During the past years, Vietnam economy has made a number of significant achievements. Since the beginning of the cause of renovation (Doi Moi) initiated by the Communist Party, the country’s state has changed
substantially compared to the period of pre-renovation. The economy has recorded high growth rates for several years in a row. People’s living standards have been considerably improved. Since the market opening-up, the number of foreign investors rushing to Vietnam has risen surprisingly, resulting in a huge increase in Foreign Direct Investment (FDI). In 2006, Vietnam has successfully fulfilled and exceeded almost all development targets set by the National Assembly. The economic growth rate is 8.17%; that of industry is 17%; the service sector has posted a high development rate, especially retail industry; high export value has been maintained, reaching $ 39.6 billion; there has been a reduction in trade deficit in terms of net value and proportion of import and export. FDI and ODA attraction remains strong. Vietnam’s accession to WTO and hosting of APEC demonstrate successful diplomatic and economic activities. The approval of the Permanent Normal Trade Relation by the US Congress is an evidence of Vietnam’s increasing importance in the world stage.
The development of Vietnam’s Stock Exchange with its vibrant activities in recent months is also a positive sign to some extent. All of those accomplishments prove that the country is initially integrating into the world economy successfully. However, Vietnam’s continuous high growth rates for many years raise a question over the viability of the development. Could the economy maintain such a vigorous development in the coming years ? Or heating development will be followed by a severe collapse due to implicit problems ? This document is to be divided into three sections to discuss the economic issues of Vietnam economy in the stage of integration and globalization.
– Part 1: Vietnam economy at a glance.
– Part 2: Vietnam economic issues assessment.
– Part 3: Solutions to the issues.
TABLE OF CONTENT
A. OVERVIEW OF VIETNAM ECONOMY OVER THE PAST YEARS. 3
1. Domestic policy. 3
2. Foreign trade and international economic integration: 5
3. Foreign Direct Investment: 6
B. ASSESSMENT OF VIETNAM ECONOMIC ISSUES IN THE NEW STAGE. 7
1. Corruption and bureaucracy. 7
2. Economic structure. 10
a. By sectors. 10
b. By ownership ( Equitization process ). 11
3. Human resources 13
4. Environment. 14
a. Natural Environment. 14
b. Business Environment. 16
5. Income disparity. 18
C. SOLUTIONS 19
1. Corruption and business environment. 19
2. Economic structure. 20
a. By sectors. 20
b. By ownership 21
3. Human resources. 22
4. Natural Environment. 22
5. Income disparity. 23
A. OVERVIEW OF VIETNAM ECONOMY OVER THE PAST YEARS.
1. Domestic policy.
Viet Nam embarked on the Doi Moi policy in 1986. Since then, the country has seen dramatic changes, first and foremost in the economic thinking. The centrally-planned economy was replaced by the socialist-oriented market economy; national industrialization and modernization were initiated together with the policy of multilateralization and diversification of external economic relations, opening-up and international integration.
The 1987 Foreign Investment Law was the first legal document that helped form the legal framework for the Vietnamese market economy. In 1991, the Private Enterprise Law and Corporate Law were introduced. The amended 1992 Constitution affirmed the existence and development of a multi-sector economy under a market mechanism, including the foreign-invested sector. This was followed by the promulgation of a number of laws essential for the formation of the market economy, including Land Law, Tax Law, Bankruptcy Law, Environment Law, and Labour Code etc. Hundreds of ordinances and decrees were enacted by the Government to guide the implementation of these laws, which help ensure national socio-economic development.
Along with the law-making process, market economy institutions have also been established. Government policy advocates the elimination the central planning mechanism, the emphasis on monetary – market relations, the focus on economic management measures and the establishment of a wide range of financial institutions, banks and basic markets for money, labour, goods and land, etc. The administrative reform was also promoted by the authorities.
Overall, tremendous economic reforms taking place over nearly two decades of Doi Moi have yielded encouraging results. External economic relations have been expanded and the flow of foreign direct investment has increased. Export of goods and labour, tourism industry and remittances from overseas Vietnamese have been strongly promoted to generate increasing foreign earnings for Vietnam.
During 20 years of Doi Moi, GDP of Vietnam saw a sustained growth, which stood at 8.2% in 1991-1995 as compared to 3.9% in 1986-1990. This rate dropped to 7.5% in 1996-2000 due to the impacts of the Asian financial crisis. Since 2001, GDP growth recovered on a year-on-year basis, reaching 6.9%, 7%, 7.3% and 7.7% for 2001, 2002, 2003 and 2004 respectively. The figure for 2005 was 8.4%. Vietnam has now succeeded in gradually replacing the centrally-planned economy, bureaucracy and a subsidy mechanism by a socialist-oriented market economy with growing dynamism. The GDP growth rate of 7 to 8% has been sustained, along with stronger industrialization and expanded integration with the world and regional economy. Vietnam has enjoyed a sharp rise in trade volume, especially exports, and an increase of foreign investment and income.
The ratio of the industry and construction rose from 38.13% in 2001 to 41.03% in 2005; the service from 36.63% up to 38.08%; and only the agriculture, forestry and fishery from 23.24% to respectively.
The economic structure has also witnessed significant changes. From 1990 to 2005, the contribution of agriculture sector dropped from 38.7% to 20.89% , while that of the industry and construction was up from 22.7% to 41.03% . The service sector relatively stabilized, 38.6% in 1990 and 38.08% in 2005. In each sector, the structure has also positively shifted. The agriculture sector has seen a decline in the role of agriculture and forestry from 84.4% to 77.7% during the period 1990-2003, while fishery gained a higher share. In the industrial sector, the proportion of the processing industry was up from 12.3% in 1990 to 20.8% in 2003 with improved product quality. In the service sector, the share of high-quality services such as finance, banking, insurance and tourism, etc. is increasing rapidly.
