Vietnam’s Economy: Poverty and Prospects

01Dec99

Amy Mowl | Pham Phung | Darcelle Pruitt | Ananda Mahto
China/Vietnam | Study Abroad 1999

Foreword

In the 25 years since the American government withdrew financial and military support from the former South Vietnamese State the unified government of Vietnam has worked to recover from the destructive impacts of the war. In 1975 the Vietnamese government inherited a country on the verge of economic collapse. Through the progressive steps of central planning, agricultural reform, state owned enterprises, the economic restructuring of doi moi, and the steps taken toward opening up to global trade, Vietnam has sought a path to provide stability for its people.  Through a stable national policy, Vietnam hopes to create a harmonious national environment, equity within society, ensure social welfare, alleviate poverty, and balance citizen’s rights with their responsibilities.

In this paper we will address Vietnam’s economy after the war, the restructuring of the economy under doi moi, foreign policy implications, and the successes and failures of the Vietnamese government and foreign aid donors in achieving domestic policy goals.  In section one we will discuss in detail the situation after the war, the initial economic plans, and the beginning steps toward decentralized economic planning.  In section two we will introduce Doi Moi, discuss Vietnam’s hesitance to enter the free market economy, and look at some achievements of Doi Moi.  Section three will address Vietnam’s foreign economic policy, the benefits of foreign investment in Vietnam , the drawbacks for foreign investors, Vietnam’s trade imbalance, and the U.S. economic embargo.  In section four we will examine Vietnam’s domestic policy priorities using the education and health care systems to analyze the implementation of domestic policies, examine the overall effect Doi Moi has had in attaining public goals, and look at foreign aid donors as participants in reaching domestic policy goals.  Finally, in section five we will summarize our findings and make policy recommendations intended to further the economic and social development goals of Vietnam.

Economic Development 1975-1986

Modern Vietnam is the product of decades of armed struggle both against foreign forces and among the Vietnamese themselves (Fforde 47). The country became a French colony in the late eighteenth century, and independence was declared in 1945, shortly after the Japanese surrendered at the end of WWII. The French did not recognize this independence though, and war broke out in 1946. The French set up a regime in the South, but were defeated in the North in 1954 and withdrew from Vietnam, leaving the country divided into two parts. Civil war resulted. The United States became heavily involved in the civil war after 1965, and finally, in 1975, the United States withdrew and the country was unified. Though Vietnam attempted to recover from the devastation of the war and make genuine economic progress, in 1985, Vietnam remained one of the world’s poorest countries.

Situation in 1975

By the fall of Saigon in 1975, three decades of warfare had “imposed heavy costs in the form of massive loss of life, physical injury, psychological damage, and a demographic imbalance characterized by a relative scarcity of males, destruction of the countries infrastructure, and severe disruption of the economy” (Griffin 2). Vietnam was in a state of near total devastation: one million military war dead, 1.5 million civilians dead, 15 million homeless, sixty percent of southern villages destroyed. In the north, every major town and provincial capital along with main roads, railway lines, bridges, ports, and industrial facilities had been bombed. It is estimated that 14 million tons of bombs and shells had destroyed the land (Murray 18). The country sustained a further loss in human capital through the exodus of approximately one million refugees from Vietnam after the communist victory in the South, among them tens of thousands of professionals, intellectuals, technicians, and skilled workers (Cima 149).

1975: Initial Economic Plans

After April 1975, economic reform was the highest priority of the new government. The newly unified Vietnam confronted two major challenges after April 1975. First, it was compelled to respond to and recover from the devastation of the prolonged conflict, and second, it had to promote economic integration (Ryan). North, Central, and South Vietnam were historically divided by ethnolinguistic differences, though all areas traditionally were agrarian and subsistence based. The French developed the regions separately, with the north the basis of industrial activity and the south designated to be developed agriculturally. This separation distorted the basic Vietnamese economy by overly stressing regional economic differences (Cima 148).

Vietnam at reunification was essentially one country under two economic systems, neither of which was well designed to achieve growth with equity and human development. In the south a form of capitalism had emerged that was heavily distorted by the need to service a large foreign military force, and in the north a system of central planning emerged whose primary purpose was to mobilize resources for the war effort. The formidable task after reunification was to transform these two incompatible economic systems into one and then redirect it so that it would serve developmental purposes (Griffin 2).

