

Other Total aAs of 11 December 1995 .

Source: Vietnam Econom ic Review, january 1996.

TABLE 5.5 FDI by investment categorya

Number of projects joint venture 100% foreign capital Business cooperation contract Total aAs of December 1995 . Source: MPI 1996.

844 383 98 1,325

%

63.7 28.9 7.4 .. 100.0

Invested capital (US$ million)

%

12,437.9 3,154.6 2,433 .5

69.0 17.5 13.5

18,026.0

100.0

78

Nguyen Tuan Dung

TABLE 5.6. Leading investors in Vietnama Country

Taiwan Hong Kong japan South Korea Singapore United States Malaysia Australia France Switzerland

Number of projects 232 183 120 134 112 53 42 47 69 15

Capital value US$ million 3,300 2,110 2,000 1,500 1,500 1,120 846 703 636 585

aAs at December 1995. Source: Vietnam Economic Review, january 1996.

and 14% of total registered capital. By 1995, the proportion had risen to 28.9% of projects and 17.5% of total invested capital. The geographic distribution of foreign investment in Vietnam has also changed in the eight years since the Foreign Investment Law was passed. Initially, foreign investment was concentrated in the south. In 1988-91, only 25% of projects (20% of total invested capital) was in North Vietnam. The north has since caught up, and in 1995 attracted 41% of total commitments. The southern provinces received 53.3% and the central provinces 6.7% of total foreign invested capital in the same year. However, as is the case in other Asian countries, foreign investment in Vietnam remains concentrated. Inflows have been heavily concentrated around Ho Chi Minh City, Hanoi, Dong Nai, Khanh Hoa and Hai Phong. These provinces, which have only 16% of the total population, received over 75% of cumulative FDI. An attempt by the government to balance FDI inflows among provinces led to the withdrawal of a US$1.2 billion oil refinery project by the Total company of France. By the end of 1995, 49 countries had invested in Vietnam. As mentioned earlier, the Asian region is now the most important source of capital for Vietnam (Table 5.6), with investment from Asian countries other than Japan accounting for around 57% of total foreign

t in 232

Pull and push determinants of FOI

Pull

f~

tors

diuntry: it incurs ti n dif culti ,

mmuni

80

Nguyen Tuan Dung

and is less knowledgeable about local market regulations and customs. To remain competitive in overseas markets, the firm must possess firm-specific and/or locational advantages that at least offset these disadvantages (Dunning 1994). This approach shows that certain firm-specific advantages, such as technology, management and marketing skills, may be the primary determinants of whether investment occurs overseas. Locational factors in the host country-includin g market size, rates of return, access to natural resources, the quality and cost of labour, tariff and non-tariff barrier , and the host country's policy toward FDI-are important in determining where (rather than whether) the investment takes place. The most significant pull determinants for FDI are sound macroeconomic policies and growth potential in the host economy, together with creditworthiness and adequate and transparent regulations. Vietnam offers foreign investors impressive economic prospects along with a number of other advantages. These include its favourable geographical position, abundance of low-cost labour, literate workforce, unexploited natural resources and mineral reserves, and perceived political stability (Oanh and Grub 1992). H ost country policies toward FDI

Host country policies are important in attracting FDI, if not in themselves sufficient to encourage large investment inflows (World Bank 1993a). A multinational enterprise's decision on the location and size of FDI will be affected directly or indirectly by host government policies on such matters as import tariffs and quotas, tax incentives, labour regulations and discriminatory measures against foreigners. The major determinants of locational decisions are, however, market size, economic growth and stability in the host country, including a stable exchange rate. Since 1986 the Vietnamese government has introduced policies, laws and measures to promote exports and attract FDI. It has taken s teps to establish neutrality between imports and exports and to achieve an effective exchange rate that is set very close to exchange rates in parallel markets. To a limited extent, the trade and tariff regimes and the financial system have been liberalised. Export promotion schemes have also been introduced. The Vietnamese government has undertaken a serious stabilisation and reform program to improve the macroeconomic climate and thereby encourage trade as well as foreign and domestic investment. The

Foreign direct investment in Vietnam

81

success of macroeconomic reform (see Chapter 2) has improved the business climate, making Vietnam more attractive to foreign investors. Natural resources and the labour force

Vietnam is well endowed with natural resources. It has substantial oil and gas reserves, rich agricultural land suitable for cultivating tropical products such as coffee, rice, rubber and fruit, and virtually untouched reserves of such minerals as iron ore, tin, copper, gold and coal (Oanh and Grub 1992; Robinson 1995). Oil is found along Vietnam's long continen tal shelf, and deposits are believed to exist in the Mekong Delta. The extent of oil reserves has not yet been established, but rough estimat s place them at 3-5 billion barrels. Gas reserves are estimated at 110 billion cubic metres. Crude oil is Vietnam's single largest xport. Vietnam's considerable natural attractions, particularly its sandy beaches and tropical climat , provide the potential for a thriving tourist industry. 1n 1994 over 1 million people visited the country, and this is expected to increa e to 4 million by the year 2000. Between 1988 and 1995, US$6.3 billion worth of foreign investment projects (ab ut 35% of total commitmen ts) was implemented in hotels and tourism (Table 5.4). With nearly 72 million peopl in 1994, Vietnam is the thirteenth most populous country in the world. Th population is relatively young: 75% is under 35 year of age . Vie tnam h as a highly literate labour force- the lit racy rate stands at approximately 95%-including a contingent of po tgraduates. The national minimum wage is US$30/month; the working week consists of six eight-hour days. This puts Vietnam's labour fore among th cheapest in Southeast Asia. Asian countries with lower minimum wage rates are Sri Lanka, Bangladesh and Pakistan. Import substitution

Trade policies in the host country, notably the promotion of import substitution through tariff and non-tariff barriers, can affect the prospective rate of return of inward investments, especially tho e seeking markets in the host country. Multinational enterprises often choose to invest in protected industries so as to circumv nt tariffs and import controls and take advantage of tax holidays and other investment incentives (Dunning 1994).

82

Vietnam has focused on promoting development of its infant industries through import substitution policies, even though this may create economic distortions. To achieve thi goal, it has offered quantitative import restrictions and favourable tariff rates, tax rates and foreign exchange instruments to foreign investor . These measures have contributed to currency overvaluation and a bias against exports, leading to balance of payments deficits; in addition, the tariff system, which imposes rates varying from 0 to 200%, is often accused of being inefficient. However, the measures have also been successful in attracting foreign inve tment into import substituting manufactures (World Bank 1993b). Since late 1994, for example, there has been a sharp increase in the number of FDI projects involving the motor vehicle industry, in which tariffs are very high (up to 200% in the case of automobile ). Push factors

Vietnam is favoured by a number of push factors that have been significant in attracting investment from abroad. First, Vietnam lies within the East Asian region, sharing its good growth and trade prospects and stable investment environment (Fry 1993). The real growth rate of the dynamic Asian countries (the East Asian economies and southern China) has exceeded 7% since 1991. In 1994, 70% of worldwide investment in developing countries went to the Asia-Pacific region (UNCT AD 1995). The new wave of FDI has spread to Vietnam since 1990. Second, several large capital exporters are located in Asia, including Japan, Taiwan, Hong Kong, South Korea and Singapore. These countries, which are also the largest investors in Vietnam, have sizeable trade surpluses and hence are a major source of investment funds (Gates and Truong 1995). It would appear that international capital is readily available to countries like Vietnam that can provide favourable growth and profit opportunities. Third, because of domestic cost increases (including higher labour costs), the East Asian countries now look upon Vietnam as an export platform to produce standard manufactures for international and regional markets. This strategy also helps them to counter current or potential problems with the General System of Preference (GSP), currency appreciation and OECD protectionism. Finally, the lifting of the US trade embargo, and the normalisation of the relationship between Vietnam and the United States,

Foreign di

ha removed b tad firms.

8 t

inv

tm nt in Vi tnam by Ja r

U

and

Japan

Slow implementation of FDI

in urin g in Vi "tn m . $1,844 mi ll ion (

% in th •

84

Nguyen Tuan Dung

In 1995 only a very few projects received land use rights within 30 days from a project licence being granted (MPI 1996). Labour regulations offset the attractiveness of low-cost labour and slow the implementation of FDI projects in Vietnam. Although the Foreign Investment Law allows foreign investors to both hire and fire local workers, hiring is restricted in three ways. •

• •

Recruitment must be handled by the local government labour office or a labour supply company, both of which are permitted to charge an upfront fee of 8% of the worker's monthly salary for an appointment or 3% for a referral (based on a fee scale recommended by the Ministry of Finance). In theory, if recruitment through one of these agencies is unsuccessful, then the foreign investor can opt to advertise directly. In practice, however, the investor is under strong pressure to hire workers through a local government agency, and often to pay fees that are two to four times higher than those quoted above (Burke and Howell1993). Expatriates can be recruited only if the skills sought are unavailable locally . The minimum wage to be paid by foreign investors is currently set at US$30/month, compared with a market wage of about US$15-20/month. As mentioned earlier, this is higher than the minimum wage in Sri Lanka, Bangladesh and Pakistan (Oanh and Grub 1992). Vietnam's high minimum wage rate could place it at a serious disadvantage in attracting FDI into labourintensive industries once these South Asian countries are able to establish political stability and restore civil order.