Upon the amendment of the Enterprise Law in 2000, private businesses have enjoyed strong encouragement for development. This Law institutionalized the freedom of all individuals to do business in areas not prohibited by law. In the 2000-2004 period, 73,000 private enterprises were registered, up by 3.75 times against the period of 1991-1999. By 2004, the total number of private enterprises operating under the Enterprise Law amounted to 150,000 with the total capital of VND 182 billion. From 1991 to 2003, the private sector’s share in GDP was up from 3.1% to 4.1%; other non-state sectors increased from 4.4% to 4.5%; and foreign-invested sector from 6.4% to 14%; and the household sector was down from 35.9% to 31.2%.
As the multi-sector economy has further developed, the proportion of SOEs (State Owned Enterprises) in GDP decreased from 40.1% in 1991 to 38.3% in 2003. The collective sector dropped from 10.2% to 7.9% during the same period. In 2002 and 2003, 1,655 SOEs were listed for reorganization and reform. The figure for 2004 and 2005 were 882 and 413 respectively.
Economic growth is combined with the improvement of life quality and development of health care and education. The Human Development Index of Vietnam increased from 0.583 in 1994 with a rank of 120/174 to 108/177 in 2005. The average life expectancy was raised from around 50 in the 1960s to 70.5 at present. The poor household ratio dropped from 70% in 1980 to below 7% in 2005s.
2. Foreign trade and international economic integration:
With the policy of openness and industrializtion, the country has been expoiting its inherent advatages such as abundant natural resources, low labour cost and so on, which generate an increasing flow of foreign income. Over the years of the Doi Moi process, Vietnam’s export growth has averaged 20%. From around US$ half a million before the introduction of the Doi Moi policy, the total export volume of Vietnam reached US$ 26 billion in 2004 and US$32.23 billion in 2005.
The structure of exports has also seen a positive change. During the 1991-1995 period, major exports of Vietnam were crude oil, fishery products, rice, textiles, coffee, forestry products, rubber, peanut and cashew nuts. By 2005, apart from crude oil, textiles, rice and coffee, Vietnam was mainly exporting garment and textile, footwear, seafood, woodwork, electronics appliances, and rice. This structure reflects an increase in processing and manufactured products and a decline in unprocessed products, including agricultural, fishery, forestry products and minerals.
The policy of “multilateralization and diversification” of international relations has helped Vietnam integrate more deeply into the world and regional economy. Before 1990, Vietnam had trade relations with only 40 partners. Now with the foreign policy of openness, which is to be friend and cooperate with all countries in the world on the basis of equality and mutual benefit, Vietnam has established diplomatic relations with 167 countries, and has signed multilateral and bilateral trade agreements with over 80 nations. The country has been granted MFN (Most Favored Nation) status by more than 70 countries and territories, including countries and regions with large capital resources, high technologies and vast markets, such as the United States, Japan, the EU and newly industrialized countries in East Asia.
Following the introduction of Doi Moi, Vietnam signed an economic and trade cooperation agreement with the EU in 1992, joined ASEAN in 1995, AFTA in 1996 and APEC in 1998. Vietnam also signed the Bilateral Trade Agreement with the United States in 2000. Vietnam started negotiations for WTO accession in 1995 and has just got the full membership of this organization by the end of 2006.
3. Foreign Direct Investment:
In December 1987, the Foreign Direct Investment Law of Vietnam was introduced to help form the basic legal framework for foreign investment activities in Vietnam. To better respond to business requirements and feedback from foreign investors, this Law was amended and supplemented several times, notably in 1996 and 2002, which created a more open and attractive environment to draw foreign investors into crucial industries such as export-oriented processing and manufacturing, and key economic zones of the country.
In recent years and especially in 2005, the Vietnamese Government made a number of adjustments and conducted reforms to create more incentives for foreign investors. They are now supported in tackling business obstacles. The Law on Personal Income Tax has been amended in favour of the tax payers. The one-stop-shop policy has been promoted, telecommunication tariffs lowered to gain competitiveness over other countries in the region. Infrastructure has been improved. More areas, including those previously closed to foreign investors, such as telecommunication, insurance and supermarkets, etc. are now open to investment. As such, Vietnam has become an attractive destination for foreign investment.
The above measures resulted in recovery and rapid increase of the FDI inflows in 2005. The sharp rise of FDI is also attributed to political, economic and security stability, high economic growth rate, continuation of economic reform in accordance with market economy principles, improved living standards leading to higher domestic demand, greater international integration and the emergence in the international market of Vietnamese trademarks and Vietnam’s growing reputation.
Over the past years, Vietnam has drawn increasing inflows of FDI. From a negligible figure of 1986, FDI into Vietnam reached US$ 3.2 billion in 1997. Due to the negative impacts of the 1997 Asian financial crisis, the FDI flow then saw a drop during 1998-2000 period, with only US$ 1.58 billion in 1999. In the past few years, Vietnam has enjoyed a recovery of FDI, from US$ 2.6 billion in 2001 to US$ 4.1 billion in 2004. FDI not only generates profits for foreign investors but also represents a significant capital source which comes along with technology transfer as well as advanced managerial and professional skills
B. ASSESSMENT OF VIETNAM ECONOMIC ISSUES IN THE NEW STAGE.
Although Vietnam has seen a surge in economic development for many years, the economy still contains a number of potential unstable factors which, if not resolved in time, could lead to serious consequences in terms of not only economy but also society.