To meet these challenges, the government chose central planning. Planning is a key characteristic of centralized, communist economies, and one plan established for the whole country normally contains detailed economic development guides for all of its regions (Cima 149). In a centrally planned economy, the role of the state is very different than the role of the state in a market economy. All resources are allocated by government decision and administrative mechanisms, rather than the price mechanism that determines the allocation of resources in a market economy (Griffin 37). The Second Five-Year Plan (1976-1980) was initiated to bring about this process to the country (the first five-year plan applied only to the North.) The plan set extraordinarily high goals for average annual growth rates, and it gave priority to reconstruction and new construction while attempting to develop agricultural resources, to integrate the North and South, and to proceed with communization (Cima 150). Vietnam collectivized agriculture in the south along with nationalizing all manufacturing and most services (Murray 19). Central planning in Vietnam “followed a Soviet model, advocated large-scale industrial investments, self-sufficiency in food production and allocation of resources through a complex planning system”(Ryan). In heavy industry, there was a limited number of major infrastructure investments, with some assisted by the Soviet Union; in agriculture, the emphasis was on the establishment of state farms and cooperatives that served as both production and social units (Ryan).

By the government’s own admission, “socialism-building” was a disaster, that left the war-devastated economy barely able to feed the nation.  Hundreds of thousands of southern soldiers, officials, and intellectuals were sent to “re-education” camps after reunification, while another two million people were driven into exile in the ensuing years of harsh rule, including many with the administrative and business skills vitally needed to rebuild a shattered economy (Murray 19). Another loss to the nation was the loss of many of Saigon’s Chinese traders, swept out in 1977-78 by a wave of anti-capitalism and xenophobia. The post war economy from 1976 to 1980 was stagnant; industrial production grew an average of 0.6% a year, agricultural production gained 1.9%, but at the same time, the population was growing by nearly one million a year (Murray 21). Vietnam faced major problems in agriculture due to “exceptionally adverse weather, including a drought in 1977 and major typhoons and widespread flooding in 1978” (Cima 154).

By 1979 it was clear that the Second Five-Year Plan had failed to “reduce the serious problems facing the newly unified economy. Vietnam’s economy remained dominated by small-scale production, low labor productivity, unemployment, material and technological shortfalls, and insufficient food and consumer goods” (Cima151). In addition, in 1979, Vietnam’s invasion of Cambodia led to its isolation from the international community while the severe economic hardships that existed were exacerbated by a lack of access to international aid and extensive foreign trade (Murray ix).

Beginning Steps Toward Decentralization

Clearly, something had to be done to increase the pace of economic growth. The failure of the post-unification reforms led to the Third Five-Year Plan, which contained the first steps toward decentralization (Than 45).

The plan’s highest priority was to develop agriculture. In Vietnam, as in China, reforms began in agriculture, for it is the largest sector of the economy, and the sector that accounted for most of the employment. Of equal importance is that it is the sector where most of the poor were concentrated and the benefits of the reforms were therefore very widespread, reaching the great majority of the population and creating a favorable political climate for later reforms (Griffin 15).

Vietnam embarked on “systemic reform, the replacement of collective farming by a system of household farming with land use rights guaranteed for reasonably long periods” (Griffin 83). First, there was the abolition of agricultural cooperatives. There was a redistribution of access to land that was highly egalitarian at the local level but unequal between regions (Griffin 84). Second, there was the introduction of agricultural incentives through a contract system in which the government contracted an output quota with individual rice farmers instead of cooperatives, with inputs provided by the state at pre-determined levels. This system stimulated individual initiative and allowed free markets to develop. Since private initiative and personal effort were encouraged, output increased in range of 4-10% in the early 1980s, allowing the government to drastically reduce the amount of yearly rice imports (Murray 22).

As soon as the early success in agriculture became apparent, the experiment was extended to other areas of the economy.  Price controls were eased and state enterprises permitted to sell to private markets once they fulfilled state quotas; somewhat hesitantly, but significantly, the reforms also aimed at eliminating subsidies for both consumers and enterprises, along with structural reforms to the banking system to free more cash for investments in key development areas (Murray 22). The informal private sector, especially small traders and craftsmen, began to operate (Ryan).

Why Further Reform Was Needed

Despite these attempts at reform, the economy in the mid-1980s remained devastated. Vietnam has the unique distinction of being of one of the first countries in modern history to experience a sharp economic deterioration in a postwar reconstruction period (Cima 143). Inflation “was running at 700 percent a year, millions of farmers were on the brink of starvation, there was little on store shelves, the economy was hooked on a life-support system of over USD 4 million a day in Soviet aid—much of which was wasted on ill-conceived projects—and the nations energy was drained away in a costly military adventure in Cambodia (Butler 58).  Soaring inflation was particularly troublesome, and the population boom put pressure on food supplies and “severely taxed” the government’s ability to create jobs (Cima 143).  Vietnam remained desperately poor, and some rural provinces faced starvation; then, Vietnam’s longtime patron, the soviet Union, began to unravel, and Hanoi came to realize that “only by ditching Marxist economics could it” survive (Steinberger 22). It became clear even to the most conservative government figures that radical reform was necessary to save the system. Vietnam, a fertile nation, was unable to feed itself and was spending scarce foreign exchange to import rice (Eisenstodt 66). Reasons for this disappointing economic performance, despite attempts at reform, included “severe climatic conditions that afflicted agricultural crops, bureaucratic mismanagement, elimination of private ownership, extinction of entrepreneurial classes in the South, and military occupation of Cambodia (which resulted in a cutoff of much needed international aid for reconstruction)” (Cima 143).