Foreign investors in import substitution industries find few problems with the current policy of protectionism. Enterprises with foreign invested capital are exempt from import duties on capital goods and materials to be used in the manufacture of exports. However, the number of import permits required for inward shipments, combined with customs officials' lack of knowledge about imported goods, has created costly delays with cargo clearing and added another bureaucratic layer. To avoid such delays, foreign investors need to allow plenty of time for document approval (Mai Dung 1994). An environment in which the delivery of inputs can be held up by administrative interference also provides many opportunities for corruption (Dollar 1993).

Foreign direct investment in Vietnam

85

Another obstacle to the implementation of FDI projects lies in the lack of financing opportunities for investors in Vietnam. The banking system is underdeveloped, and although foreign and domestic investors are permitted to borrow on the domestic capital market, in reality they are forced to arrange all financing overseas. This delays the rate of projects coming into production and increases transaction costs. Some recommendations for change

As Vietnam has only recently begun to accept foreign investment, it still has much to learn. The flexibility it has shown in changing and adapting the approval process suggests that the climate for foreign investment should continue to improve. Both the World Bank and APEC offer guidelines for further reform, including equal treatment for foreign and domestic investors (national treatment), the establishment of a stable legal system and of a transparent and decontrolled regulatory framework, and the formulation of more liberal labour regulations (Shihata 1993) . In short, foreign investment policy reform should be part of more general reform of investment policy directed at liberalisation and rationalisation. I have argued that investment incentives in Vietnam are comparable to, and in some cases more favourable than, those in other Asian countries. However, research has shown that economic stability in the host country is the most important consideration for foreign investors, and that the effects of incentive packages on investment levels are inconclusive or insignificant (IMF 1985) . Indonesia, for example, attracts higher FDI flows than Vietnam (US$14 .1 billion against US$4 .3 billion in 1994) despite offering fewer actual incentives. According to Osada (1994, p . 487), 'the increase of FDI was not caused by Indonesia's FDI policy per se but by the combination of FDI policy and many other related deregulations'. This seems to suggest that Vietnam should redirect policy away from active promotion of FDI and towards reducing the remaining controls on investment. First, Vietnam needs to abandon its listing of 'priority industries', which is too broad to be meaningful or effective. A better approach would be to list industries excluded from FDI, based on security requirements. All other industries should be open to foreign investment on an equal footing.

86

Nguyen Tuan Dung

Second, the number of agencies required to approve FDI proposals at the central level should be reduced. At present there are many such agencies (the State Planning Commission, Finance Ministry, Ministry of Commerce and Trade, Ministry of Science, Ministry of Con struction, Central Bank [State Bank] and 'other Ministries relevant to the subsector in question'). By reducing the number of agencies, the authority of the SCCI would be strengthened and a 'one-stop' service could become a reality. Third, trade policy should be liberalised as part of more general economic reform and to promote the expansion of POI and exports. The present system of high import tariffs and quantitative restrictions is biased against export-oriented industries while also encouraging smuggling. The first step in any program of tariff reform would be to replace the present system of import and export licences with a set of moderate tariffs in the 10-20 per cent range. Such a revised tariff schedule could make a substantial contribution to economic transition and increase government revenue, as well as removing trade distortions. Fourth, Vietnam would benefit from a relaxation of labour market regulations. Distortions in the labour market, such as high minimum wage rates, make labour artificially expensive; they discourage FDI in labour-intensive industries, in which Vietnam should have a comparative advantage. An adverse consequence of inappropriate labour regulations may be the transfer of technologies that are unsuited to factor endowment conditions in Vietnam. Moreover, current exemptions from duties on capital equipment tend to lower the cost of capital, encouraging substitution of capital for labour. Labour regulations could be relaxed to allow foreign firms to recruit directly, while still giving preference to local workers; wages, like other prices, should be decontrolled. If a regulated minimum wage were to be retained, it should be based on a more realistic market wage of around US$20/month. Regulated minimum wages should be retained in the case of workers with scarce skills of a managerial or technical nature, who would still be cheaper to employ than expatriates. FDI and domestic investment policies need to be placed on the same footing, so that foreign investors neither obtain special privileges nor face discrimination compared with domestic investors. This would ensure minimum distortion in resource allocation, smoothing the way for long-run growth from investments.

Foreign direct investment in Vietnam

87

Conclusions

FDI has become an important source of capital for Vietnam, changing the structure of the economy, creating jobs, pushing up domestic savings, increasing trade volumes and improving the balance of payments. In 1994 alone, FDI accounted for 30.6% of total investment. It has been estimated that FDI projects implemented between 1988 and 1995 have created about 90,000 jobs directly and another 100,000 jobs indirectly (MPI 1996). Exports from foreign investment projects amounted to US$113 million at the end of 1993, US$350 million at the end of 1994 and US$400 million at the end of 1995. In 1994, exports from foreign investment projects accounted for 30% of all manufactured exports. FDI has also contributed to the economy through the introduction of new technology and advanced management methods. Recognising that FDI contributes to employment and income, the Vietnamese government has given high priority to creating a legal environment suitable for foreign investment. Foreigners can invest in any sector of the economy, with no limits on participation. Through such incentives as tax holidays and lower income tax and withholding tax rates, the government encourages investment in priority sectors. However, the legal framework for foreign investment approvals is still incomplete, with a gap apparent between legislation and practice. Reforms to FDI policy need to be part of a more comprehensive program of investment policy reform. The entire regulatory framework should be streamlined to accelerate approvals and achieve greater transparency and certainty. To obtain the maximum benefit from FDI and maintain high economic growth, foreign and domestic investment policies need to be based on the same principles. Differences in treatment between foreign and domestic investors lead to distortions in the allocation of resources and production, reducing the benefits Vietnam could otherwise expect from FDI. A number of pull and push factors favour Vietnam as a location for FDI. With further progress towards macroeconomic stabilisation and structural adjustment, with the creation of credible policies, and with a reduction in politico-economic risks and uncertainty, Vietnam should continue to attract increasing amounts of FDI for the rest of the decade.

88

Nguyen Tuan Dung

References

Burke, F.R. and D. Howell (1993), Vietnam : A Legal Brief, State Political Publishing House, Hanoi. Cuong, C.V . (1993), Foreign Investment Law and Regulations: A Compara t ive Study of Vietnam and Indonesia, Institute of Southeast Asian Studies, Singapore. D ollar, D . (1 993), 'Vie tnam : Successes and Failures of Macroeconomic Stabilization', in B. Ljunggren (ed .), The Challenge of Refo rm in Indo china, Harvard Institute for International Development, Cambridge MA, pp. 207-32. Dunning, J.H . (1994), Multinational Enterprises and the Global Economy, Addison Wesley, Washington DC. Fry, M .J. (1 993), Foreign Direct Investment in Southeast Asia, Institute of Southeast Asian Studies, Singapore. Gates, C.L. an d D.H .D. Truong (1995), 'Development Strategy and Trade and Investment Policies for Structural Change', in Irene Norlund, Carolyn L. Gates and Vu Cao Dam (eds), Vietnam in a Changing World, Curzon Press, Richmond, Surrey, pp. 85-108. Gu isinger, S.E. (1985), Investment Incentives and Performance Requirements: Pa tterns of International Trade, Production, and Investment, Praeger, New York. IMF (In te rn ationa l Monetary Fund) (1985), 'Foreign Private Investmen t in Developing Countries', Occasional Paper 33, IMF, Washington DC. Mai Dung (1994), 'Licensing Liabilities', Vietnam Economic Times, July. MPI (Ministry of Planning and Investment) (1996), Foreign Direct In ves tmen ts in Vie tnam, MPI, Hanoi. Oanh, N .X. an d P. O. Grub (1992), Vietnam: The New Investment Frontier in So utheas t Asia, Publishing House, Ho Chi Minh City . Osada, H . (1 994), 'Trade Liberalisation and FDI Incentives in Indonesia : The Impact on Industrial Productivity', The Developing Economies, 32 (4), pp. 479-91. Pan-Long Tsai (1991), 'Determinants of Foreign Direct Investment in Taiwan: An Alternative Approach with Time-Series Data', World Develop ment, 19 (23), pp. 275-85. Robinson, I.J. (1995), 'Problems and Opportunities in Vietnam and American Shortsightedness', Vietnam Economic Bulletin, 9 (14), pp . 1-7.

Foreign direct investment in Vietnam

89

Shihata, I. (1993), Legal Treatment of Foreign Direct Investment, The World Bank Guideline, Martinus Nijhoff, Dordrecht. UNCTAD (United Nations Conference on Trade and Development) (1995}, World Investment Report 1995: Transnational Corporations and Competitiveness, UNCTAD, New York. World Bank (1993a), Global Economic Prospects and the Developing Countries, World Bank, Washington DC. World Bank (1993b}, Viet Nam: Economic Policy for Transition to an Open Economy, World Bank, Washington DC.