Within the scope of this essay, only some prominent points are to be made as follows. ( Due to the seriousness of corruption, this issue is stripped from the investment climate one )
1. Corruption and bureaucracy.
Corruption is generally viewed as a serious problem in Vietnam. This view is shared by senior government and party officials, local and international business leaders, citizens and donors. Corruption is thought to play a significant role in the waste and inefficiency that characterize public expenditure in this still nascent transition economy. Such inefficiencies are in many cases a legacy of the former centrally planned economic system practiced prior to 1986. Centralized state management is still the norm throughout much of the economy and state owned enterprises still dominate commercial activity. Laws and regulations are often ambiguous, criminal and civil law are not separated, and considerable authority for the interpretation of laws rests with designated authorities. Both domestic and foreign businesses find that the complex and detailed nature ofpermit requirements, the opaque nature of decision-making, and the prevalent need to pay commissions and “give envelopes” are barriers to doing business. Paying commissions to influence company and administrative decisions is thought to be commonplace, including in tendering processes.
Many foreign businesses which were attracted by the early reforms of the Doi Moi period (perhaps unrealistically) have now become disillusioned and are reassessing their presence in Vietnam, citing corruption and an unpredictable business environment as majorfactors. The Global Competitiveness Survey found that unclear procedures, lack of public information, bureaucratic discretion on the part of middle-level officials, and long delays were the factors which caused Vietnam to be viewed by the private sector as near last in competitiveness compared to other countries. Similarly, Transparency International ranks Vietnam as 111th in its list of 163 countries.
A number of recurrent problems in the operation of the National Integrity System (NIS) can be observed across nearly all pillars. These include the following:
* The government has a generally piecemeal approach to tackling corruption. Where government plans or strategies exist, it is not clear that they are being pursued systematically from one institution to the next. Moreover, few institutions featured in the NIS are adopting a systematic approach to tackling corruption in their own ranks even if they are tasked with fighting corruption elsewhere.
* Whether corruption is uncovered, investigated or prosecuted – and whether it is not – is often politically motivated. That is, the politically powerful are able to escape investigation and prosecution, while allegations of corruption are often used to fight political battles. The Communist Party and government have pledged to root out corruption regardless of who is involved, but few believe that this is what happens in practice.
* Institutional rivalry and jurisdictional disputes are considerable between institutions tasked with the fight against corruption. The 2005 Anti-Corruption Law allows for the creation of a National Anti-Corruption Steering Committee under the prime minister, but it remains to be seen how successful it will be in coordinating the different organisations involved in the fight against corruption.
* Nepotism is commonplace across all state institutions involved in the NIS despite the formal existence of merit-based appointment systems. Codes of conduct, where they exist, are poorly enforced. This is especially the case where they deal with conflicts of interest. Access to off-the-books funds is the norm.
* Despite a relatively strong tradition of public consultation through mass organisations, consultation is actually quite formalistic and narrowly based. State institutions are more at home with secrecy than openness.
* While internal and public complaint mechanisms exist, there is a general reluctance to use them for fear of the potential repercussions for the people who complain. There has been a small increase in formal citizen complaints directed at lower-level public officials, but the increase is marginal. Anonymity or protection for whistleblowers cannot be guaranteed.
There is a sense in which the media, civil society and international organisations are potentially pushing in the same direction in terms of an increased willingness to focus on corruption and a greater commitment to government transparency. However, there is no clear alliance between them, and the role of civil society – because it is still weak – is relatively piecemeal and uncoordinated in terms of the fight against corruption. There is a wide gap between the formal rules governing the NIS and actual practices on the ground. This is commonplace across all areas of political, economic and social life in Vietnam. The reasons for the disagreements in relation to corruption have to do with the fact that political power often operates outside the law, that nepotism is widespread and that officials can be bribed relatively easily. Overlapping jurisdictions, unclear rules and weak state capacity are part of the problem, but there is a sense in which these problems are secondary to the political and attitudinal problems cited above.
The government’s existing anti-corruption strategy as reflected in the new Anti-Corruption Law is highly ambitious. Even to make limited progress in implementing the law would be for the state to significantly up its game in the fight against corruption. However, given the way in which the NIS is currently operating, it is likely to be some years before the Anti-Corruption Law is properly enforced. In the meantime, what is actually happening on the ground in terms of anti-corruption activities is much more limited but is what one would expect given the real nature of the NIS.
Clearly, corruption has really become an evil which has it root deeply grafted in the society. Not only does this evil cause troubles for people in their daily lives but it also sets up obstacles for foreign investors. Just imagine that a Korean investor spent years trying to get his investment license approved but still failed. Some donors, including Sweden, Denmark and ADB, have had to bring in specialist consultants to guide them on the most strategic interventions. The World Bank even published a handbook guiding investors to cope with this fact in Vietnam. In short, maybe it is a long-lasting and daunting task, Vietnam still has to have determination to radically eradicate the evil in the new stage of integration. Otherwise, who knows ? Perhaps Vietnam economy could be hollowed to the point of a collapse.
2. Economic structure.
a. By sectors.
In the economy structure, agriculture sector represents a major proportion. The sector employs more than a half of Vietnam’s labor force and contributes nearly one fourth of the country’s GDP and a third of exports earnings.