In 1975, party leader Le Duan promised a television and a refrigerator in every home within ten years. Instead, there followed what the Vietnamese call the “10 bad years,” during which orthodox communist policies and a costly occupation of Cambodia made Vietnam one of the world’s poorest countries (Gibney Jr. 38). Clearly, the initial reforms were not far-reaching enough.

Economic Development: 1986-Present

To combat the “10 bad years,” Vietnam, in 1986, adopted a new economic reform policy called doi moi—”new life”.

Introduction of Doi Moi

Following the economic experiments in the 1970s and early 1980s, Doi moi was implemented to remedy the excessive rates of inflation, which exceeded 700 percent in 1986, the decline in the standard of living, regional famine, and “inefficient state run enterprises and cooperatives” (Ryan). Doi moi’s key elements included:

  • policy reform for the “decentralization of state economic management” allowing decision making to be made by these newly autonomous enterprises;
  • an end to the use of administrative measures and controls in favor of economic ones, for example, allowing inflation to be controlled by market forces;
  • “the adoption of an outward-oriented policy in external relations,” including making interest rates responsive to market conditions, and the creation of a new, liberal foreign investment law;
  • a reform in the agricultural policies, granting land-use rights, incentive for long term development, and granting more freedom to farmers to determine production inputs and outputs; and
  • “The reliance or acceptance of the private sector as the engine of economic growth” (Than 5).

However, doi moi was not a clearly outlined plan of reform, but rather, an approach that focused on stability, incremental progress, and pragmatism. Doi moi was flexibly implemented “when the economic, political and social climate allows or requires it.” As such, it was not until 1989 that doi moi began to be more seriously implemented, encouraged by the success of some agricultural reforms combined with the “unraveling” of support from the Soviet Union (Ryan).

Open Markets, Democracy, and State Authority

In many ways, doi moi has been seen as Vietnam’s accepting that economic growth and development is best achieved through a market-oriented economy. However, the party in Vietnam still holds on to socialism and centralized control of power, which leads to difficulty when transferring the means of production to the private sector—a necessary factor for the creation of a market economy (Than 15). The persistence of state control over economic matters has led to question whether Vietnam is indeed pursuing a market economy or a multi-sector commodity economy. In a multi-sector commodity economy the state retains its central role, and, in the long run, is essentially “a new version of the old ineffective command economy” (Than 34).

One major reason Vietnam was initially hesitant in opening up the market entirely is that as a market is gradually opened, and the private sector grows more economically stable, more demands are likely to be made of the party. With the growth of the private sector, the party may lose some of its control and authority, perhaps eventually leading to demands for a multi-party democracy (Than 15). But, as noted by Dan Ton That, “democratic rule should not lead to a denial of authority.” Nor does it necessarily lead to “immediate individual freedom,” as can be seen with the long—and expensive—history for freedom sought by United States citizens. “Democratic rule only ensures that authority is based on the will of a clear majority of the population and is responsive to its wants and needs” (Than 37).

Dan Ton That also points out that democracy is not necessary for economic growth, nor does economic growth necessarily lead to multi-party democracy. Furthermore, the state cannot be left out of economic matters. State intervention is inevitable and, “in some cases intervention might even be necessary. Strong and authoritarian governments can coexist with strongly performing economies.” The intervention of the state should be limited, clearly defined, and held constant over time. The state has the responsibility, for example, to do its best to reduce impediments to growth. This can be done in various ways such as promoting gender and racial equality, reducing poverty, encouraging “creativity and entrepreneurship,” and doing its best to support economic measures which will promote sustainable development (Than 28)/(undp.org.vn/…/execsume). Finally, to be effective, the state must be able to provide the proper leadership to help advance the economic developments (Than 46).

Achievements of Doi Moi

In more recent years, Vietnam’s pragmatic view of development has shown in its open willingness to adopt a market-oriented economy. In a United Nations Development Program article, the Government of Vietnam is quoted as stating, “A market-oriented economy is considered best for ensuring rapid economic growth on a sustainable basis, and for achieving social goals” (Morey).

This certainty in supporting the economic direction in which Vietnam is heading can be attributed to at least two things. First, there has been a change in the education curriculum, especially in economics and economics-related courses, with great interest lying in examining the success of foreign markets (Than 42). Second, as Jordan D. Ryan asserts, support has been undoubtedly influenced by the economic achievements of doi moi. Among these achievements are macroeconomic stability, foreign policy achievements, agriculture, legal reforms, and education (Ryan).