6 Foreign investor in Vi tnam: An Australian ca study Elizab th Maitland

Th rapid con mic d v lopm nt E t A i n r gion has mesmeri d W tern p Hey mak r and bu in rching for ways to integrate th ir cou,ntri int th r gi n' b ming ec n mi and to participate in th ir ucce s. Much att ntion h n japan, China, th A ian ' tig r ' and th cond-tier m rging conomies, such as Malay ia, lndone ia an Thailand . A n glected area has been the tran itional sociali t economy of Vi tnam. This chapter uses a survey of Au traUan investors the b i for a case study on foreign investors in Vietnam. Austra lian firms were among th fir t foreign companie to enter Vietnam's newly Hberalised markets in 1987; for everal years in the ea rly 1990s, Australia wa the larg t foreign inve tor. In July 1994, Australia was still the fourth large t foreign investor in Vietnam, behind Taiwan, Hong Kong and South Korea (Table 6.1). 1 Thi chapter develops a model of Australian bu ine involvement in Vietnam since 1986, drawing on contract (tran action co t) theory. It analyses the negotiation proces and writing of incentive contracts for wholly owned and joirlt venture arrangements between Australia and Vietnam. It also considers sources of risk to projects, indicating areas of concern for foreign corporations and mechanisms for risk reduction . It is hoped that this study will form the basis for comparing different groups of foreign investors in Vietnam, such as those from Taiwan, South Korea and Hong Kong. 1 More

recent data show Australia to be ranked eighth, after Taiwan, Hong Kong, Japan, Singapore, South Korea, the United States and Malaysia (see Chapter 5 for a discussion of foreign direct investment in Vietnam).

91

TABL 6.1

For ign investm nt in Vi tnam by country of o r igin~

Country o( origin

0

rating proje ts (num r)

Total regis! red capi tal (U S million)

Taiwan Hong Kong S uth Korea Australia 5 Singapor 6 Japan 7 Malaysia 8 Fran 9 N th rlands 10 Britain

133 150 69 36 60 57 26

13 13

1, so 1,246 713 632 537 513 509 482 379 360

Total for all countries

824

8,708

1 2 3 4

so

"As of july 1994. Sour e: Vietnamese State Commit! e for

ooperation and Investment.

Australian investment in Vietnam

Information on 35 Australian companies operating investment projects in Vietnam was obtained from the Australia-Vietnam Bu ine Council and the Vietnam Investment Review, a weekly State Committ joint v nture publication invol ing the Vi tnam for C op rati n and Investment, the body which licens foreign inv stm nt projects. Nin te n compani r ponded to the survey, wer incompl te. lthou h tw of the respon Tabl .2 h w that the sample i r a onably repr ntativ of t f Australian firm op rating in Vietnam, ht und rr presentation of ervic firms. Taking xy for corporat ize, Table 6.3 how f compani c nducting perations in Vietnam through to large nt rpri v ry mall- al with o r 0,000 employee . The majority of th were lOOo/o Au tralian-owned p ndin to th of over a owned ub idiari w Th shareholding of b tween 50 and thr

Elizabeth Maitland

92 TABLE 6.2

Firms' responses by industry group (number)

Industry group

Survey mailing lista

Respondents

4

2

Manufacturi ng Electrical engineering Co nstruction Telecommuni cations Infrastru cture Banking and finance Petro leum and energy Servi ce Mining/resources

2

2

2 2 15 7

1 5 5

Tota l

35

19

~ comp il ed

from Aust rali a-Vi etnam Business Council, Vietnam Investment

Review.

Transaction cost economics Economic modelling of exchange and organisations has undergone a shift away from the traditional framework, in which the firm is defined by a 'black box' production function, towards a consideration of the firm as a 'nexus of contracts'. This approach links employees to eac h other and the firm as a whole to its suppliers and consumers, through spo t (arm's-length) markets, vertical integration, and franchises, licences and other long-term contracts. Rather than being defined on the basis of foreign direct investment and the control of produc tion establishments, the international involvement of firms extends across a spectrum of contractual forms . Markets (exporting), licensing, technical expertise contracts, equity joint ventures and who lly owned subsidiaries are alternative forms of international asse t transfe r. Increasingly, contracts without equity contribution from a foreign company are being classed as 'investment' agreements (Wolfgang 1986), shifting the notion of investment away from disembodied capital flows to the economic nature of the contracts involved. The decision by a firm to expand from domestic to international operations or to increase the scope of its international involvement

Australian companies in Vietnam

TABLE 6.3

Firm size (number of employees) Less than 5 5-20 21-50 100-500 1,000-5,000 10,000-15,000 40,000-70,000 Missing observations Total

93

Firms' responses by firm size (number) Respondents

3 2 2

5 1

3 2 19

rests on its possession of assets which endow it with a competitive advantage over host country firms. These ownership or firm-specific assets include product and process technology, patented knowhow, brand name and managerial skill. The international transfer of firm-specific assets requires the firm to decide both the location of investment (where to invest) and its contractual form (whether the investment should take the form of a wholly owned subsidiary, franchise, joint venture etc.). The choice of contractual form is determined by transaction costs, which are associated with the costs of exchanging property rights in assets. Costs are incurred in the search for buyers, sellers or partners; the negotiation and writing of contracts; the monitoring of a partner's contractual obligations; and sanction for breach of contract. Market transfer of assets is difficult when assets are 'intangible'. The problem arises from the public good characteristics of the assets, when their use in several different applications and locations does not diminish their value in their original use or location. For assets such as advertising o'r labour organisation knowhow, the inability to patent such 'knowhow', and thereb y define property rights, inhibits market sale. In non-market transfer, an agency relationship is established between the firm, as the principat and an agent, whether a licensee or subsidiary. The firm delegates some of the property rights over an asset, such as u ser

94

Elizabeth Maitland

rights over a resource, to the agent in return for a predetermined payment. The agent is in turn bound by an incentive contract to act in the firm's interest. In cases in which non-market transfer requires elaborate incentive contracts to protect the principal's interests from opportunistic behaviour by agents, the wholly owned subsidiary is often a superior contrac tu al form. The hierarchical structure of such a firm helps to ensure monitoring, control and enforcement, through mechanisms such as internal accounting and reporting systems. The choice of contractual form is also influenced by locationspecific factors. Despite diminution of control, cooperative arrangements and strategic alliances are advantageous for risk reduction and circumventing government-mandated trade and investment barriers. Linking up with a host country partner may provide access to existing distribution and retailing networks. A partner's political and business contacts can also be used to obtain strategic advantage and to lower the costs of establishing reputation and goodwill. Concepts such as reputation are central to the selection of the form of transfer, since the structure of a contract depends not only on the technical aspects of the assets being transferred but also on the legal system and commercial networks (Eggertsson 1990). For contracts to be effective, their operation must be underpinned by a combination of a coherent and consistent legislative environment and business networks that identify and ostracise opportunistic agents. The final determinants of location are location-specific inputs, which combine with the firm's ownership advantages more profitably in one location than in another. Influential factors include the n ature and availability of labour; government legislation and policies, including tax rates and constraints on dividend remissions; and market size and future growth prospects. An economy in transition

Vietnam is one of a group of East Asian economies making the transition from an economic development strategy labelled as a 'bureaucratic centralised state subsidy system' (Tri and Booth 1992) to a socialist-oriented market economy. Since the adoption of policies of economic renovation, or doi moi, in early 1987, the emphasis has been on encouraging a multisectoral economy, including private enterprise. This has not meant: 'an endorsement of unfettered market capitalism. The seventh congress [of the Vietnamese Communist Party, June 1991] made clear that key in-

Australian companies in Vietnam

95

dustries would remain under central control and that the aim of economic development was socialism' (Thayer 1991; p . 22). The attractiveness of Vietnam to foreign corporations is generally argued to lie in the following: its strategic location in Southeast Asia, with land links to the booming markets of southern China; its significant natural resources, including coal and oil deposits on its continental shelf under the South China Sea; and its large and geographically concentrated population. The absence of competition from American corporations, barred from Vietnam until February 1995 by the United States' 1975 application of the Trading with the Enemy Act, also strengthened the attraction for Australian companies of operating in the country in the earlier years. The effective opening of Vietnam to Western investment began with the passing of the first of the doi moi laws relating to foreign investment, in December 1987 (Magennis and Nguyen 1992). The Foreign Investment Law permits investment by contractual business cooperation (for which no separate legal entity is established}? by joint venture enterprise and by enterprises with 100% foreign-owned capital. Preferential provisions for treatment of joint venture enterprises are included as a means of encouraging this mode of investment. Yet, despite what has been described as one of the most liberal investment environments in Southeast Asia (Tri and Booth 1992; The Economist, 10 July 1993), the framework of laws necessary for a market economy is embryonic. The drafting and implementation of important support laws for foreign investment, including laws dealing with bankruptcy, copyright and insurance, is a protracted process. An area of particular concern is legislation pertaining to the mining sector, where companies undertaking exploration and preparation of feasibility studies do so without guarantee of exploitatiqn rights. Further, in order to be seen as satisfying the requirements of various ministries, those laws which have already been passed exhibit varying degrees of internal inconsistency, leading to differing interpretations and enforcement. The Foreign Investment Law has been the subject of two .amendments (June 1990 and December 1992) and 90 reinforcing documents; until July 1994

2Examples of business cooperation contracts include offshore oil and gas exploration and production-sharing contracts between PetroVietnam and foreign oil companies.

