Thursday, July 26, 2007

The Economy


Today we had a final review session for all the major topics that we've covered in Vietnamese history. Yesterday I wrote that there was remarkably little mention of the Iraq War during our class, but today we ended with a thourough discussion of the similarities as well as the many differences. It was a lively conversation and it demonstrated how Vietnamese history has shaped our class' perception of modern American policy.

The final component of the class was a paper on some aspect of Vietnamese society or history. Through our six weeks in Vietnam we were supposed to gather diverse impressions on a topic and consolidate them into an informal paper at the end of the course. My topic was the modern Vietnamese economy and the challenges it faces. It's not a formal, academic paper that cites books and articles, but a compilation of the things I've come to learn about the Vietnamese economy. In that sense, it's similar to a blog, so I've decided to post it. I apologize for its length and seriousness but I was too lazy to post anything else.

*****

In 1945, Taiwan, Korea and Malaysia were as poor as any other part of the Far East, but today they’re considered wealthy countries. By adopting market oriented policies early on, these countries became labeled the “Asian Tigers”. Vietnam, by comparison, still has a per capita nominal GDP under $1,000. Only in recent years has Vietnam begun to break out of bleak rural poverty. It is one of Vietnam’s many historical tragedies that today’s rapid growth did not begin many years ago. But Vietnam’s past is a history of lost opportunities. Today, the government is making up for lost time and works feverishly to promote economic development. Reaching First World standards of living within the next generation is the overarching goal of Vietnamese society, and many expect that transformation to take place. They should be proud of the gains that have been made in recent years but also conscious that there are vast hurdles to overcome before Vietnam can rightfully be called and Asian Tiger.

In the mid-1980s, the “social thermostat” readjusted, as Neil Jameison would put it. The country had been reunified for ten years, but the government, under the control of aging revolutionaries such as Le Duan, failed to achieve the expected socialist economic miracle. The government had boldly pushed forward with the construction of an economy based on subsidies, commune production and price-setting predicting growth of 15% each year. Not surprisingly, this didn’t come to pass—the Vietnamese remained desperately poor, indeed, hungry in many provinces. As the old revolutionary generation ceded control to a new moderate generation, change became possible and Vietnam began dismantling its socialist economy, a process that continues to this day.

As early as 1981 the government began allowing farm de-collectivization and an increase in food prices to stimulate food production, which was well below subsistence levels at the time. This was a cautious experiment with market forces and there would be many to come. In the mid-1980s, the Party abandoned the Stalinist strategy of promoting heavy industry in favor of policies that encouraged light industry and exports. The leadership decided that instead of wasting resources to build inefficient factories, Vietnam should only produce goods that it is good at making. It is simple logic, but this important acknowledgement formed the theoretical framework for the stunning growth in wealth over the past two decades.

In 1986, the government introduced a series of laws permitting foreigners to operate companies in Vietnam. This was the first in a series of measures that have broken down the barriers to foreign investment. Another major element of the market reforms was the revolution in rural production. In 1988 the state sharply reduced levies on farmers and in the early 1990s, farmers were granted long term rights to their individual plots of land.[4] No longer afraid that their land would be suddenly appropriated from them, farmers began to invest in their farms. Moreover, they were free to keep and sell more of what they produced, so, naturally, they produced more. Property rights and market forces created a miracle. While famine has long been a regular feature of Vietnamese life, wide scale food shortages are unthinkable today.

In addition to reducing restrictions on the economic activity of its own people, Vietnam has reduced its barriers to international trade. In the mid-1990s, Vietnam normalized relations with the United States and entered ASEAN and other regional market groups. Vietnam was accepted into the WTO in 2006. However there are still minor barriers to trade, such as American resistance to Vietnamese catfish imports.Despite these remaining barriers to trade, Vietnam’s bilateral trade levels have risen from $5bn in 1990 to over $90bn today, representing a twenty-fold increase in as many years.

Through this two decade reform progress, not only has hunger been eliminated, but poverty rates have been reduced to 15%, down from over 60% in 1990. The market reforms have allowed millions of Vietnamese to rise out of abject poverty and enter the middle class. Anyone familiar with Vietnam as recently as the 1990s remarks how far the country has come. Simple things like windowed storefronts were nearly unheard of in the mid-1990s. Motorbikes were rare, cars were reserved for a small elite. Bicycles were the primary mode of transportation. Today, Vietnamese roads are packed with armies of motorbikes and a healthy number of automobiles, including a few luxury models. The roads are just one of innumerable indicators of growing prosperity in Vietnam.