Despite the progress made in agricultural production and export growth, and in liberalizing commodity, land, and credit markets in recent years, rural poverty remains high (estimated at 45%), and the role of the private sector in marketing remains small. Growth in the past was the result of (i) reliance on higher input use (labor, land, fertilizer, tractors, and irrigation); (ii) policy reforms in land, markets, and trade; and (iii) high public investment, mainly in the forms of irrigation and roads. It is unlikely, however, that this strategy will be able to sustain growth in the future because (i) the potential for expansion of the rural labor force and land under cultivation is limited; (ii) new investment in irrigation exhibits decreasing marginal returns, as the stock of irrigation capital is already very high and requires increased operation and maintenance expenditure rather than new expansion; and (iii) rice export revenues are declining. Major agricultural exports of the country are generally unprocessed or semi-processed materials and low-quality produce with trivial value added. Future agricultural growth will have to come from the increasing demand for high value and value-added products. This will require a new policy environment with greater diversification of crops and value addition through processing, and shifting the focus from production volume to value. Policy reforms that promote competition, diversification, and more effective use of science and technology are required. Some of the major factors contributing to low agricultural diversification include (i) low investment in and poor effectiveness of research and extension, (ii) limited access to high quality genetic material, and (iii) limited access to financial services and market information.
Although Vietnam has recently tried a lot to reduce the ratio of agriculture in the economy, the sector still accounts for quite a large part at 20.1% ( 2006 est.), employs as much as 56.8% labor force and will continue to be at the core of the economy in the next decade. Therefore, intensification and diversification to enhance the competitiveness of the industry has become a pressing task in the new stage of integration.
Besides, other industries of the country are of relatively weak competitiveness with restraints in terms of technology and quality as well. Many of the must rely on unstable factors with low value added. In 2006, Vietnam’s steel industry must import as much as 70 percent of steel ingot. Meanwhile, steel ingot accounts for the major part in the value of steel. Other industries are in the same condition as well. They must import most of their semi-processed or processed production materials abroad at a high price while export their products into other countries with quite low value-added. As depending to much on the world’s market, they’re easily affected by negative changes. That’s not to mention the fact that due to obsolete technologies, their products could hardly compete with others from developed countries in some highly profitable industries. In addition, Vietnam products usually have difficulties with non-tariff barriers in these areas, for example, hygiene standard, products quality or safety, etc…In short, to successfully penetrating the markets of that kind is a fearful obstacles to Vietnam’s economic sectors.
However, that is the inevitable trend of the economy that Vietnam must take. If the country want to survive to further develop, it has to overcome all of these barriers to integrate into the world’s economy, accepting its rules and regulations. Otherwise, it is not difficult to predict where the economy would head for.
b. By ownership ( Equitization process ).
Although the equitization program has been successful in transforming a large number of SOEs into more efficient enterprises, there are still many shortcomings. The pace of equitization has been slow. By early 2005, only 80% of the government target has been met; total capital of equitized SOEs accounts for only 8.2% of total state-owned capital in the economy. The remaining 92% of state-owned capital is still held by state general corporations ( SGCs 90 and 91 ) and other large SOEs that yield significant monopoly power. Furthermore, equitization process has lacked transparency and benefited political elites (i.e., government and insiders hold large chunks of the equitized firms). As a result, equitization has failed to attract investment from domestic investors and improve the management structure of equitized enterprises. There is also anecdotal evidence that public assets in equitized firms are quietly and legally transferred to private ownership because of internal and underpriced equitization.
It is reported that in 12 years of equitization (1992-2004), the total investment raised from nonstate sources is VND 12,411 billion ( US$ 0.8 billion). This amount is small when compared with the investment contributed by the domestic private sector during the same period. The Central Institute of Economic Management (CIEM) reports that between 1992 and 2003, around VND 190,000 billion (est. US$ 12 billion) was invested in newly registered private enterprises; US$ 9.5 billion was raised between 2000 and 2003 following the implementation of the [Private] Enterprise Law effective January 1st , 2000.
Equitization has been partial. The fact that the state maintains large number of shares in equitized firms has posed several serious problems to the corporate governance of these companies and the government regulations. Similar to the situation prior to equitization, there is no clear separation between the controlling and ownership rights with respect to the state being legally defined as shareholder and, at the same time, regulator. Ownership of large blocks of shares also gives the state veto power in most important management and investment decisions, resulting in frequent particular interventions in the governance of equitized firms. At the macro level, the dual role of the state as the owner of SOEs and equitized firms and as the only regulator creates a real possibility of ( Regulatory capture is a phenomenon in which a government regulatory agency which is supposed to be acting in the public interest becomes dominated by the vested interests of the existing incumbents in the industry that it oversees). Another serious problem is that the institutional capacity of the state agency responsible for managing state capital is very limited as it is in charge of a vast number of equitized firms. As a result, despite being a large (if not the largest) shareholder in many firms, the state is unable to exert proper management oversight. Coupled with the fact that workers usually have a very weak voice in running the company implies that managers enjoy great discretionary power, which can be easily abused to pursue private benefits.
Another notable feature of Vietnamese equitization is that it has been a highly internal process. The largest chunks of shares have been held by the state and insiders (managers and workers); on average only about 15% of shares have been sold to outside investors. Out of 2224 equitized firms (as of 2005), 860 firms never sold any shares to the public. Indeed, there is a problem of information asymmetry between insiders and outsiders with respect to real and future value of equitized firms. Faced with this information asymmetry and the legal system that does not afford proper protection to minority shareholders, most people do not want to take the risk.
Anecdotal evidence suggests that many equitized SOEs, especially profitable ones, have been underpriced ( as in the case of Vinamilk and Phu gia ). There are some possible explanation for this situation. For example, the value of land use rights has not been properly accounted for, valuation of equitized enterprises is the result of negotiation between the managers and the evaluation committee or the auditing firm etc…
Equitization has had a modest effect on the ownership structure of the economy. The overall structure of ownership in Vietnam, however, has not been substantially changed by equitization. It is projected that equitization will be completed by 2008. Meanwhile, as of February 2005, SGCs alone accounted for nearly 80% of total state capital. Three SGCs, namely Vietnam Oil and Gas Corporation (PetroVietnam), Vietnam National Post and Telecommunication Corporation (VNPT), and Electricity of Vietnam (EVN), account for 66% of all SGC fixed assets. This fact, reinforced by the government policy to retain control in large and strategically important equitized firms, implies that without significant improvement in the private sector, public ownership will still be the dominant form of ownership in the economy by 2008.