96

Elizabeth Maitland

coflfusion surrounded the enforceability of economic contracts, which lay outside the jurisdiction of the People's Courts and which lacked precedent. Other obstacles to the smooth operation of investment projects include Vietnam's appalling lack of infrastructure 3 and the embryonic private enterprise system. A 1993 study found that 63% of businesses in Ho Chi Minh City had been operating only for the last three years (Central Institute for Economic Management, Vietnam, cited in Asiamoney supplement, July-August 1993, p . 7). Between 1993 and 1995, the number of non-state enterprises operating in Vietnam increased from 4,212 to 18,697. Short operating periods are compounded by low capitalisation rates. Of the 4,212 non-state enterprises operating in Vietnam in 1993, 67% had a capitalisation of less than A$20,000 (200 million dong) and only 41 had a capitalisation greater than A$100,000 (1 billion dong) (Dang 1995, p. 24). Operating in Vietnam would appear to present a number of difficulties for Australian companies. The rudimentary commercial networks and the lack of a developed legal framework for a marketbased economy point to difficulties not only in enforcing contracts, but also in searching for suitable partners and negotiating contracts during the earlier stages.

Survey results Why Vietnam? The motivations for Australian companies to undertake operations in Vietnam differ quite markedly from the general propositions regarding Vietnam's attractiveness to foreign investors. The scores in 3The

lack of infrastructure in Vietnam is a legacy both of the long years of war and of the subsequent blocking by the United States of multilateral aid funds. Embargoes on Vietnam were also implemented by various OECD countries after Vietnam's invasion of Cambodia in 1978. By the end of the Vietnam War, in 1975, 9,000 of 12,000 villages in the south had been destroyed. In the north, three out of twelve provincial and district towns had been completely destroyed; six railway routes, all bridges, 1,600 irrigation works, 3,000 schools and 350 hospitals had been bombed (Tran 1994, p. 20). Multilateral aid funds have since been obtained for a number of projects. Shortage of electricity is of particular concern. According to Tran (1994, p. 64): 'By 1995 and the year 2000, power output will meet 82.3% and 91.6% respectively of the minimum consumption demands, and 70% and 75% respectively of the maximum consumption demands'.

Australian companies in Vietnam

97

TABLE 6.4 Firms' motives for investing in Vietnama Motive Establishing a long-term presence Strong growth prospects Size of Vietnamese market Absence of competition from US companies Establishment of an export base to Asian countries Forestall entry by a competitor Low wage costs Access to raw materials Establishment of an export base to China

Score 4.6 4.2 3.5 3.1

2.6 2.4 2.3 2.3 1.4

ascores are calculated using a scale of 1 to 5, where 1 represents low importance and 5 high importance.

Table 6.4 were calculated using a scale of 1 to 5, where 1 represents low importance and 5 high importance. Low wage costs (2.3), access to raw materials (2.3) and establishing export bases to China (1.4) and other Asian countries (2.6) were not significant motivations for investing in Vietnam. Nor was the absence of US corporations (3.1) an influential variable. Establishing a long-term presence (4.6), the strong growth prospects of the economy (4.2) and the size of the Vietnamese market (3.5) were the major drawcards for Australian corporations, indicating both a strong belief in the stability of the economy and political system, and a long-term commitment to operating in Vietnam. The low scores assigned to using Vietnam as an export base appear to underline Australian companies' commitment to operating in the country's domestic markets. Faith in the economic reform program is also evident in firms' responses to assessment of project risk (Table 6.11, below).

Negotiations In line with their stated commitment to long-term operations, 14 of the 19 respondents had spent more than six months researching conditions in Vietnam before commencing negotiations. As indicated by Table 6.5, negotiating periods were also fairly lengthy, a point concurred with by the 11 respondents (58% of the sample) who

Elizabeth Maitland

98

TABLE 6.5 Length of negotiating period (number) Negotiating period

Respondents

Less than 3 months 7-12 months 13-18 months 19-24 months More than 2 years

5 6 2 2 4

Total

19

described negotiations as 'protracted'. Such a response indicates that the companies underestimated the length of time needed to negotiate a contract, reflecting Australian inexperience with operating in Vietnam and Vietnamese inexperience of dealing with foreign private companies. The description of negotiations as protracted may also be a proxy for the extent of haggling, for, although none of the companies described the negotiations as hostile, 17 (89%) did not feel they were operating in an environment in which they could ' tru st' their Vietnamese counterparts. This suggests that more formal or complex contracts were sought to prevent opportunism. Further, when asked to assess their existing contract, four companies expressed a desire to renegotiate a more tightly worded contract.

TABLE 6.6 Position in firm of negotiator Position Chair Directo r Managing director/CEO/partner Senior executive DevelopmenVoperations manager Middle manager Consultant

Negotiator 1 2 4 4 7 2

Negotiator 2

Negotiator 3

4

5 2

2 1

Australian companies in Vietnam

99

The results of the survey confirm the theoretical proposition that the costs of negotiations are high. Given the length of the negotiating periods, the seniority of personnel involved was significant, providing a measure of the costs of negotiations to the surveyed companies (Table 6.6). Although the chairpersons and directors participating in negotiations were drawn from the smaller companies (less than 50 employees), each of the medium to large enterprises in the sample had been represented by either a chief executive officer or senior executive. Once negotiations were concluded, the approval process was also prolonged. Half of the projects waited more than a year for approval and 15 were subject to approval by more than one state body. These bureaucratic delays contradict Vietnamese government claims that projects should be approved within three months and that foreign investors need deal only with the State Committee for Cooperation and Investment, established in 1989. Contrary to the promise that this body would act as a 'one-stop' shop for foreign investors (Magennis and Nguyen 1992), government regulators imposed significant costs on contract negotiations.

Ownership advantages Ownership advantages transferred by Australian companies to Vietnam were predominantly in the form of process technology (63%) and managerial skill (84%) (Table 6.7). Only one respondent transferred patented technology. The high transfer rate of nonpatented knowhow reflects the need to use a non-market mode which involves hierarchy to protect property rights of intangible

TABLE 6 .7 Type of technology transferred (number) Technology type Product technology Process technology Skilled labour Patented knowhow Brand name Managerial skill Marketing and distribution expertise

Respondents 5 12 7

4 16 5

Elizabeth Maitland

100 TABLE 6.8

Form of licence obtained (number)

Form of licence

Respondents

Business cooperation contract joint venture enterprise Wholly owned subsidiary Ministry of justice li cence Not specified

2 10 3 2 2

Total

19

assets. This indicates that equity investment, in the form of wholly owned subsidiaries and equity joint venture enterprises, would be the prevailing form of investment in order to protect property rights in knowhow. Table 6.8 confirms that this is indeed the case for Australian firms in Vietnam. Furthermore, five companies explicitly stated that their perceptions of the risks associated with operating in Vietnam had motivated them to seek equity in the project. Australian companies described the ownership advantages being transferred as predominantly 'state of the art' (Table 6.9). While the quality of technology transferred contradicts assessments that only projects utilising low technology can succeed (Hiebert 1994, p . 102), it is a further indication of the commitment by the surveyed firms to operating in Vietnam over the long term.

TABLE 6.9 Vintage of technology transferred (number)

Technology vintage Patented State of the art Older generation Fast-changing Of exportable potential

Respondents

11

3 3 3

Australian companies in Vietnam

101

The high rate of transfer of managerial skills highlights the relevance of location of investment to the type of asset being transferred. The long period of a centrally planned economic system in Vietnam has created a shortage of labour skilled in market production, particularly in the area of management expertise. This is also apparent in the responses from Australian companies involved in cooperative arrangements with Vietnamese partners. Of the 13 cooperative arrangements, only two featured management expertise provided by the Vietnamese partner.

