Economic reforms of Doi Moi
In 1986, the Vietnamese government initiated an economic reform process called Doi Moi. Prior to this time, the central planned economy followed a Soviet model where a central bureaucracy decided the allocation of resources according to national priority. International trade was managed through agreements with foreign governments, the overall level of trade was low and Vietnam was closed to foreign investors. The reforms consisted of six major economic policy changes: 1. The decentralization of state economic management, which allowed state industries some local autonomy.
The replacement of administrative measures by economic ones, including a market oriented monetary policy, which help to control inflation 3. Adoption of an outward orientated policy in external economic relations, exchange rates and interest rates were allowed to respond to the market 4. Agricultural policies that allowed for long term land use rights and greater freedom to buy inputs and market products 5. Reliance on the private sector as an engine of economic growth 6. Letting state and privately owned industries deal directly with the foreign market for both import and export purposes
Doi Moi became a milestone for Vietnam’s political and economical development. The government decided to implement an export-led, market-based economy and to turn away from the existing Stalinist economic system, with its strong focus on development of heavy industry and total collectivization of agriculture. Having China’ successful market-oriented from 1978 in mind, Vietnam quickly inaugurated its own structure for a market economy, of which the foreign direct investment law of 9 December 1987 was the primary cornerstone of the legal framework towards this development.
The FDI legislation turned out to be highly progressive and served to attract new investments and provide international market access for Vietnam’s export-led development. Vietnam has succeeded in integrating with the global economy. Many of its market-based economic policies and supporting legal frameworks are in place, and Vietnam became a member of the World Trade Organization (WTO) in January 2007. The pace of the political transformation process has however been limited as the country’s political power still remains in the hands of a single political party, the communist party of Vietnam.
1. 2 Vietnam’ integration with the world economy Before Doi Moi, Vietnam’s international trade was restricted to commodity exchange programs with other Socialist countries. In the economic reform, international trade was fundamental for Vietnam’s economy and the country implemented trade liberalizing measures including reductions in order to reduce import and export restrictions. 1. 3 Overview of Vietnam economy year 2009 Despite the weak external environment, the economy has continued expanding this year, albeit at a slower rate, GDP grew by 3.
9% in the first half of 2009, as against 6. 2% in 2008 and more than 8% in 2005-2007. Figure 1. GDP growth by sector in 2005-2009 Source: General Statistic Office of Vietnam Expansionary fiscal and monetary policies boosted public consumption and domestically financed investment. Imports fell more steeply than exports, so the net exports contributed to GDP growth. At the same time, a rise in unemployment and fall in remittance inflows damped growth of private consumption, and a downturn in inflows of foreign direct investment(FDI) caused a declined in foreign-financed investment.
Vietnam’s economic slowdown appears to have bottomed out early in 2009, with year-on-year GDP growth quickening to an estimated 4. 5% in the second quarter from 3. 1% in the first. Growth of agriculture pulled back sharply in the first quarter because of bad weather, but rebounded in the second quarter, aided by a bountiful winter-spring rice harvest. Manufacturing, which is contracted in the first quarter on account of weak external demand, started growing again in the second, as expansionary monetary and fiscal policies sthenghen domestic demand.
Growth of services and construction accelerated in the second quarter owing to a pickup in private consumption and domestically financed investment. Following several years of decline, output of crude oil grew by 17. 9% in the first half of 2009. Falling output at some old fields was more than offset by increases at new fields. Figure 2. Crude oil output in 2005-2009 Source : GSO Vietnam A softening in the labor market that started in late 2008 continued in early 2009, as economic activity slowed and businesses shed labor.
Although most layoffs occurred in urban areas, unemployment and underemployment increased in both urban and rural areas, as some of those from villages who had lost their jobs in cities returned home. Declines in remittance receipts and wages pushed some households into poverty. Toward mid-2009, however, demand for labor appeared to pick up again. Inflation has decelerated sharply owing to lower world commodity prices and relatively slows domestic economic growth. Period-average inflation eased to 8. 3% in January-August 2009 from 23% in 2008. Year-on-year inflation fell to 2% in august 2009 from 28.
3% in August 2008. Figure 3. Inflation in 2008-2009 Source : GSO However, inflation pressures reemerged in the second quarter as commodity prices edged up and growth accelerated. Seasonally adjusted month-on-month inflation rose to 0. 8% in the June-July period, a fairly high rate given that world commodity prices were well below their peaks. To stimulate economic activity and limit the rise in unemployment, the State Bank of Vietnam (SBV), the central bank, eased monetary policy significantly in late 2008 and early 2009 and has kept it relatively loose since then.