Despite its remaining persistent shortcomings, equitization has also improved the enterprise performance. However, if Vietnam wants to take full use of its potential to further develop after the accession to WTO, it will have to improve the SOEs’ equitization process soon.
3. Human resources.
For many years, it has been said that Vietnam’s “cheap labor force” is a competitive advantage. Yet, in the new stage of integration, as the country is facing the fierce competition from other country and simultaneously, becoming more developed, this advantage doesn’t bring about significant benefit as it was any more. Conversely, this fact is gradually showing weaknesses of Vietnam’s labor force in the process of industrialization and modernization.
According to a survey of labor trends in 2006 in Southeast Asia by the Japan External Trade Organization, the shortage of senior managers and other qualified personnel is more acute in Vietnam than in any other ASEAN country. In fact, a shortage of engineers and managers, particularly in design and development, is common throughout the region, in stark contrast to China and India. Half of the Japanese companies in Vietnam cannot find suitably qualified engineers from the local populace and nearly 60% have only managed to recruit one or two apiece, well under the proportion in other ASEAN nations.
In information technology, for instance, Vietnam has a clear advantage over the other countries in one respect – low pay – but their software writers and engineers know little or no Japanese and their technical qualifications are often below par. The same situation is a common thing in other industries which require employees who are well-trained and good at professional expertise. Another problem is the rising pay in the ASEAN countries, India and China, a trend that looks likely to continue. The problem is that the pressure for higher wages could get out of control and out an end to the advantage of low labor costs compared to the rest of the world. As it is, the advantage of inexpensive labor of the country is to substantially decline in the coming years. On the contrary, With ever more foreign companies coming to Vietnam to invest, the shortcomings of its workforce are being clearly exposed. Although an abundant supply of cheap labor can temporarily compensate for these shortcomings, in the long term Vietnamese employees will have to face competition from China, Thailand, Indonesia, Malaysia and such. Even in agricultural sector, the sector employs as much as 57% of the country’s labor force, productivity is still depends much on manual labor. Therefore, the efficiency is greatly constrained with low productivity. Hence, it’s reasonable that most of the poor comes from the sector. In short, in the future, the current comparative strength can’t be maintained very long any more. Instead, only skilled laborers with high productivity will become the source of stable development of the country.
In conclusion, even if a country owned the most advanced technologies and abundant natural resources, without the good human resource, it couldn’t effectively tap its own potential to develop. In contrast, despite difficulties of all kind, with the capable and developed human resources, the economy could overcome any obstacles in order to sustainably progress. As for Vietnam, to reform the country’s labor force is a must so that it would successfully integrate into the world’s economy and become an Asian tiger, as many analysts note.
a. Natural Environment.
Vietnam’s environment is under considerable stress from rapid economic growth, urbanization and rising human pressure on relatively scarce natural resources. While it has gradually improved its environmental regulatory framework, Vietnam has very limited capacity for implementation. Therefore, future rapid economic growth (an expected doubling of GDP in the next 10 years) and substantial investments in infrastructure may significantly threaten the environmental sustainability of the country’s development.
Progress has been made in reforestation programs and tightening the control of illegal wildlife trade. Mechanisms for integrated river basin management are being established under the Law on Water Resources. Ministry of Natural Resource is now drafting amendments to the Law on Environmental Protection to enable new policy tools and remedies for pollution prevention and cleanup and adjustments to cover environmental management in the private sector.
Despite these signs of progress, there is need for substantial improvements in the policy framework for environmental sustainability and the institutional arrangements to achieve them. Progress has been slow due to weak commitment by sectoral agencies, low awareness in local departments and officials, and capacity challenges at all levels. There is a lack of environmental integration at planning and programmatic levels, especially in the public investment planning process and in regional plans for land and resource use. In addition, awareness on the expected, negative environmental impacts of sustained economic growth, and the mechanisms for stakeholders to hold government agencies accountable for their performance is weak.
Industrial production grew from 15 percent per year between 1995 and 2004, with some of the fastest growth generated by state-owned enterprises (e.g., oil and gas, electricity, and cement). These enterprises have poor environmental records due to old equipment, lack of adequate controls, and inadequate treatment of wastewater and air emissions. Many industrial pollutants have a high environmental health cost. The Government has implemented fees on wastewater pollution and introduced a Prime Ministerial Decision to reallocate, close down or adapt cleaner technologies, but these policies need to be enforced effectively.
Land degradation is also a major problem, particularly in upland areas. Its major causes are insecure land tenure, poor logging practices, drought, salinization and acidification. Degraded steep slopes and deforested landscapes, especially in the northwest region, are now very susceptible to soil erosion during heavy rains. Despite recent increases in forest area, forest quality remains a concern. Closed canopy forests still make up only 13 percent of the total forest area, while poor/regenerating forests account for 55 percent.
Fisheries output, which more than doubled from 1990 to 2005, is now experiencing declining rates of catch per unit effort. Rapid expansion in aquaculture activities has caused a substantial decline in mangroves and wetlands, raising concern about coastal fish yields. Coral reefs are under pressure, and more of Vietnam’s reefs are classified as at “very high risk” than in any of the eleven other countries in the Southeast Asia region.