Cooperative arrangements Overwhelmingly, the Australian companies elected to operate in Vietnam with partners: 13 of the 19 projects were cooperative arrangements with Vietnamese partners,4 10 of these in the form of a legal liability joint venture enterprise. This is characteristic of all foreign investment in Vietnam, with joint ventures comprising 786 of the 1,200 operating projects in November 1995 and 75% of total registered capital (Vietnam News, 25 November 1995, p . 4). Six of the 13 Australian projects involved third-party, non-Vietnamese partners, who were sought for finance (2), to spread the risk of the project (3) and for their marketing expertise (1) . Overall, eight of the 19 Australian companies indicated that they had selected a cooperative arrangement rather than a wholly owned subsidiary in order to spread the risk of operating in Vietnam. Table 6.10 shows firms' motivations for seeking a Vietnamese partner. Even when the government required a partner, Vietnamese partners were clearly sought for their intangible knowhow in the form of cultural, social and political contacts (3.9) and local market knowledge (4). Given the low score for suitable facilities (2.8), the high score for partner's strategic location (4.2) would appear to reflect knowledge of operating in a particular location rather than the contribution of tangible assets. Dominant control of these cooperative arrangements rested with the Australian companies. Nine had Australian general managers,

4These projects comprise two business cooperation contracts, ten joint ventures and one unspecified as to whether it is a business cooperation project or a joint venture. Business cooperation contracts differ from joint ventures in that the Vietnamese partner does not have equity in the project but participates only in profit-sharing. Also, no separate legal entity is formed in the case of a business cooperation contract.

Elizabeth Maitland

102

TABLE 6.1 0

Firms' reasons for seeking a Vietnamese partner3

Reason Partner's strategic location Local market knowledge Cultural, political , social knowledge/contacts Vietnamese government requirement Access to marketing/distribution network Past relationship Availability o f a suitable facility as a going concern

Score

4.2 4.0 3.9 3.8 3.3 3.1 2.8

ascores are calculated using a scale of 1 to 5, where 1 represents low importance and 5 high importance.

compared with only two headed by a general manager supplied by the Vietnamese partner. Executives of the Australian parent company were chairs of nine of the boards of management, as against only one executive from a Vietnamese partner. Executives of Australian parent companies were also predominant on the boards of management, comprising more than 50% of the boards of eight of the cooperative arrangements. However, the power of the management board is limited by the legal requirement for unanimity for all key decisions, including production and business plans, budgeting, borrowing and appointments of senior personnel. Regardless of its equity contribution, the Vietnamese party must have at least two seats on the management board of the joint venture enterprise.

Risk monitoring and enforcement The surveyed companies did not perceive Vietnam to be a particularly risky environment in which to operate. External risk to projects posed by regional (2.38), economic (2.31) and political (2.25) instability were not viewed as significant, and the more specific conditions of restrictions on profit remittances (3.25) and foreign exchange risk (2.94) were viewed as exerting only a moderate level of risk on the operation of projects (Table 6.11). However, when account is taken of the difficulties of monitoring and enforcing contracts, large and small enterprises differ interestingly in their risk assessments. Although the lack of a developed

Australian companies in Vietnam

103

legal system received only a moderate total score (3.44), the larger enterprises in the sample rated this factor as a high source of risk (4.25). Of the ten companies that had inserted clauses into their contracts to cover areas of confusion and/ or inadequacy in the Vietnamese legal framework, only one was a small enterprise (less than 50 employees) while the remaining nine were enterprises with more than 1,500 employees. Similarly, none of the companies operating more than eight projects in foreign countries had failed to insert clauses into their contracts. The failure to insert clauses and the low risk assessment given to the legal system in Vietnam point to inexperience and underestimation on the part of smaller companies of the difficulties in monitoring and enforcing contracts in foreign countries. This is further reinforced by the differing estimates between large and small companies of the risk posed by the lack of experience of a market-based economy in Vietnam. It is possible that the large enterprises assigned a high score to this category of risk based on their knowledge that commercial networks are very important in the monitoring and enforcing of contracts.

TABLE 6 .11

Firms' assessment of project riska

Source of risk

Firm size

50-5,000 employees

More than 10,000 employees

3.17

3.17

4.25

3.44

2.83

3.50

3.50

3.25

2.50 2.67 2.50 2.17 2.00 2.50

2.83 2.67 3.30 4, 67 2.30 2.30

4.00 3.75 3.00 2.25 2.75 1.75

3.00 2.94 2.94 2.38 2.31 2 .25

Less than

so

employees Lack of adequate legal system ProfiVpayment remittance restrictions Lack of experience of marketbased economy in Vietnam Lack of infrastructure Foreign exchange/currency risk Regional instability Economic instability Political instability

All firms

ascores are calculated using a scale of importance and 5 high importance.

to 5, where 1 represents low

104

Elizabeth Maitland

Outcomes The responses of the surveyed companies to their operations in Vietnam were favourable, with only one company expressing disappointment. Each of the companies believed that, given their experiences, they would still invest in Vietnam, and none would elect to delay their entry into the country. Although three companies felt they would like to change their equity commitment, none of the firms wished to alter the contractual form of involvement. The lure of Vietnam for Australian companies lay not in quick profits and cheap inputs for production of exports but in establishing a long-term presence in an economy with strong growth prospects. Negotiating a presence in the country was a costly undertaking, with significant delays being encountered both in the negotiating process and in receiving approval from regulatory bodies. As predicted by contract theory, Australian companies used non-market contractual modes to transfer unpatented intangible assets to Vietnam. A number of the companies also sought equity, either through a wholly owned subsidiary or a joint venture enterprise, to protect property rights in knowhow . The choice of contractual form was further influenced by government restrictions and the desire for the knowledge of local conditions and contacts of Vietnamese partners. Cooperative arrangements were clearly the favoured mode for undertaking operations in Vietnam. Although Vietnam was not viewed as a particularly risky environment, perceptions of risk altered considerably when consideration was given to the monitoring and enforcement of contracts. The larger and more internationally experienced enterprises were more fully aware of the difficulties of operating in a foreign country, particularly one making the difficult transition from central planning to a market-based economy. Apprehensive of the risk stemming from the rudimentary legal system, these companies inserted clauses into their contracts to cover areas of confusion in Vietnamese law.s Given the short timeframe of Australian involvement in Vietnam (1987-95), caution must be exercised in drawing conclusions from a sample that is relatively small, representing just over hall of the actual number of projects operated by Australian companies in 5

This accords w ith recent extensions of the definition of ownership advantages to include knowledge gained from operating a multinational enterprise (Kogut 1990).

Australian companies in Vietnam

105

Vietnam as of July 1994. However, the surveyed firm s do represent a wide cross-section of enterprises in terms of both industry spread and size. Firms included in the sample range from very small enterprises through to some of Australia's largest multinationals . Further, th e favourable assessment of the projects does not preclude recognition that several companies have encountered difficulties in ente ring a transitional economy with a low level of industrial development. Where major problems have arisen, the re i evid ence that these relate to control problems regarding joint venture partners and, in particular, state opportunism . When a company invests in a foreign country, the state receive a broad option for opportunism . Contracts with sove re ign stat e , whether explicit in the form of a licence, or implicit in that th e foreign corporation operates in the ho t economy, are vulnerabl e to expropriation, forced renegotiation, renounced d bt , blocked profit remittance and ex post performance requirement (Ya rbrough and Yarbrough 1994). The vulne rability o f th e fore ign firm is particularly acute in extractive indu tri e . Whil th e re o urce company brings with it technology, employ m nt and forth, its activities involve a pe rmanent ex traction of the nation ' wea lth (Wolfgang 1986). The coercive power of the ta te rests on the absence of third party enforcement of cro -border contracts and, combined with the political influence of various inte re I group , all ow for opportunism in legislation, court d eci ion and admini trativ e rulings. The difficulty for foreign companie is in pr tec tin g th eir operations from tate opportun ism. Th contractu a l form of inves tment already secur much of the comm r ia l ris k. Th evid ence on Australian companies demonstrate that man y compani are aware of broader institutional ri k, with r pec t to th e lac k of lega l and commercial infrastructure, and have att empted to in ul a t th eir projects from risk lemming from th e e ource . However, th e challenge re mains to und e r land h o w g rea t th e ri k o f sta le opportunism actuaUy is, and how firms can minimise their exposure.

References

Dang Due Dam (1995), Vietnam 's Economy 1986- 1995, The Gioi Publis hers, Hanoi. Eggertsson, T. (1990), Economic Behaviour and In stitutions, Ca mbridge University Press, Cambridge UK.

106

Elizabeth Maitland

Hiebert, M . (1994), Vietnam Notebook, Review Publishing Company, Hong Kong. Kogut, B. (1990), 'International Sequential Advantages and Netw ork Fle xibility ' in Christopher A. Bartlett et al. (eds), Managing the Global Firm, Routledge, London, pp. 47-68. Magennis, W. and T.H. Nguyen (1992), Law in Vietnam : The Framework f or Foreign In ves tment, International Bar Association, Cannes. Thayer, C. A. (1991), Political Developments in Vietnam: From the 6th to 7th National Party Congress, Paper presented to the Vie tnam Update Conference: 1991, Research School of Pacific and Asian Studies, Australian National University, Canberra, 25 October. Tran, H .K (1 994), Economy of Vietnam : Reviews and Statistics, Statistical Publishing House, Hanoi. Tri, V.N . and A. Booth (1992), 'Recent Economic Developments in Vie tn am ', Asian-Pacific Economic Literature, 6 (1), pp. 16-40. Wolfgang, P. (1986), Arbitration and Renegotiation of International Investment Agreements: A Study with Particular Reference to Means of Conflict A voidance under Nature Resources Investment Agreements, Martins Nijhoff Publishers, Dordrecht. Yarbrough, B. and R. Yarbrough (1994), 'International Contracting and Territorial Control : The Boundary Question', Journal of In stitu tional and Theoretical Economics, 150 (1), pp. 239-64.