Since the early 1990s, Vietnam has managed to achieve macroeconomic stability, reducing inflation to a level under ten percent and holding it relatively stable. This has promoted the “sustained, high 9-10 percent growth witnessed in today’s [1996] Vietnam.” Financial and fiscal reform, foreign direct investment, and trade have spurred on macroeconomic stability. Central to the financial and fiscal reform is a “maturing” of Vietnam’s banking system. This maturing has encouraged Vietnam’s foreign direct investment (FDI) to continue “in a positive trend.” Vietnam’s FDI portfolio is substantially diversified to ensure stability (Ryan). With the collapse of the Soviet Union and other members of the Council for Mutual Economic Assistance (CMEA) in 1990, Vietnam lost most of its trading partners. This forced Vietnam to rapidly enter the world trading market, changing its role with agricultural reform from being a rice importer to being self-sufficient and being one of the major rice exporters in the world (Murray 6).

As said before, doi moi was spurred on in a large way with the real success that was observed in the agricultural sector. This fact has profoundly changed the rural population, which makes up about 80 percent of Vietnam’s population (Griffin ). One of the major transitions was from reliance of collective farms to reliance on household farms. The “securing” of land-use rights for farmers, the freedom granted to determine their crops, and the allowance for the market to determine the resale prices of the crops have all contributed to increased incentive for productivity (Ryan). Long term sustainable development of agriculture has been the goal of agricultural reforms, with the hope that ultimately it can help “eradicate hunger, reduce poverty, and strengthen unity in the countryside” (Vietnam [1998-1999] 23). Although the agricultural potential of Vietnam is great, the government is anxious to pursue more industrial growth rather than relying on agriculture. This is due to the large costs historically associated with their agriculture. In 1991, for example, Vietnam lost over one million tons of un-harvested food crops due to adverse weather conditions (Grub). The severity of this can also be seen with the devastation of the central region of Vietnam due to storms.

In the past decade, Vietnam has significantly restructured its foreign policy. Two examples of change regarding foreign involvement include the lifting of the United States embargo on Vietnam, and the membership of Vietnam into the Association of Southeast Asian Nations (ASEAN), which was initially an organization created to prevent the spread of communism (Ryan). Foreign policy is important, as Dan Ton That points out: “Superior economic performance has been achieved by those countries which have been more open to external relations as opposed to those which have been inward looking and isolated” (Than 22). There are, however, some complaints from foreign investors concerning the cumbersome bureaucracy that they encounter on a regular basis (Grub).

One of the major changes related to the complaints of foreign investors is Vietnam’s reform of its legal system. Along with very liberal foreign investment laws, the National Assembly adopted a constitution in 1992. This Constitution, among other things, permitted private ownership, committed the state to doi moi, and established the National Assembly as the “highest representative body of the people” (Ryan). Other significant laws include the Land Law of 1993, the Civil Code of 1995, and the Budget Law of 1996. The Land Law “granted farmers rights over the land they worked.” The Civil Code was a major reform that provided the legal groundwork necessary for a market economy (Ryan). The Budget Law set out the responsibilities of different parts and levels of government, and allowed for “more effective decentralization, and participation at the local level” (undp.org.vn/…/execsume).

An evident problem concerning Vietnam’s legal system is the ineffective or slow implementation of laws. The example of the slow implementation of doi moi can be an illustration of this. Another example can be found in an article from Far Eastern Economic Review. The article states, in early 1999, “Washington lifted its trade embargo… on February 4, 1994, and normal trade ties have yet to develop…. Now Hanoi is talking about an eight-year phase-in period” (Keenan [1]). A few months later in the same magazine, an article referring to technology firms investing in Vietnam ran the following: “If you want a venture-capital fund you have to have legal and financial infrastructure in place to accommodate it…. The needed regulations are not in place today” (Keenan [2]). Many feel that without a serious reform of the enforcement of Vietnam’s legal system, the credibility of any talks of economic renovation is jeopardized (Than 40).

Part of the problem is availability of information and the necessary education to use the information. Concerning laws, Vietnam has been putting effort into making the laws available to the public. This had been done through various papers, and radio and television broadcasts (Vietnam [1998-1999] 70). In addition, there has been government encouragement for the establishment of grassroots juridical libraries. The obvious problem is funding—there is no budget allocation for the establishment of such libraries. The second problem is the lack of necessary education of library custodians, resulting in “low effectiveness in the exploitation of the libraries” (Vietnam [1998-1999] 71).

This has led to incentives for educational reforms to take place. Many of the reforms need to occur for those in administrative positions. In these areas, is would be advisable to seek assistance from foreign educational institutions. Vietnam’s academic authorities have requested assistance from foreign universities to help rewrite their curriculum—especially in economics and economics-related courses—to help people better understand the functioning of a market economy (Than 42). Another problem facing Vietnam’s level of education is the forging of diplomas at various levels. The Ministry of Education and Training acknowledges that such actions are “causing serious discontent among people and adversely affecting the quality of education and training,” and have resolved to work strongly with law enforcing bodies to cut down on further fraudulent activities (Vietnam [1998-1999] 65).