Vietnam’s surface, ground and coastal waters are threatened by pollution. Although the quality of upstream river waters is generally good, downstream sections of major rivers reveal poor water quality and most of the lakes and canals in urban areas are rapidly becoming sewage sinks. Rapid urbanization and industrialization in coastal areas, expansion in coastal tourism, and an increase in the number of oil spills are all contributing to the deterioration of coastal water quality. World Bank assistance focuses on expanding access to sanitation and wastewater treatment.
Wastewater and run-off from urban areas, industrial centers, and agricultural land, pollute surface, ground, and coastal waters. Water bodies such as lakes, streams, and canals increasingly serve as sinks for domestic sewage and industrial wastes. Air quality in nearly all urban and industrial areas is affected by various pollutants, such as particulates, lead and nitrous oxides, sulfur dioxide and carbon monoxide emitted by sources including vehicles, factories, power plants, and households. Sulfur dioxide levels near some factories occasionally exceed national standards by several times. Household waste collection efficiencies remain low, and there is no separate treatment for hazardous wastes.
The development sustainability of a country depends largely on the environmental conditions. As the impacts of environmental pollution on the country has becoming more and more serious, it’s high time Vietnam radically carried out all possible activities on a large scale to preserve its invaluable resources for the development of next generations. If not, the wealth that the country has been proud of will definitely deplete. Then, nothing will be able to save it any more.
b. Business Environment.
Since the 1999 Enterprise Law took effect, the Vietnamese business environment has become more favourable. This was a breakthrough in administrative reform, which has improved the transparency and equality of the legal framework for business activities in Vietnam. Procedures for business establishment have been simplified with the removal of hundreds of unnecessary licences and legal documents, and the establishment of new legal documents, providing guidelines for business activities. The 1999 Enterprises Law and its enforcement have encouraged the development of business activities of Vietnamese and foreign individuals and organisations. The number of enterprises increased from 62,000 in 2002 to 200,000 in 2006
The Vietnamese legal system’s strength is the seriousness and urgency with which it is trying to meet the development demands of the economy and match the WTO system. It is possible to say that State management has caught up with economic development. While intellectual property rights became a hot issue in Vietnam and the world, the Law on Intellectual Property was issued as a guideline for settling copyright issues. When the Vietnamese people adapted themselves to e-commerce and the stock market, the Law on E-commerce and the Law on Securities were issued. More importantly, however, two laws, which cost much strength and effort, the Unified Enterprise Law and the Common Investment Law were issued. Yet, a number of innate and serious problems do still exist in the system, making Vietnam’s business environment less attractive in the eye of many foreign investors.
Despite significant improvements, problems remain in the legal environment in Vietnam, especially the existing business licence system, to which the Government is paying great attention. In 2006, many improvements in the business environment were seen. Apart from the Enterprise Law and the Investment Law which took effect, the Prime Minister took tough measures, asking relevant agencies to reform administrative procedures and apply the one-stop mechanism for transactions with people and enterprises. In fact, some localities have seen a significant progress. However, when the laws took effect, issues relating to business licences emerged. In fact, the system of licences has cost enterprises more. Therefore, it is necessary to review and remove unnecessary licences. Specifically, since the 2005 Enterprise Law was issued, issues relating to licences have heated up because under the law, business fields have conditions stipulated by other laws, ordinances and decrees. In fact, concrete conditions are stipulated in circulars, decisions by ministries and people’scommittees at all levels with unclear conditions and times. The Vietnamese Government and relevant agencies are making efforts to filter the system of business licences to facilitate investment and business activities of enterprises in Vietnam. However, many inherent problems seems take quite a long time to resolve since their efforts are working sluggishly.
Law enforcement and the tribunal system are rated very low by foreign businesses due to complicated formalities and high fees. Law enforcement takes longer time and causes delays to project implementation in Vietnam. As a result, few businesses seek dispute settlement by law and official procedures, in most cases they negotiated among themselves.
Vietnam law is often without guidance for implementation. For instance, Decree 72 issued in July 2006 allowing the establishment of commercial branches. However, until now, there is no guidance for the establishment of commercial branches. No one knows for sure whether they can be established or how far they can operate. WTO protocol approved by Vietnam contains no commitment on commercial branches though Decree 72 mentions it in clear term.
In spite of Vietnam’s accession to WTO several months ago, businesses are not very optimistic about the prospect of the business environment in the coming years. With WTO membership, many new laws will be promulgated and law enforcement will be slow as often happened. Furthermore, new laws will not be immediately understood and implemented causing misunderstanding and confusion. For instance, new Investment Law and Enterprise Law were approved in late 2005 and effective in July 2006, decrees for the implementation of those laws have not been issued causing some controversy.
In the process of integration and globalization, no country can stay out of the trend and live well in its own niche. Since the internal resources are limited, all countries should looking for external ones to help them soundly develop. Therefore, the more investors rush to the country to do business, it means, the more capital is poured into the country, the better. Hence, efforts should be further promoted so that the business environment could be more and more favorable and attractive. This is one of the tasks requesting to be done immediately for the sake of the country’s development.
5. Income disparity.
Over the last two decades Vietnam has undergone strong economic development as a result of cautious political reforms. Many people claim that Vietnam is winning the battle against poverty via a high rate of economic growth. During the past years, Vietnam government has also launched a number of programs aimed at hunger elimination and poverty alleviation and obtained significant achievements. According to statistics of World Bank, 67% of Vietnam’s population lived under the poverty line in 1993, but the rate dropped to 24% last year. Yet, at the same time, the gap between rich and poor has increased.