The market reforms provided the groundwork for Vietnam’s economic renaissance. But no country can raise itself out of agrarian poverty alone. Vietnam’s progress is largely a product of foreign markets and international investors, a few of whom I was fortunate enough to meet this summer. While over two thirds of Vietnamese people still work in agriculture, the backbone of the modern boom is industry. Vietnam is not a natural industrial country because it doesn’t have indigenous sources of raw materials, as in China, Japan or the United States. Nevertheless, manufacturers consider Vietnam a promising production center because wages are so low that they offset the cost of importing raw materials. Much of Vietnam’s growth has been made possible by the fact that it is extremely low on the international economic pecking order. Whereas many Mexican manufacturing jobs have moved to the cheaper Chinese market, many firms that once produced shoes, textiles and cheap electronics in China are now choosing to open factories in Vietnam. Perhaps one day low end manufacturing jobs in Vietnam will move to even cheaper labor markets in Africa or elsewhere.

Although millions of “Made in China” labels are being replaced by “Made in Vietnam” markings, cheap industry is only one element of Vietnam’s economic transformation. The country is working overtime to develop its IT and electronics industries. The government is pumping money into improving communications and National Assemblywoman Ton nu thi Ninh accredits the explosive rise in internet usage to these investments. When Chuck Searcy applied for an internet account in 1995, he became one of the first twenty internet users in Vietnam. Today there are millions of internet users. Internet use has surpassed Thailand and the Philippines and the prevalence of cheap internet cafes filled with young children is a real indication that Vietnam is becoming a wired country.

Vietnamese officials have displayed an impressive determination to wire their country. The trouble is that very few Communist Party cadres are experts in modern technology. Luckily, they are extremely receptive to outside advice and investment in technological development. Rahul Desai, a Tokyo-based Indian-American businessman, spoke favorably of Vietnamese progress in IT. American and Japanese investors, he recalled, worked with extremely open-minded Vietnamese officials to build a first rate stock exchange, banking network and other financial machinery. Rahul is convinced that the Vietnamese financial system has surpassed Japan’s in efficiency and technology. In this sense, Asia’s newest Tiger is leading Japan, the biggest Tiger of them all.

Only a generation ago, it was illegal for Vietnamese people to hold foreign currency. Now, Vietnam’s state-of-the-art financial system is successfully funneling billions of dollars of foreign investment into the fast growing economy. The booming stock exchange is growing rapidly as Vietnam’s state-run companies become publicly listed. Over 700 state companies are currently in the process of going public. Through these IPOs, stagnant companies are attracting the foreign capital to radically expand their operations. It has transformed Vietnamese business. TFP, an obscure Vietnamese company not long ago, is now considered “the Vietnamese Microsoft.” This summer, TFP partnered with a consortium of Japanese investors to create an investment fund in Vietnam. The fund currently has $100m but its capital could soon grow to $1bn as more foreigners pump money into investment funds. Major western banks are also entering the Vietnamese market. Not far behind a stature of Ho Chi Minh in Saigon, there’s a new CitiGroup tower. JP Morgan, Deutsche Bank and many other financial giants can now be found in Hanoi and Saigon, where they handle private equity, mergers and IPOs. They’ve even began to offer financial services to High Net-Worth individuals.

The HSBC Tower behind Saigon's Ho Chi Minh statue

Thanks to the efforts of the pragmatic government leadership, the investment climate in Vietnam is one of the most open in the region. Vietnam is able to compete against major emerging markets such as China and India for big ticket investments. After a thorough search that included all three countries, Intel committed to building a $1bn plant in Vietnam. It’s the biggest American investment in Vietnam to date, but it may soon be surpassed by investments by GE, which is in the process of committing major resources to Vietnam. Microsoft may follow suit. If the original Asian Tigers built their economies on tech exports, then the United States is building Vietnam some big claws.

The United States is by no means the most important investor in Vietnam. It ranks well behind Japan, China, Taiwan and other Asian nations, although these official tallies obscure the reality because many “Asian” companies are actually branches of American owned companies. If these branch companies, such as the Singapore-based offshoot of Coca Cola are considered American, the United States becomes the second or third biggest investor in Vietnam. The Japanese have come to Vietnam in droves and their most notable investments are in infrastructure, such as the tunnel between Da Nang and Hue. More recently, Japan has paid lip service to helping Vietnam build a modern Hanoi-Saigon highway as well as a massive technology center. The Chinese, by contrast, are known for building large, smoke-billowing industrial factories.


New construction zone in Da Nang

Another face of the economic boom is the preponderance of retail expansion. Vietnamese imports exceed exports by a modest margin and the imported consumer goods can be seen all over the country, from Johnnie Walker scotch to German cars to Nokia phones. Domestic and regional companies have made multiple brands of food and drink available to grocery shoppers, whose parents would have had to stand in ration lines to buy a bit of rice and fish oil. The vast majority of Vietnamese food and consumer goods are still sold in small “mom and pop” shops, but retail chains are rapidly appearing. Nevertheless, there’s great potential for retail consolidation in Vietnam, as well as opportunities for foreign restaurant chains to expand into Vietnam, which still, to the horror of some, does not have McDonalds.