7 Providing legal services in Vietnam: A practitioner's viewpoint Bui Kim Chi•

The provision of legal services in Vietnam takes place in an environment in which both the institutional and legal frameworks are developing rapidly. The overall objective has been to achieve a complete change from bureaucratic management to running the nation according to the rule of law. The new 1992 Constitution was specifically formulated to facilitate the transition from a centrally planned and managed economy to a more pluralistic one in which market forces would play an important role, but with a socialist orientation. Thus the new Constitution legitimised the independent operation of private firms and businesses and recognised the participation of entities other than the state in foreign investment. In addition, the government provided a measure of security to both foreign investors and Vietnamese citizens by granting title to legally held property and assuring landholders that their property would not be subject to appropriation or nationalisation without proper compensation. The new Constitution gave impetus to the drafting of a considerable amount of new legislation required for the operation of a market-based economy. This included a Company Law, Law on Private Enterprises, Law on State Enterprises, Bankruptcy Law, Labour Code, Land Law, Tax Laws and, most recently, a Civil Code.

-The author is a lawyer from the Vietnam Ministry of Water Rt>SOurces, seconded to the Melbourne office of Deacons Graham & James. This law firm has had representative offices in Hanoi since 1992 and Ho Chi Minh City since 1994.

108

Bui Kim Chi

The process started with the Foreign Investment Law of 1987, which may be counted among the most liberal in socialist or formerly socialist countries. The thrust of legislation has been directed towards facilitating foreign investment and the better operation of the private sec tor so that it can sustain such a drive.

Challenges for practising foreign lawyers Despite the new legislation, formidable difficulties still remain in operating within the legal environment in Vietnam . These appear to fall into two categories: intrinsic or conceptual difficulties on the one hand; and institutional problems that arise from these intrinsic difficulties on the other.

Intrinsic/conceptual difficulties Lawyers practising in the commercial area in Vietnam, whether foreign or Vietnamese, have to deal with the inherent social uncertainty surrounding the mixture of law and commerce. The law, in the traditional interpretation, is an instrument of control to be used by the authorities in the proper management of society. The role of the law and court rulings is primarily to maintain the control of the state over the people. Years of foreign occupation have reinforced the identification of 'law' with national security. Law is often the exclusive domain of authority and a symbol of power. As one of the first foreign law firms in Vietnam, my own firm, Deacons Graha m & James, has acted for major Australian and multinational corporations since those earlier days when legal services were still a no ve lty for most Vietnamese. It has been our experience that negotiations often involve intense explanation and the reconciliation of different concepts from both sides. Rights and obligations which would be regarded as having a legal foundation in Western jurisdictions by reason of a Jaw or contract may be treated differently in Vie tnam . They are sometimes regarded as optional or me rely procedural and not intended to be mandatory or binding. Furthermore, although more ne w laws have been passed in the last four years than in the whole life of the country since it has been known as the Socia lis t Republic o f Vietnam, there is simply no direct translation in Vietnamese for many of the Western legal and commercial conce pts which need to be applied in order to conduct business at an international standard. In such circumstances, it is important to kn ow how a particular piece of legislation is

Providing legal services in Vietnam

109

interpreted and implemented in practice. Merely reading the legal instrument itself could be misleading. By providing legal services to business, law firms are also introducing a new concept in the sense that services have in the past been equated with servitude. Traditionally, service has been based on class division in the society; it was something that the lower classes did for the upper classes. There has been neither the concept nor the expectation, for instance, that 'public service' should serve the citizens. The Vietnamese term for public service translates as 'state office', and has the connotation of different levels of security and power. The notion of fees for services did not exist. During the years of socialist development, the provision of services was seen as parasitic, as it was unproductive in terms of material goods. For nearly half a century, the Vietnamese people learned to believe that only working manually in agriculture and industry was productive and worthwhile. New terms such as 'legal service' and 'consultancy' have become increasingly common, along with others such as 'new thinking', economic renovation' (doi moi) and 'market economy'. When foreign law firms accompanied their clients into Vietnam during the first wave of foreign investment, many Vietnamese did not really understand the role of the lawyers. They were simply accepted as a necessary condition for the foreign investment which the country needed and for which Vietnam had to compete. As a result lawyers kept corning, and 25 foreign law firms, including my own, have now established representative offices in Vietnam. Because of the irrelevance of modern commercial legal concepts and lawyers under central planning, Vietnamese lawyers, especially those in the north, were ill-prepared to cope with the new situation. Practising lawyers who were well versed in criminal matters found commercial legal issues daunting. That is not surprising since most of them gained their legal education in either the former Soviet Union or East Germany. Vietnam's law graduates have in the past had no incentive to study English as there was absolutely no prospect of using it. Those who sought a career in the court system would not need English, and there were no legal reference materials in English to be found in the libraries. In 1992, when my firm was preparing the ground for the establishment of an office in Hanoi, it was difficult to find Vietnamese lawyers who could use English as their working language.

110

Bui Kim Chi

Institutional difficulties Despite official willingness to have the country governed according to the rule of law, the absolute authority of the law is not yet a widely recognised principle in Vietnam. Administrative discretion remains the basis for many decision-making processes. Authorities are often unwilling to commit themselves to a course as defined by law, preferring instead to make decisions on a case-by-case basis. The decision-making process is often prolonged because government bureaucrats are under few time constraints or have little incentive to speed matters up. In addition, there is the need to obtain consensus in what is understood to be a collective decision-making process with great emphasis placed on collective rather than on individual responsibility. This becomes all the more complicated when administrative discretion is lacking in consistency. Different ministries or government authorities may take totally different approaches to an issue involving a foreign partner. Regulations concerning the same issue can vary from one government office to another. It is often difficult, or even impossible, to determine in advance what documentation or approvals will be required in order to obtain permission to conduct a certain activity. Cumbersome procedures can delay projects for weeks or months. For example, when we applied to establish a branch office, all foreign documents to be submitted with our application had to be 'consularised'. This involved firstly that they be 'certified' by an Australian state body and then submitted to the Vietnamese Embassy to be stamped! In Australia, all solicitors are able to certify documentation. In addition, hundreds of practising lawyers, appointed to act as notaries public, have the capacity to certify documentation for presentation overseas . In Vietnam, all documentation that needs certification has to be stamped by an official notary public office. There is only one such office in Hanoi and two in Ho Chi Minh City. Delays are more likely with projects involving more than one province or requiring directions from several levels of administration. Sometimes the imposition of political will coloured by rivalry between regions also interferes with business interests. Broad and undefined, this influence often undermines the certainty and consistency which legislative and administrative reforms are attempting to create. Recent administrative reform has been aimed at achieving a more efficient bureaucratic structure and performance. The latest

Providing legal services in Vietnam

111

move in this respect is the amalgamation of several ministries and the creation of new, specialised commissions under the direct leadership of the Prime Minister. This reform is profound in the sense that it should deliver a more streamlined administrative system. Whether the system will function effectively, however, remains to be seen. Vietnam has no central authority responsible for providing, in a timely manner, official copies of all the legal instruments relating to foreign investment. There are several sources for obtaining copies and English translations, none of them entirely reliable . The problem is becoming more acute, as the number of Vietnam's legal instruments increases almost daily. They come out in various forms, such as decrees, ordinances or directives, and are issued by the ministries or authorities concerned. There is an urgent need for a single legislative instrument covering all contractual matters, similar to Australia's Sale of Goods Act. Regulations recording secured interests in real estate and personal property are also urgently needed to cover the tremendous growth in commercial activities in Vietnam. The Civil Code passed at the last National Assembly session, in October 1995, contains chapters dealing with some aspects of these matters. The complex legislation consists of 834 separate articles covering diverse subjects ranging from responsibilities of citizens to property ownership and copyright. As the code is so large in scope, it is unclear how it will interact with other, more specific, laws already on the books. It is also unclear to what extent the Civil Code will apply to company activities. The Ministry of Justice is, however, drafting a Commercial Code for possible submission to the National Assembly by July 1997. At present, apart from resort to the Economic Court, the settlement of disputes and enforcement of rights in the commercial area is handled by the Vietnam International Arbitration Centre, which is part of the Vietnam Chamber of Commerce and Industry . This non-governmental agency, established as a neutral forum to assure its credibility, represents an attempt to improve due process. It has a total of 11 Vietnamese arbitrators and offers the only arbitration available in the country for economic and commercial dispute settlement. At present there are no foreign arbitrators working for the centre, though foreign lawyers can represent clients in arbitration proceedings. The centre has expressed its intention to recruit foreign arbitration experts, but so far none has been enlisted.