In Vietnam, although the gap between the rich and the poor is not as big as in many other countries in the world, it has been going up over the time. The results of many researches also show that inequality of living standard (the rich-poor gap) in Vietnam is shown most prominently in the inequality between the various geo-economic regions and inequality between the rural and urban areas. This inequality originates from several factors among which there are educational qualification and occupation.
Per capita expenditure of top 1% and top/bottom 10% of households,
The widening labor productivity growth gap between the primary sector and the industry and services sectors of the country helps to explain the growing urban-rural gap documented in the Vietnam Living Standard surveys. According to the survey findings, while the overall incidence of poverty declined significantly, from 58.1% in 1995 to 37.4% in 1998, and to 18.1% in 2004, the reduction in poverty was much greater in urban areas, where it declined from 25.1% to 9.2% and to 8.3% respectively. Rural areas experienced a smaller decline, from 66.4% to 45.5% and to 23.2% correspondently. Moreover, real per capita expenditure in urban areas grew twice as fast, recording a 60% increase, relative to rural areas, which recorded a 30% increase (World Bank 2004).
Source: VLSS calculations
Inequality within each region
Inequality between Regions
within Urban-Rural area
Theil decompositions of inequality by region and rural/urban
The evidence from the Living Standard surveys leaves little doubt that, while per capita income has risen and most Vietnamese are better off, the gains from the first phase of reform and external liberalization have largely favored urban, educated, white-collar, and relatively well-off households. Inequality increased by all measures, recording the greatest change. The disparity between richer and poorer households also was apparent when comparing real per capita expenditure between the poorest and richest. From 1999 to 2004, reflecting their higher income growth, the richest 10% of the population increased their spending by 53.3% compared to a 23.3% spending increase by the poorest 10%.
The inequality in terms of income, as a consequence, also leads to a number of impacts on life between the rich and the poor, the urban and the rural people. People living in rural areas enjoy fewer opportunities and poorer education as well as other utilities such as clean consuming water, sanitation facilities, electricity, communications and so on in their lives. Meanwhile as for a number of people, mostly in urban areas, studying abroad, traveling by luxurious private vehicles, consuming expensive goods etc… is a common thing.
This trend is more and more widening in the country, causing discontent among some groups. That can result in social disorder, compromising the ultimate goal of socialism, harming the country’s institution. Therefore, tackling this issue has become one of the most important issues in order to ensure the stable development of the country.
Dealing with all of the above issues is a time, effort, and funds consuming task. Therefore, the country must have enough determination to pursue this very long way. And foremost, it can’t be finished solely by the government but need the joint efforts between the State and people. On that people, a number of solutions is to be proposed as follows:
1. Corruption and business environment.
* Minimizing red-tape and arbitrary discretion: reducing to a minimum activities for which government permission is required and the number of steps required to acquire necessary permits. This includes codifying wide ranging areas of permitted activity (not needing approval) and defining more precisely activities requiring licenses or permits, to curtail opportunity for corruption arising from officials’ scope for interpretation and delay.
* Disclosure: greatly increasing the volume of official information that is in the public domain, including more detailed budget information and successful bids in procurement operations; requiring top officials and high elected officers to declare their assets on assuming office and at intervals thereafter (making this information public); and permitting increased independence of the media.
* Strengthen judiciary and judicial processes: ensuring full independence, integrity and efficiency of the judicial system in dealing with matters of corruption; minimum ambiguity in laws and regulations; better public dissemination of laws and legal opinions; fair and efficient procedures for bringing corruption charges, with just, consistent and transparent penalties. Judicial and legal reform programs should identify changes in procedures and institutional arrangements which would help anti-corruption goals and promote integrity in public life.
* Strengthening human resource management: developing a modern, performance-based personnel system for civil service recruitment and promotion (to ensure a true meritocracy); reviewing civil servants salaries to ensure a living wage; providing training in ethics and integrity; requiring civil servants who routinely meet the public to wear name tags; and displaying prominently to the public instructions to staff concerning customer service standards.
* Reforming procurement: already much progress has been made, but further steps could be taken including: (i) publishing in the national press information about winning tenders for government procurement contracts above a given size; and (ii) strengthening procurement laws, possibly adopting the UNCITRAL ( United Nations Commission on International Trade Law ) model law on procurement (which has proved highly effective elsewhere) to the Vietnam context.
* Other elements of Public Administration Reform including strengthening: (i) expenditure management, particularly prioritizing allocations among and within sectors, (ii) revenue management, especially revenue collection enforcement, and (iii) decentralization, including establishing clear intergovernmental fiscal transfer system.
2. ECONOMIC STRUCTURE.
a. By sectors.
* Carry out economic structure transformation with focus on agriculture and rural industrialization and modernization to meet the requirements of the market and minimize the proportion of agriculture production in GDP;
* Intensively develop industries boasting competitive advantages; selectively establish a number of heavy industrial establishments; strongly develop hi-tech and export-oriented industries.
* Focus on developing small and medium-sized industries and infrastructure and service industries; develop three major economic zones in the Northern, Central and Southern regions together with those in midland, mountainous and coastal regions.
b. By ownership
* The political will to equitize must be nurtured: This condition is critical to sustain progress of equitization and to keep equitization on the right track. Evidence shows that political will, expressed in terms of pragmatic and timely policies, can overcome obstacles to equitization, even when the process grinds to a virtual standstill (e.g., during the 1992-1998 period.) The political will in Vietnam, accompanied by sound economic analyses, must support the view that the government should limit its reach in areas where people or markets can do a good job.
* Equitization authorities require organizational capacity proportionate to the scale of their task. There are at least two alternatives. The first is to build up the capacity of this organization quickly so that public assets in remaining SOEs and equitized enterprises are properly managed, and bad debts before equitization (which is one of main reasons for slow equitization) are handled effectively. Second, the state could decisively and selectively shorten the list of SOEs that need to be kept under public ownership, and at the same time, gradually reduce public ownership in equitized firms to a minimal level.