Grand Opening of a Saigon electronics outlet

The breathtaking rate of economic expansion may be attracting excess investment. James Kim, a Korean-American investment broker runs a firm that helps Americans find investment in Vietnam, even if they have no idea what they want to do with their money. James usually finds a suitable investment opportunity, but he says that there are vast numbers of Americans who want “in” to Vietnam because they hear it’s “hot”. In my opinion, the hordes of ill-informed Western investors should make one wary of an investment bubble.

A possible investment bubble is most conspicuous in the property market. Vietnamese businessmen tend to invest in property projects because they can produce short term returns on modest levels of capital. This investment is readily visible in the high rise construction sites and building cranes seen in Hanoi and Saigon. The trouble is that they are being built in uninhabited farmland on the end of the city, in the hope that urban growth will quickly reach the area and make raise demand for housing and offices. But nobody can accurately predict how a city will grow, so these developments are highly speculative stabs-in-the-dark.


High rise construction on the ouskirts of Hanoi

Property speculation is perhaps most intense along the coast. Vietnam has beaches that hold up to any resort area in the world. I believe that China Beach will one day look like Cozumel and that Nha Trang could get as many visitors as Phuket. Rahul thinks it could do even better, claiming that Vietnam’s beaches will become an Asian St. Tropez with seven star resorts. Whichever prediction comes to pass, Vietnam’s beaches have a lot of development ahead of them. But that still shouldn’t justify the property speculation in these areas. In some costal areas, small beach condos that sold for under $200,000 are fetching $1m today. That would be a steal in California or Florida, but Vietnam is still a poor country with 2,000 miles of underdeveloped coastline. Those prices may not be sustainable in the long run.


One of many pristine, under-developed beach in Central Vietnam.

The (questionable) speculative bubble in Vietnamese investment is only one of the long term threats to continued growth in Vietnam. Low cost manufacturing and export agriculture has rapidly pulled tens of millions out of poverty. But in order for Vietnam to become a middle class nation, it needs to expand its IT, R & D, financial and business sectors.

The number one complaint of American investors in Vietnam is that the human capital of their Vietnamese employees is too low. Without competent foremen, the new Intel plant will be held back, and without English speaking, modern executives, Vietnamese companies will have difficulty competing internationally. In order to advance in “New Economy” sectors, Vietnam needs to produce high caliber computer technicians, scientists and business professionals. At the moment, the Vietnamese higher education system is woefully inadequate for the task. Although an evaluation of Vietnamese education is beyond the scope of this paper, I will suffice to say that the many Vietnamese university students who I’ve talked with have expressed frustration with the quality of educational training in Vietnam, for which they hold the government responsible. Nearly all intend to or dream of studying abroad.

Nevertheless, progress is being made in some areas. The Hanoi National University Economics Department is working with American institutions, including Princeton University, to develop a modern business school, or a close approximation thereof. This is just one example where Vietnamese university administrators are seeking a crash course in the West about how to train professionals at modern standards.

According to an informal consensus gathered from a diverse group of officials, the biggest challenge to the Vietnamese economy is to promote continued growth without causing intense inequality and all the problems associated with it. One of the first things that struck me about Hanoi was that there are no obvious slums. In most developing countries, millions of poor farmers settle in ramshackle developments outside of the industrializing cities. These slums can become seething centers of crime and social instability, neither of which the cautious Communist Party is keen on promoting. The Vietnamese government recognizes that urban slums will develop in Vietnam if the cities grow rich and the countryside stays poor. Accordingly, one of the major objectives of the government is to bring jobs and prosperity to the countryside. Through a combination of subsidies and incentives, Vietnam is working to attract factories away from the traditional industrial centers of Hanoi-Haiphong and Saigon. The goal, described by Madame Ninh, is to bring jobs to the rural workers, so that the rural workers don’t bring slums to the cities.

For this reason she justified the recent project that would baffle economists. The government worked with Total, a French oil giant, to build the Dung Quoc oil refinery. Total wanted to build the plant near Saigon, because the sources of oil are located off Vietnam’s southern coast. The government leadership, however, intervened and insisted that the refinery be built in a less developed area of Central Vietnam. This location greatly added to the transportation costs of the Vietnamese crude oil, but the government hopes the Dung Quoc refinery will bring jobs to a poor region.

Madame Ninh is optimistic about the government’s efforts to bring jobs to the countryside, but the statistics are sobering. The province of Hanoi, with 3.1m people has received over $10bn in foreign investment, or around $3,000 of investment per head. By contrast, a mere $255m has been invested in Nghe An province, which has a population equal to Hanoi. This forty-fold difference in investment levels between the two provinces is a sign that inequality is likely to grow, with harmful side effects.

Containing excess investment, improving human capital, and stemming inequality are major challenges in the way of further prosperity in Vietnam. Each will require calculated, long term policies to overcome. But Vietnam is a country that has defeated the most powerful states in history. Its recent economic progress is no less impressive than its military record. A nation of collective farms and Stalinist economics now has one of the most advanced stock exchanges in Asia. A land of periodic famine now exports food of all varieties. Compared to the achievements of its past, the challenges of the future look minor.

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