Foreign Economic Policy

After years as a closed economy, Vietnam opened up to foreign investment in 1987 with the proclamation of the foreign investment law. The opportunities the country has to offer have been greeted enthusiastically by foreign investors. However, to succeed in Vietnam , the foreign businessman must have patience as well as be willing to make long-term commitments. The foreign investor needs to be aware of the possible problems and pitfalls that may be encountered, just as they may be encountered in the early stages of any rapidly developing economy (Than 43).

Investors with knowledge of the region are looking for traditionally strong reasons to invest.  In land and property development, the three leading reasons have always been Location, Location and Location. However, other important considerations are: stability of government (politics and economics), reliability of workforce (education, experience, loyalty, and trainability), costs of operations and services (source of material, and availability of labor, taxes, and wages). Vietnam can offer the following attractions and advantages: abundant mineral and natural resources; active government encouragement of foreign investment; cheap labor and a literate workforce; potential tourism; a potentially important consumer market with a population of about 77 million; a central location in the fast-growing Asia-Pacific region. On the other hand, the foreign investor needs to be aware of the difficulty of poor infrastructure. There are severe problems with roads and the railway system, port facilities, bridges, water and electricity supply, sewage and drainage. Official statistics are not always consistent. Communications and the banking system also need further development, along with serious impediments of bureaucracy and corruption.  However, it is important to point out that although Vietnam is a challenging place for the foreign investor, progress is being make in nearly all mentioned areas, and that the pace of change over the last few years has been remarkable (vietnaminfo.virtualave.net).

Since 1987, Vietnam has been transforming a centrally planned economy to an economy subject to market forces. This has involved creating many laws and regulations to facilitate foreign investment, the most important of which is the Law on Foreign Investment in Vietnam. The Law on Foreign Investment imposes no minimum or maximum amounts of investment and does not limit the maximum percentage of foreign ownership in investment projects. There are four primary means for foreign companies to participate in Vietnam’s economy: the Business Cooperation Contract (BCC), Joint Venture, 100 percent-owned Enterprise, and Build-operate-Transfer (BOT).

A BCC allows a foreign firm to pursue business interests in Vietnam in cooperation with a Vietnamese firm without conferring the right of establishment or ownership. In many respects, this is the most flexible arrangement that Vietnam offers to foreign investors, although the BCC business license carries no tax holidays or concessions given to other types of foreign investments.

Joint Venture agreements in Vietnam typically pair foreign companies and local companies sharing capital and profits in a 70-30% split. License usually granted for up to 50 years.

100-percent-foreign-owned-enterprises (FOE) have become more popular recently, as investors have learned better to navigate the local system on their own, and as problems with joint-venture partners have become more apparent. These enterprises now account for around 20 percent of all foreign invested projects. Disadvantages include more difficult access to land (except in industrial zones and export processing zones), and a more limited duration license of not more than 10-15 years.

Fifty seven percent of the total investments in come from joint ventures, twenty nine percent from 100%-foreign-invested-enterprises, and fourteen percent from business cooperation contract. Beside these three main forms of investment, Vietnam recently just established two new ones: investments in export zones and build-operate-transfer (vietnaminfo.virtualave.net).

Vietnam plans to modernize and industrialize the country, creating jobs for a labor force that is adding workers at the rate of one million a year. A new stage has begun. In July 1995, Vietnam became the newest member of the Association of Southeast Asian Nations (ASEAN). After Vietnam joined the ASEAN, its bilateral relations with other ASEAN members- including Australia, Brunei, China, Denmark, Finland, France, Germany, Indonesia, Italy, Laos, Malaysia, Philippines, Russia, Singapore, South Korea, Sweden, Taiwan, and Thailand- are in a better position to develop. Dozens of governmental agreements have been signed, laying the legal groundwork for the development of cooperation in the economy, trade, investment, science, technology, culture and society. ASEAN is an important trade partner and accounts for 30% of Vietnamese exports and imports (Vietnam’s Integration in Progress 7).

The opportunity to conclude import-export activities in Vietnam is meanwhile more favorable than in the last few years. The foreign trade monopoly of the state is generally abolished. Import-export activities are subject to two types of licensing, both of which are administered by the Ministry of Trade. First, import-export business licenses are required for enterprises engaged in foreign trade. Second, specific import licenses are required for many products. As far as distribution organizations are concerned, where there is a need to import products on an on-going basis, approvals also need to be obtained. In November of each year, the relevant entity must submit to the Ministry of Trade its annual importation and distribution plans. The plans must indicate a proposed level of importation and describe how the imported products will be either re-exported or distributed locally. The plan may be amended at certain times throughout the year and a six-monthly report must be prepared, setting out how those plans are being implemented. Most foreign goods imported to Vietnam are subject to import duty and a number of items are subject to export duty. The rates range from 1% to 200% depending upon the product. The import duty for many products is very high, especially for the consumer goods e.g. cars 150%, TV 40%, garments 50%. Given the vast number of products that may be subject to duty and the fact that the rates change regularly, due diligence is important. Duty is generally calculated on a CIF basis for imports and a FOB basis for exports. There are certain exemptions from import duty, such as for equipment contributed to a joint venture by way of capital contribution and generally for imports into one of Vietnam’s export processing zones. Vietnam records have been shown that they imported three times more than exported. This indicates the imbalance of Vietnam’s economy (vietnaminfo.virtualave.net).