Year-on-Year growth of reserve money quickened from 13. 7% in the third quarter of 2008 to 26. 7% in the first quarter of 2009, before a decline in SBV’s foreign assets pulled it back to 21. 2% in the second quarter. Figure 4. Growth of money and banking indicator in 2007-2009 Source : State bank of Vietnam Spurred by the introduction of government interest rate subsidies, growth of credit and money supply accelerated in the first half of 2009, in particular, growth of total liquidity stepped up to 35. 5% in the second quarter from 20.
3% in the fourth quarter of 2008. Since the easing of monetary policy was not enough to prevent a sharp slowdown in growth, the Government approved several fiscal stimulus measures in the first half of 2009. They include a temporary 30% cut in the corporate tax rate for small and medium size enterprises, additional financial assistance to poor households, a 4% point interest rate subsidy on certain bank loans, and a boost in planned infrastructure spending. The total cost of these measures is estimated at VND 145.
6 trillion was launched in March 2009. The tax break, coupled with a fall in oil income caused by lower world oil prices, reduced budget revenue and grants in the first half of 2009. Budget expenditure decreased as well, because the fiscal stimulus mainly increased off-budget spending and lending. The budget fell into deficit, from a surplus a year earlier. The overall fiscal deficit was likely much larger than the budget deficit. Figure 5. Government finance in 2005-2009 Source: Ministry of finance and GSO
SBV has kept its reference foreign-exchange rate fairly stable since December 2008. Declines in exports as well as in remittance and foreign capital inflows have reduced the supply of foreign exchange, while expansionary monetary and fiscal policies have increased demand for it. Figure 6. Exchange rates in 2007-2009 Source : State bank of Vietnam Prospects Forecasts of 2010’s outcomes are based on the assumption that the government will not adopt additional fiscal stimulus measures next year and that SBV will pursue moderately tight monetary policy.
It is further assumed that SBV will eliminate the shortage of foreign exchange through greater flexibility of its reference rate, tighter monetary policy in 2010 is maintained at 15. 5 million metric tons, an easing from this year’s level. On this basis, GDP growth is forecasted to increase to 6. 5% n 2010, in line with the ADO 2009 projection. Growth of consumption and domestically financed investment will speed up as the 2009 monetary and fiscal stimuli work through the economy. Figure 7. Growth and inflation in 2005-2010 Source : Asian development outlook database
2. FDI in Vietnam 2. 1 Introduction to FDI in Vietnam Vietnam’s National Assembly passed the first law of Foreign Investment in Vietnam on 29 December 1987 and has since then amended it several times. The law includes general regulations for establishing and operating a foreign invested company in Vietnam. Since the 1987 law, FDI inflow to Vietnam has increased considerably and accounted for a large part of total capital inflows. However, the FDI growth was rapidly interrupted after 1996 and new investments fell by almost 50% the following year.
There have been different explanations for the downturn in FDI inflows to Vietnam during this time. One is that the East Asian crises played a part since the major proportion of FDI in the beginning of the 1990s came from East Asia countries. Another is that the beginning of the downward trend in FDI was already apparent before the East Asian crises hit the country, which according to some was because of a slow-down in the economic reform process in Vietnam in the mid-1990s. Affected by the downturn of global economy, FDI in 2009 dropped dramatically compared to 2008, but still second highest year on record.
The total resisted FDI capital in 2009 is US$21. 48 billion, in which implemented FDI capital account for US$10 billion and dropped less than 15%. Figure 8. FDI in 1997-2009 Source : State Bank of Vietnam and Ministry of Investment and Planning 2. 2 Different types of FDI Four different types of FDI are recognized by the law in Vietnam. 100% foreign owned firms, joint ventures, business cooperation contracts (BCC) and build-operate-transfer (BOT), build-transfer-operation (BTO), BT (build-transfer) and mother-son Company.
of which the first two accounts for the greater share of FDI in Vietnam, are 62% and 31% in 2009, respectively. Figure 9. FDI by type of investment as of October 2009 Source : MPI During the past two decades, there have been major shifts in the destination of FDI by sector. Between 1988 and 1992, oil, gas and real estate accounted for more than 50% of FDI inflows to Vietnam while the inflows from the manufacturing/processing sector were relatively low, about 15%. However, the share of manufacturing has increased considerably over time.