112

Bui Kim Chi

Until recently, the operation of all foreign legal firms was regulated by the Ministry of Trade, and law firms, like any other foreign company, were able to operate only as representative offices. The Ministry of Justice took over responsibility for the regulation of foreign law firms under Decree 42/CP, issued on 8 July 1995. The ministry is still drafting legislation covering the operation of local law firms. The decree defines the scope of operations, rights and obligations of foreign law firms and lawyers. It permits foreign lawyers to advise clients only on foreign and international trade and investment laws; they may not give advice on Vietnamese law or serve as counsel for clients before Vietnamese courts. Foreign law firms wishing to advise clients on local law can do so by entering into cooperation contracts with a local law firm. Under the decree, foreign law firms may not employ Vietnamese lawyers for the purpose of providing legal advice, although they can admit them to their firms for training purposes. While lobbying by foreign firms is intense and clarification is s till needed on what constitutes 'advice' or 'practising legal consultancy' in the context of the decree, it seems likely that the government will permit foreign lawyers to practise only in a fairly limited manner in Vietnam. 1 Perhaps the best that could be achieved would be for foreign law firms to offer investment advice to clients on the clear understanding that any procedural or legislative action would be in the hands of the Vietnamese partner firm . In any case it seems probable that, for the continuing operation of foreign law firms in Vietnam, cooperation with a Vietnamese firm will be essential. That being said, the work of foreign law firms continues to include providing assistance to investors pending clarification of the above issues. This work can be divided into three main areas: •

advising foreign companies on the establishment in Vietnam of a representative office, foreign invested enterprise, joint venture or other form of representation;2

1 It should be noted that in Australia and, indeed, in most other Western countries, lawyers are not allowed to practise locally at all unless they have been admitted to the bar in that country. 2 Ciients come from all sectors, including breweries, building product manufacturers, telecommunications providers and food producers, as well as from

Providing legal services in Vietnam

• •

113

advising Australian and other investors on post-licensing issues; and advising on ancillary matters of concern to local and foreign invested enterprises, such as taxation, labour regulation and financing.

In addition, it is in the interest of representative offices to provide assistance in the drafting of new legislation. Although foreign law firms are now prohibited from advising on Vietnamese law, there is still scope for them to guide clients in the process of establishing a business. Advice on the market and on cultivating government relationships is much in demand . While not requiring the provision of direct legal advice or services, this kind of guidance can only be provided with a detailed knowledge of government structure and of the legal background to transactions. This is at present a grey area . While no restrictions have been imposed as yet, the exact scope of work legal firms may undertake will soon need to be defined more clearly. This may be achieved by practice and precedent rather than by a formal clarification from the Ministry of Justice.

Conclusions Since 1993, Vietnamese law has provided for the enforcement of a foreign civil judgement where the foreign country concerned has a specific agreement with Vietnam allowing reciprocal enforcement. There is a caveat that the judgement in question must be valid under Vietnamese law. Vietnam recently took an important step in strengthening its legal framework for foreign investment by acceding to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. This gives formal recognition of the enforcement by legal means of an offshore arbitral award over assets in Vietnam. In an attempt to bring Vietnamese law in line with customary international arbitration practice, the Ordinance on Recognition and Enforcement in Vietnam of Foreign Arbitral Awards came into effect on 1 January 1996. Application for enforcement of an award is lodged in the first instance with the Ministry of Justice. If the application is approved, the ministry will hand it to the court at the approservice industries such as banking, information technology and property

development

114

Bui Kim Chi

priate level for consideration. From then on the case will follow the procedures required for any court hearing of a civil case. Until procedural difficulties are ironed out and Vietnamese arbitrators acquire considerably more commercial experience, offshore dispute resolution will remain the preferred option for most foreign investors wishing to resolve disputes with Vietnamese partners through formal proceedings. Although foreign arbitration is ultimately permitted, the law requires that there should first be an attempt at a negotiated settlement by the parties concerned. By establishing the Economic Court and by formally recognising and enforcing foreign arbitral awards, the government has at least indicated its commitment to facilitating the resolution of disputes between foreign and Vietnamese commercial partners. This commitment can only be realised in practice when there is satisfactory legal infrastructure for enforcement. The Foreign Investment Law in Vietnam has been amended twice . Another round of amendments is now being discussed at ministerial level with a view to making the Vietnamese economy m ore competitive and attractive to foreign investors. Participation in the 1965 Washington Convention on Settlement of Investment Disputes is now under consideration by the government. For foreign companies investing in Vietnam, obtaining easier access to appropriate legal services is undoubtedly a major consideration . It was foreign investment that created the demand for legal consultancy and in turn gave rise to legislation governing the presence of foreign law firms in Vietnam. For better or for worse, legal firm s that have established branches in Vietnam will continu e to travel the path of economic renovation with its government and citizens. For their own survival, these firms will need to continue to attract foreign investment into the country. With strict adherence to legal ethics and international standards, the genuine efforts of foreign legal firms in helping Vietnam prosper w ill, in time, be properly recognised.

Index

administrative courts, 61-2 administrative links, 54-5 administrative reforms see public administration reforms agricultural sector, 3, 21-40, 75-6 agricultural census, 39 commercialisation, 30--1, 38 growth, 8, 9, 21 labour force, 14 prices, 38, 45(fn) productivity, 29, 35 reforms, 21-40 APEC,85 arbitration, 111, 113, 114 ASEAN, 2 Australia, 2, 78, 90, 90(fn), 91 Australia-Vietnam Business Council,91 Australian Agency for International Development (AusAID), xiii Ba Dinh, 49 balance of payments, 82, 87 Bangladesh, 81, 84 banking sector, 3, 14, 18, 33-4, 85,92 capitalisation, 14

credit, 33-4 rural banks, 34 see also financial sector Bankruptcy Law, 14 Baria, 14 bribery see corruption Britain see Great Britain budget deficits, 12, 16 Bulgaria, 8, 9, 10 bureaucracy, workings of, 44, 45,46-7,48,50,52,53,110 see also public administration reforms Cambodia, 96(fn) Cantho, 28 Central Party Office, 60 central planning, 1, 16, 43-53, 101, 109 China, 7, 10, 11,38,82,90 Civil Code, 4, 14, 107, 111 civil servant, definition of, 63 civil service, 4-5, 15, 62-3 code,62 coal, 56 cocoa,24 coffee, 17, 24 Commercial Code, 111 commercial law, 14

Index

116

competition, 10, 19,32,48,69 Constitution, 14, 42, 52, 107 construction industry, 3, 47-9, 59,92 consumer price index (CPI), 7 consumption, 16 contract farming, 25 cooperative arrangements see joint ventures corruption, 18, 28, 29, 39, 48, 50,52,58,64,84 Council of Ministers, 44, 55 credit, 33-4 customs regulations, 60 Czech Republic, 10 Czechoslovakia (former), 8, 9 Danang, 14 deficits see budget deficits Department of Plant Protection,32 doi moi, 42, 46, 94, 95, 109, 114 domestic investment, 2, 12, 14 domestic savings, 3, 87 Dong Nai, 14, 78 Dung Quat, 14 Dyke Protection Laws, 49-50 Economic Court, 111,114 economic renovation

see doi moi Eighth Plenum of the Central Committee, 53 electrical engineering, 92 electricity, 17, 56 English language, 109 European Union, 1 export administrative procedures, 60

quota,37-8 taxes, 38 exports, 12, 16, 36-7, 76, 84, 86, 87 agrarian products, 12 aquatic products, 39 cashew nuts, 10 coffee, 10 crude oil, 12, 81 manufactured, 12 minerals, 12, 81 rice, 8, 10, 23, 25, 37-8, 38(fn), 39 rubber, 10 fertilisers and pesticides, 31-3,39 use per hectare, 34 financial sector, 3, 92 reform, 16, 18, 38 see also banking sector fish, 35 food crop sector, 21, 23--4 see also food grains food grains, 23, 24, 35 see also rice, maize foreign direct investment (FDI), 2, 3, 4, 12, 13, 14, 15, 16,69-87,90-105,108 amount of, 69, 83, 91 by investment category, 4, 77 by investor, 78-9, 82, 90-2 by sector, 77, 92 changesneeded,85-6 determinants, 79-83, 95, 96-7 implementation, 83-5 incentives, 70-4, 76 jobs created, 12, 87 land ownership, 71

Index

licence obtained, 100 negotiating period, 97-9 policy, 70, 80-1 proportion of total investment, 12,83 risk monitoring, 102-:3 tax incentives, 71-5 technology transferred,

99-100 Vietnam/Indonesia comparisons, 70-4, 85 vulnerability of foreign firms, 105 foreign investment see foreign direct investment Foreign Investment Law, 69, 75, 76,78,95, 108,114 foreign lawyers, 108-13 conceptual difficulties, 108-9 institutional difficulties, 110-13 France, 78, 91 fruit, 10, 35 'functional' ministries, 45, 55,

117

per capita, 1, 13 services, 15 state and non-state share, 17 state sector output, 4 structure, 8-9 General Department of Investment and Development, 59 General System of Preference, 82 government and society conflict, 50-3 government finance budget deficits, 12, 16 current expenditure, 12 revenue, 10-11, 12 total expenditures, 12 Great Britain, 91 grievances, 52-3 procedures for handling, 60-2 see also arbitration grow~, 1,2-3, 7,8,82, 104 agricultural, 3 during reform, 7-8, 11