* Equitization must be transparent: When the decision to equitize an SOE has been made, the process must be transparent. To reduce management’s information advantage, all relevant information about a firm targeted for equitization should be published well in advance. This measure then reduces the possibility of underpricing and internal dealing, which may result in corruption and economic inequality.
* SOEs should be evaluated by the market: This is again a measure to limit the possibility and extent of underpricing and self dealing, thereby recovering public assets and reducing the extent of economic inequality created by internal equitization. This proposal also speeds up equitization process. Market measures such as public biddings via stock exchanges and independent audits should be employed in the evaluation of SOEs. The recent case of the Vinamilk initial public offering provides an excellent example for this.
* Trade and regulatory reforms should be promoted: These reforms create additional pressures to accelerate equitization. The protection enjoyed by SOEs which produce tradable and nontradable goods will be significantly reduced as Vietnam’s commitments under AFTA, BTA, and WTO. For tradable goods, lower tariffs intensify competition, which consequently drives SOE reform forward. For non-tradable goods, Vietnam needs a sound competition law and an effective regulation reform to create a healthy competitive environment to force SOEs to become more accountable.
3. Human resources.
For the readiness of the country’s labor force for the new stage of development, particularly post-WTO accession, the following measures need to be taken.
* The regulatory framework for labor has to be continuously improved and renewed to catch up with international standards and practices and respond to the specific conditions of Vietnam. Particularly, special attention should be paid to antidiscrimination, transparency and predictability – the basic principles of the WTO – in the labor law and management system. In the long run, labor, employment and wage have to observe market rules and the macro-management of the State toward the goal of creating a level playing field for all economic sectors in this area.
* Quality of labor has to be improved. It not only relies on skills but also workers’education, sense of discipline and respect of business etiquette. A skilled, disciplined and educated labor force will become a competitive strength of the economy, attracting more foreign investment. With regards to human resource development strategy, on one hand, the country needs to continue training of labor for labor-intensive industries, on the other hand, it should invest into the development of labor for high-tech industries so as to diversify the labor and economic structure. The Vietnamese government and the relevant agencies need to work more closely with the business community and the vocational schools to create enough suitably skilled people for the requirements of industry, and the factory owners themselves should train more employees on the job. Human resource development strategy should always be closely linked to and complement to the socio-economic development strategy.
4. Natural Environment.
* The problems can only be solved through a comprehensive approach to environmental management. It will be most important to raise public awareness and support for environmental conservation. With a literacy rate of more than 90% of the population, with the television network available to all districts since the end of 1995, and with inexpensive radios in even the most remote areas, environmental protection messages can be effectively communicated throughout the country.
* At a macro level, the government must work to enforce Vietnam’s existing environmental legislative regulations. This can only be done through an increase in the effectiveness of two-way information on environmental issues, both from the bottom up and the top down.
* At the same time, the government should strengthen the capacity for environmental development planning and investment decision-making. It is crucial to improve awareness on environmental management among those who make planning and investment decisions.
* Finally, environmental protection can be indirectly achieved through the poverty alleviation process. Efforts at reducing population growth by improving the awareness and knowledge of reproductive health and the access to family planning services could assist in this effort.
5. Income disparity.
* To address this concern, the country should focus on pro-poor measures (improved governance including strengthening of grassroots democracy to ensure better accountability, infrastructure investment in the poorest communities, better health and education for the poor, greater emphasis on agriculture and rural development, improving the environment for small and medium enterprises, and so on) to narrow the social development gap between different regions and population groups and to reduce the vulnerabilities of the poor and disadvantaged groups.
Although the country has obtained a number of substantial achievements during the past years in the cause of renovation, it’s impossible not to take into account the above issues. Red tape, corruption, low-quality labor force, uncompetitive economic structure, unfavorable investment climate, natural environment degrading, widening income inequality and so on may both lead to painful and long-lasting consequences if neglected. In the process of integration and globalization, more than ever before, they’re in dire need of being done away with so that the country could successfully penetrate into the world economy and further develop. However, they can’t be dealt with overnight. Instead, to radically solve those problems, it is necessary to take step-by-step measures under a certain schedule . Besides, this work requires the joint efforts between the State and the public rather than unilateral ones. Clearly, it is a long-term and daunting task, but not impossible to do provided the country is united and determined enough. Furthermore, the outlook of the country is still quite bright. According to a number of world’s analysts, Vietnam will be able to keep its sustainable growth in the coming years. Some even suppose that Vietnam will soon join the group of Asian Tigers, emphasizing its increasingly sound economy.
Post-WTO accession period will be a difficult time for the country with significant impacts on both economy and society. It is a milestone marking a crucial turning point of the development of the nation. Gaining WTO membership is similar to participating in a speed race. If we failed to compete with other players, we would be out of the race and would fall behind them without any opportunities to re-emerge. On the contrary, if we can overcome these challenges, we would embark on a new phase of development and prosperity. Under the wise leadership of the Communist Party, with the unity of the whole nation, no doubt that after all, we would realize the ultimate goal of building a Vietnam with rich people, powerful country, equal, democratic and civilized society.
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– Vietnam Development Report 2006.
– Labor and social issues emerging from Vietnam’s accession to the WTO, Ministry of Labor, Invalid and Social Affairs.
– Vietnam, The Long March to Equitization, Vu Thanh Tu Anh, the William Davidson Institute, University of Michigan, April 2005.
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– Figures from General Statistics Office of Vietnam.