From the mid-1990s and onwards, more than 40% of FDI inflows has gone to manufacturing industries, construction of infrastructure and sectors that produce for export while the share of oil, gas and real estate has fallen to approximately a quarter of total FDI inflows. In 2009, the new licensed projects of processing industries and researching services account for the greater share of FDI in Vietnam. Figure 10. FDI by industrial classification as of October 2009 Source : Ministry of Planning and Investment 2. 3 Geographic location of FDI
FDI are not located geographically evenly thoroughly Vietnam. FDI is concentrated to some key industrial area in the south and the north of Vietnam. Such areas are for example Ho Chi Minh city, Hanoi, Ba ria-Vung Tau, Dong Nai and Binh Duong. The explanation for the concentration of projects to these particular areas is mainly the greater existence of developed infrastructure and skilled labor. Ho Chi Minh City and Ba ria Vung Tau account for the greater share of total registered capital in Vietnam, are 15% and 13. 5%, respectively. Figure 11. FDI by geographic classification in 2009
Among the investor countries in Vietnam, US firms accounted for 37 per cent of foreign investment in Vietnam through August. In the same period of 2008, US investment amounted to 3 per cent of Vietnam’s total of 46. 3 billion dollars. US investment has concentrated on the service sector, especially the hotel and tourism industry.
Traditionally the largest foreign investors in Vietnam have been South Korea, Taiwan, Malaysia, Japan and Singapore with the United States lagging far behind. In the latest figures, Taiwan ranked second in new investment with 1. 35 billion dollars, followed by South Korea in third with 1. 2 billion dollars. Vietnam has attracted 10. 5 billion dollars in new foreign investment in 2009, down 73 per cent compared with the same period in 2008. Asian investors still have the most total registered foreign investments in Vietnam. As of August 19, Taiwan was the top investor with projects worth 21. 2 billion dollars, followed by South Korea at 20. 1 billion dollars. Figure 12. Top 10 investors in 2009 Source : MPI 2. 4 Positive impacts of FDI in Vietnam FDI inflows have helped to modernize management and corporate governance in Vietnam and to train a new young workforce.
About 300 000 workers have been trained or retrained, and 25000 technicians and 6000 managers have been trained, partly abroad. Furthermore, various studies show that FDI has an important role in raising living standards of workers through higher average wages than in domestic sector. The FDI inflows in Vietnam have had an important impact on the Vietnamese economy, especially in providing important financial resources that have represented a fundamental share of total investment, financing the fast economic growth that Vietnam has experienced the past 15 years, and providing market access for the country’s increasing exports.
FDI has contributed to the development of the domestic sector indirectly through increased incomes, expenditures, thus increased demand for domestic goods, and directly thorough increased competition, giving domestic firms incentives to invest more and produce more efficiently and introducing new technologies and skills. 3. Conclusion Vietnam plays an increasingly important role in the world economy and its recent membership in the WTO has opened up new doors for the country as an operator in the global market.
Political and social stability is strength of Vietnam. However, there are still some disadvantages to attract more FDI inflows into Vietnam: 1. High costs of doing business are the first disadvantage for the foreign investor. JETTRO of Japan has regularly published comparison of business costs among regional countries and the cost on international telephone calls, internet fees and seaports are exorbitant. And the comparison shows these business costs are relatively high in Vietnam. 2.
Weak infrastructure is the second disadvantage. The power, clean water supply, internet connection, transportation infrastructure are one of the top priorities. 3. Lack of transparency in legal system is the third disadvantage. Post-licensing procedures especially on land clearing, foreign exchange, tax and customs must be simplified tangibly. Business information has to be provided; transparency, accountability and predictability of the public administration must be improved rapidly
4. Well-trained work labors should be increased more. 4. References Asian development bank (ADB), 2009. Economic transition in Vietnam. Consultant’ reports. Quynh P. , Nguyen H. and Bui T. , 2009. A study of trade, foreign direct investment and labor in Vietnam. Prepared by Mekong economics, Hanoi, October 2009. Vietnam FDI statistic. http://www. vietpartners. com/statistic-fdi. htm Vietnam MPI. http://www. mpi. gov. vn Vietnam General statistic office. http://www. gso. gov. vn