60

gas, 70, 75, 81, 95(fn) GDP in relation to: agriculture, 15 banking sector, 14 budget deficits, 12, 16 budgetrevenue,16 domestic credit, 12 domestic savings, 3, 16 exports, 12 grow~,2-3,7,8, 15 industry, 15 imports, 12

Ha Bac, 63 Hai Phong, 14, 78 Hanoi, 14, 51, 55, 60, 61, 78, 110 Ho Chi Minh City, 13, 14, 31, 32,55,60,61,78,96, 110 Hong Kong, 78, 79, 82, 90, 9Q(fn), 91 household registration procedures, 50 household responsibility contract system, 21, 22 Hungary, 8, 9,10

Index

I 18

import administrativ

see also unemployment; procedures,

60

sub titution, 8 1- 2, 84 tnriHs, 86 imports, 12, 32, 84 agricultural inputs, 3, 32, 37, fcrtili ·crs, 36, 39 mach in •ry, 37 pesticides, 32, 36, 39 in omc distribution, 19, lS-6, 37,40 in re mcntal capi tal-output ratio, 16 Indonesia, I, 70-4, 85, 90, 1 indus trial rops, 23, 24, 35 industrial sector, 9 production, 10 inflation, 1, 2, 3, &-7, 12, 14, 16, 27 during reform, 11 infra tructure, 12, 25, 39, 92. 96, 96(fn) input market, 32- 3 investment see domestic investment; foreign direct investment investors in Vietnam, 78, 82, 90-105 Japan, 44(fn), 78, 82, 83, 90, 90(fn), 91 joint ventures, 3, 25, 95, 101-2 reasons for, 101-2 Khanh Hoa, 78 Labour Code, 14 labour market, 29-31, 39, 86, 101

wage rates labour r · gulation~. 84 Land Law, 3, 14, 17, 21, 22(fn), 28, 29, 39, 50, 61, 7"1, n(fn) l.1nd management co li c tiv~tion, 25, 29 on."'Crvation, 25, 29 de ollcctivi.sation, 26 l;md usc, 2. 4, 23. 24, 26. 27 rights. 3, 23, 28, 29, 71(fn), 83-4 transfer of, 3-4, 21, 28. 39, 50-1, 71(fn) land values, 28, 29 Law for Environmental Prott.-ction, 61 Lnv on Administrative Tribunals, 15 I,HVS, 1, 47, 61, 95, 102-3, 104, 107- 14 administration of, 1- 2, 3, 47, 11 0- 13 local government/ administration, 55, 57, 58, 58(fn), 59, 59(fn) property rights, 1, 2, 3, 4, 23, 28, 29, 71(fn), 83-4 rights of citizens to protest, 52(fn) lawyers see foreign lawyers legal reforms, 4, 14, 110 legal system see laws; legal reforms letters of criticism see protests 'line' ministries, 45, 55, 57 living standards, 13, 39 see also income distribution

Index

local government, 44,57-9 macroeconomic reforms, 1, 2, 6-8, 14 maize, 24, 35 Malaysia, 44(fn), 74, 78, 90, 90(fn), 91 manufacturing industries, 31 , 39, 75,76,92 market economy, 2, 6, 15, 46, 103, 109 marketing state involvement, 38 meat, 10 Mekong River Delta, 25, 26-40 microeconomic reforms, 1, 2-3, 21-40 minerals, 81, 92 mining resources su minerals Minister for the Interior, 49 Minister of Construction, 49 Minister of Water Resources, 49 Ministry of Agriculture and Food Industry (MAFI), 36 Ministry of Culture and Information, 60 Ministry of Energy, 56 Ministry of Finance, 45, 55, 59-{,() Ministry of Health, 60 Min is try of Justice, 111, 112, 113

Ministry of Labour, 45 Ministry of Planning and Investment, 15 Ministry of Science and Technology, 55 Ministry of Trade (MOT), 36, 37, 112

119

monopolies see state monopolies motor vehicle industry, 82 National Assembly, 42, 60, 61, 111 National Centre for Directing Electricity, 56 National Integrated Rural Development Program, 28 natural resources, 81 Netherlands, 91 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, 113 non-state enterprises s~~ private businesses OECD, 96(fn) Office of Popular Aspirations, 49 Office of State Inspection, 52, 61 oil, 70, 75, 81, 95(fn) s~~ also petroleum Ordinance on Recognition and Enforcement in Vietnam of Foreign Arbitral Awards, 113 overseas development assistance (ODA), 12, 13, 15, 16 Pakistan, 81, 84 People's Committees, 4, 28, 39, 49,55,57-8,59,61,62,83 People's Councils, 55, 57, 58, 59 People's Courts, 42, 60, 96 People's Prosecution Office, 60

120

petitions see grievances Petitions Law, 61 petroleum and energy sector, 92 see also electricity; oil PetroVietnam, 95 Philippines, 74 Phuoc Thoi, 26, 28,29 plant protection, 32 Poland, 8, 9, 10 police, 51 political leadership, 2 political reform, 42-64 population, 16, 81 poverty, 13, 16 Presidency, 42 Prime Minister, 36, 42, 49, 50, 56, 111 private businesses, 4. 12, 17, 18,32,38,98,107 capitalisation, 96 private traders see private businesses productivity, 17, 23, 26, 29, 35 property rights see Land Law; land use protectionism, 84 protests, 52-3 procedures for handling, 60-2 provinces, 2 public administration reforms, 4-5, 14,42-64, 110-11 administrative procedures, 59-62 guidelines, 53-4 public savings, 12 public service, definition of, 109

Index

see also bureaucracy, workings of; civil service; public administration reforms Quangnam, 14 Quangninh, 14 Red River Delta, 23, 27-40 regulation crop choice, 24 research and development (R&D), 75 rice, 8, 21, 23, 24, 30, 33, 34, 35, 38 export price, 37 rice-farming costs, 32 irrigated, 34, 35 land, 23, 24, 28 risk monitoring, 102-3 Romania, 10 rubber, 24 rural banks, 34 rural investment, 4, 28-9 rural-urban migration, 3, 31, 39 Russia, 10 see also Soviet Union services sector, 9, 92 Singapore, 74, 79, 82, 90(fn) Sixth National Party Congress, 45-6 smuggling,l8,38,86 socialism, 43 society and conflict with government, 50-3 Song Be, 14 South Korea, 78, 79, 82, 90, 90(fn)

Index

Soviet Union (former), 7, 8, 9 see also Russia Sri Lanka, 81 state administration reforms see public administration reforms State Bank, 33, 56 state bonds, 17 State Committee for Cooperation and Investment (SCCI), 83, 86, 90, 99 state institutions reform, 43-64 political implications, 63-4 see also state-owned enterprises state monopolies, 2, 3, 18 State Planning Commission, 36 state, role of, 4, 18 state-owned enterprises (SOEs), 3, 12, 14, 17, 18, 32, 32, 37, 38, 39, 45, 46, 55, 75, 76 reorganisation of, 55--6 surveys agricultural census, 39 Australian investors, 90-105 businesses operating in Ho Chi Minh City, 96 civil servant training needs,63 foreign investment dealings,83 income distribution, 35--6 rural land market, 28 Switzerland, 78 Taiwan, 78, 79, 82, 90, 90(fn)

121

Tan Quy Group, 32 tariff reform, 86 tax evasion, 28, 50 exemptions, 60 incentives for foreign investment, 14,71-5 reform, 10 Taxation Law, 61 taxes land transfer, 28, 39 land use,24 telecommunications, 17,92 Ten Giang, 38 Thailand, 1, 74, 90 Total, 78 tourist industry, 81 Trading with the Enemy Act, 95 transaction cost economics, 92-4 Ukraine, 10 UNDP Human Development Index, 1 unemployment, 13, 16 Union of Coal Enterprises of Vietnam, 56 Union of Electricity Enterprises of Vietnam, 56 United States, 1, 78, 79, 82, 90(fn), 95, 96(fn) urea,33,34 vegetables, 10, 23, 24, 35 Vietnam Bank of Agriculture, 33 Vietnam Chamber of Commerce and Industry, 111 Vietnam Economic Research Project Workshop, x, xiii, 1

Index

122

Vietnam International Arbitration Centre, 111 Vietnam Update Conference, ix-x, xiii, 1 Vietnam War, 96(fn) Vietnamese Communist Party (VCP), 42, 43, 45, 46, 53, 54, 64,94 Vinafood, 25

Vung Tau, 14 wage rates, 30, 39, 82, 84, 86 see also labour market Washington Convention on Settlement of Investment Disputes, 114 World Bank, 85

THE EDITOR Suiwah Leung's areas of specialisation are open economy macroeconomics and international finance. She is Director of Graduate Studies in Economics of Development at the National Centre for Development Studies at the Australian National University (ANU}, and Convenor of the Vietnam Economic Research Project.