After the Vietnam War, United States set up an embargo policy against Vietnam. It gave a history of almost twenty years without the content of the Vietnam-US relations.  However, Vietnam did not collapse. The legitimate interests of the two peoples require that Vietnam-US relationship be that of friendship and cooperation. The principle of Vietnam is to develop relations and cooperation with US on the basis of respect other’s independence and sovereignty, non-interference in each other’s internal affairs, equality, and mutual benefit. The normalization and development of economic and trade ties constitute the fundamental and most important content of the relations between the two countries in the new stage. This is of interest in the long term as a way to close the past and look towards the future. On February 3, 1994, President Bill Clinton announced the decision to lift the embargo against Vietnam and to open a U.S Liaison Office in Hanoi.  Since the lifting of the US embargo, progress has been recorded in the trade and investment field (Vietnam‘s Integration in Progress.45).

Vietnam’s Social Goals

The government of Vietnam has made bold steps toward opening up its economy to the world since the collapse of the Soviet Union and the validity of centrally planned economies were called into question.  With the implementation of economic restructuring, called doi moi (new life), in 1989 the national government has passed new laws, broadened the constitution, and began liberalizing the economy in the hopes of achieving the economic success of Singapore, South Korea, and Taiwan by following their model of state directed development.

The challenge Vietnam’s government faces is striking a balance between providing an economic climate conducive to an improved economy while striving toward their internal social goals.  The government of Vietnam’s biggest economic “worry is that the independence they gained through war is now being squandered in peace” (Schwarz 56).  Vietnam is concerned with taking the steps to join the global economy but not at the price of accepting western influence in the markets of Vietnam if it will undermine cultural values and national identity “which is an indispensable factor for integration and competition with the outside world” (Vietnam [1994-1995] 36).

Government Directed Domestic Policy

The five domestic goals as outlined by Vietnam’s former progressive Prime Minister Vo Van Kiet are 1) to bring about harmonious national development, 2) create an equitable society, 3) ensure social welfare, 4) alleviate poverty, and 5) balance citizen’s rights with their responsibilities.  The way that these five goals play out in the programs implemented by Vietnam’s leaders can be seen in the objectives the government chose to focus their resources on during the 6th Session of the National Assembly (Vietnam [1994-1995] 41).

The economic plan laid out for Vietnam during the 6th Session of the National Assembly sets domestic priorities as improving education and access to healthcare for all citizens, especially those in upland areas, in rural districts, and those living in poverty.  The need for this refocus during doi moi is from the government’s recognition that investment in Vietnam’s population is not a second order need that can be addressed later (Griffin 74).  Fees for service were introduced to the education and healthcare systems.  These fees were intended to increase private financing of schooling and medical care, instead the fees worked regressively inhibiting access to services for all but the most wealthy in society (Griffin 61).

For the purposes of this paper we will consider the provision of education and healthcare as indicators in Vietnam’s development of an equitable society where social welfare and poverty alleviation are priorities.  “The World Bank observes that although the centrally planned economies tended to have impressive literacy and numeracy as compared with countries with similar incomes in the West,” continued investment is necessary in both education and healthcare. The World Bank contends that health care and education under central planning in Vietnam failed to respond to changes in the labor market, tend to be poorly coordinated, and fail to give teachers and administrators incentives not to waste resources.  Thus the inherited system is not designed to support the reform process and the successful functioning of a market economy (Griffin 57).

Education

In education the Vietnamese government wishes to “increase the quality of the invaluable human resources of [Vietnam].” The government has developed a five-step plan to improve education. The plan would (1) readjust primary school objectives to conform to the training and use in the future, (2) provide a broadened field of study in secondary schools, (3) improve schools in ethnic and upland areas, (4) reorganize and renew university curricula, and (5) refresh and retrain teaching staff. The focus of these five steps is to focus national development on science, technology, and language. The government especially encourages continuing foreign language development among civil servants, with a focus on study abroad (Vietnam [1994-1995] 35).

These educational objectives help the government redress two problems identified in Vietnam’s school system.  These two problems are (1) the historical lack of a codified school system between the north and south (the north and south school systems were not joined in their educational goals until 1981) and (2) the lack of educational investment in the initial years doi moi. The World Bank notes that Vietnam, during the reform process, has not continued to invest in education with a decline in these services being most evident in poor rural areas with a system that delivers few benefits to the poor (Griffin 57). Currently, public expenditure covers 55% of the cost of primary school education in Vietnam (Griffin 61).

“Access to school, particularly for the poor, is limited by the many fees and contributions parents must pay—despite no formal tuition fees for primary school.” Vietnam’s Social Services Financing Survey indicates that the costs to a primary school student’s family prohibits many of the poorest children from attending school. Only 70% of the poorest children are enrolled in primary school as opposed to 91% from the richest quintile (World Bank [2] 37).

Although the Vietnamese government has indicated the importance of education and expresses a desire to create greater equity within society the political system has not directed the budgeted funds to the groups identified as most in need. Instead, “government spending on education is regressive and runs counter to government policy.” With additional funding from the government directed to the wealthiest provinces, rather than in rural and upland areas (Griffin 61).

Healthcare

As with the education system, funding for the healthcare system in Vietnam was reduced after the implementation of initial reforms under doi moi.  This reduced funding was to be replaced by user fees that were to increase the responsiveness of the healthcare system to the needs of fee-paying patients.

“The main difference between the health and education sectors is that whereas both were adversely affected by the first phase of reforms, health has not benefited from the same increase in public commitment as education during the second phase of reforms.”  Public expenditure for healthcare has continued to decline from 5.3% of budgeted expenditures in 1991 to 3.2% in 1996 (Griffin 63).

Even though healthcare expenditures have declined as a percentage of the budget from 1991 to 1996 these central government expenditures are distributed on a per capita basis. This ensures that at least government spending in healthcare is more progressive than education spending. However, the World Bank estimates that “following reform of the health system, the poor are largely unable to afford the cost of health facilities whether in the state sector or not” (Griffin 67).

Prevention of disease through the provision of safe drinking water and improved environmental sanitation facilities is an important healthcare goal outlined by the Vietnamese government. Interestingly, funding for the provision of these services has been cut since the implementation of doi moi. The World Bank conjectures that one of the reasons that public investment in water infrastructure and preventive health care is such a low priority at the moment is that the government hopes to expand the existing water supply program funded by UNICEF using aid from other donors (Griffin 64).

If Vietnam’s priorities truly are the creation of an equitable society, where social welfare and poverty alleviation are priorities, the implementation of health and education programs in Vietnam do not prove this. It seems clear from the information available that both education and healthcare have suffered since the implementation of user fees under doi moi and the decrease of direct public spending.

Doi Moi’s Economic Impact toward Reaching Vietnam’s Social Goals

It is, however, also important to understand that although fewer poor families have access to health and education services it is still true that doi moi economic policies actually have helped reduce the number of poor families. Although poverty is still a pressing problem in Vietnam the success of doi moi has reduced poverty “from more than an estimated 70% in the mid-1980s to somewhere closer to 30% today” (United Nations i).

Not only has poverty been reduced, but life expectancy has increased, adult literacy has been maintained at above 90%, real income per capita has nearly doubled, and infant mortality has declined. “In short, all available data and evidence strongly suggest that doi moi has substantially improved the overall well-being of the vast majority of people in Vietnam.” One must still remember that although conditions in Vietnam have improved significantly, “according to a global human development index… Vietnam ranks 122nd of 174 countries in the world” (United Nations ii).

Foreign Involvement in Domestic Policy

It is clear from even a brief visit to Hanoi that foreign involvement in the development of Vietnam is significant. Donor aid agencies, whether governmental or non-governmental, contribute to many of the projects of greatest priority to the Vietnamese Government.  For example, Vietnam has established an ambitious goal to eliminate poverty by the year 2010.  The intention of foreign aid agencies was well put by Roy D. Morey, the Resident Coordinator of the UN Development Program in Vietnam when he said, “UNDP is committed to assist the Government and people of Vietnam to achieve this [elimination of poverty] objective” (UNDP foreword).

Foreign involvement has been an important factor in the reduction of poverty in Vietnam.  By raising the standard of living during doi moi foreign investment and foreign aid have helped create more opportunities for the poor in Vietnam to improve their livelihoods (United Nations foreword). There are many sources of foreign development aid in Vietnam.  Both philanthropic and profit oriented projects have improved the economic climate and created opportunities especially for those in well served urban areas.  However, the “poor condition of infrastructure, especially roads and water supply is a critical constraint” on economic development in rural areas (World Bank [1] 40).

The imbalance in access to opportunity for people living in the rural areas of the central highlands and coastal villages in central Vietnam as compared to the opportunities available to those living in the wealthier provinces is significant. This inequity in access to opportunity is an issue of great importance to the Vietnamese government and the people of Vietnam. However, under current economic constraints the development of greater access to services has not been a priority with funding from the government. In fact, the government of Vietnam has removed funding from many projects that it sees as likely recipients of foreign aid. A case in point would be water infrastructure. In 1996 less than half of the rural population had access to safe drinking water yet water infrastructure is a low priority for public funding in part because the Vietnamese government hopes to expand the current UNICEF funded water supply program through donor aid grants (Wrold Bank [1] 40).

Scott Fritzen, a consultant with UNDP Rural Development, claims that the major impediment to improving social equity in Vietnam’s development process is the lack of coordination of development aid. Mr. Fritzen gave the preventative healthcare programs to control Malaria and TB as an example.  Instead of one integrated healthcare organization designed to deal with TB and Malaria simultaneously Vietnam has two parallel organizations. The duplication of administration and service delivery is typical of the way services are provided in Vietnam. This issue is not made any simpler by the fact that so many aid agencies, non-governmental organizations, and foreign governments are attempting to implement development projects in Vietnam (Fritzen 11/15/99).

Recommendations

As we have seen, domestic policy implementation has been most effective through the alleviation of poverty. Vietnam’s improved economy after implementing doi moi did more to reduce poverty than direct government spending on social programs.  To improve the economic situation in Vietnam there needs to be continued investment in the future of the country.  Foreign direct investment in the economy of Vietnam was a significant factor in the 9 to10% economic growth rate experienced by Vietnam during the first half of the 1990s.  The economic policies of doi moi, that attracted foreign investment, have done great things to create a climate in which opportunities are available for people to better their lives economically.

Judicial Reform

The economic slowdown in Vietnam was precipitated in part by the Asian financial crisis.  Yet it is important to note that weak legal enforcement has created a climate in which the cost of doing business is uncertain. Vietnamese government policy is to create a system in which there is “no restriction in a quest for wealth, but every business must be conducted in the framework of law” (Vietnam [1994-1995] 39). However, “despite a flurry of new laws, Vietnam’s legal system remains inadequate for a modern market economy” (Schwarz 52). In conversation with Tracy Thiele, public information officer for the US Embassy in Vietnam, she states that foreign business, especially American business, will not view Vietnam as a good place to invest until the judicial system is viewed as fair.  Both parties in a dispute need to know that an impartial judge, who has not been bribed or otherwise coerced into judgment, will hear their case. It may be the case in Vietnam as it was in China that foreign investors will not feel confident in the judicial system until foreign companies begin winning cases in arguments with Vietnamese companies.

State Owned Enterprise

Reform of state owned enterprises is also needed to promote economic growth in Vietnam. The problem with state owned enterprises is a lack of competition and a complacent work environment that spends 18 times as much to employ a single worker than does a privately held company. The solution to this inefficiency is twofold. First, truly follow the models of South Korea, Taiwan, and Singapore and create several competing state enterprises. Second, reduce the bureaucracy for privately held companies so that business licensing and other government regulated activities are coordinated and efficient.

Banking Reform

Currently, the Vietnamese banking system does not follow standardized accounting practices accepted worldwide. Yet, to participate in a global market it is necessary to follow similar business practices used in the rest of the world. Both of these steps will improve the business climate in Vietnam by attracting and retaining investment and creating economic stability.

Policy Planning and Implementation Coordination

As noted in the section on Vietnam’s social goals it is clear that although there are many parties attempting to improve living conditions for the poorest people there is little effective coordination of efforts. It seems clear that the first step in improving economic development to achieve Vietnam’s policy goals is to coordinate the efforts of the three levels of Vietnam’s government with the many aid agencies working inside the country. There are currently many overlaps in service delivery throughout Vietnam. By coordinating efforts the development goals of all parties are more likely to be achieved than by continuing to pursue a fragmented system of development program implementation.

Sustainability

One important thing to remember is that reform is not an automatic process.  Once we have initiated a reform process, if we are to expect continued progress, we must be willing to commit to the effort (Ryan). This brings up the idea of sustainable development—an idea that needs to be considered both by developing and already developed countries.  Sustainable development should not just focus on growth of per capita income and gross national product, but should also have a positive, lasting effect on people’s livelihood (Morey).

Sustainable development must consider environmental consequences. It is undeniable that free-markets have had considerable positive impacts on economic growth, but it is important to note that in many cases, economic growth has been achieved by sacrificing the environment. Truly sustainable development meets the needs of the present without infringing on the ability of successive generations to meet their needs (Than).

Conclusion

It is clear that economic development in Vietnam has improved social conditions since the end of their civil war in 1975. It is also clear that foreign involvement and global economic exchange in Vietnam’s economy holds promise of a better economic life and more social opportunities for the people of Vietnam. What is not clear is whether the government of Vietnam is willing to take the steps needed to enter the world economy. The world community is asking for a great leap forward from Vietnam, and is standing by to help this young country with old leaders create a better future for all its people.

Works Cited

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