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These four countries Burma, Cambodia, Laos and Vietnam that formed the Indochina peninsula (refer to map) had attained independence from European colonial powers through revolutionary means, with the exception of Burma, and this greatly affected their subsequent policy-making in economic development. Eventually they adopted a socialist and centrally-planned system and were isolated with the rest of the Southeast Asian countries due to the Cold War. As a result their economies were underdeveloped and lagging behind their neighboring countries. With the end of the Cold War, collapse of Soviet Union and faltering economies, these four countries embarked on a reform process differing in the nature and pace though. So what is this reform process? It is to systematically transform from the existing centrally-planned economy to a market economy typically involving both the political and economic elements and this process by which changes occur is known as transition process. I have chosen to evaluate Vietnam’s economic performance because Vietnam is unique among the transitional economies in several respects: like its giant neighbour China, it has retained a socialist one party political monopoly , taken a gradualist approach to reform, and its reform programme ‘doi moi’ has been very successful. In all, Vietnam successfully combined economic liberalism with political conservatism to create a Vietnamese variation of a market economy, that is still committed to socialism, to be considered as a potential "Asian tiger" economy, with a population of 77 million and a labor force that is well-educated, diligent, and young. The remainder of the paper is organized as follows. Section 2 will provide the background information on Vietnam. Section 3 will discuss on the theoretical framework of Vietnam’s transition process. Section 4 will evaluate Vietnam’s economic development plans up till 1990. Section 5 will discuss the challenges that Vietnam would encounter in its future economic development. Section 6 provides concluding remarks. 2. Background Information on Vietnam To better understand Vietnam’s economic transition, we need to examine its historical past. The 17th parallel at the 1954 Geneva Conference divided Vietnam into two parts: North and South Vietnam. The North, called Democratic Republic of Vietnam (DRV), was under the leadership of the Vietnamese Communist Party while the South, called Republic of Vietnam (RVN) was a puppet state under Western control. Civil war ensued. Moreover, the economies of the two evolved in different directions with the North following a Stalinist-Maoist model to construct socialism while the South set on the capitalist path under Western influence . On 2nd July 1976, the North and South were reunified and the Socialist Republic of Vietnam (SRV) came into existence. Following the completion of the liberation of South Vietnam, the country entered an era of economic recovery and development with the communist party set upon to impose its neo-Stalin model on the South and it led to severe economic problems. 3. Theoretical Framework of Vietnam’s Transition Process Vietnam’s overall reform from 1970 till the present can be divided into two distinct periods (Figure 1 below), each with its objectives, forces and mechanisms driving the process . The first period known as hard reform is between 1976, after the reunification, up to 1986. The central authorities maintain its tough stance against private sector and continue to control markets to defend its neo-Stalin economic model. However, reforms began to take places from the grass-roots level (e.g cooperatives and state-owned enterprises), and the government took a reactive attitude to ease the pressures of the shortage economy with the objective to achieve socialist transformation. The second period known as soft reform is began from the economic “renovation” (otherwise known as “doi moi”) in December 1986 till 1990s. The ideology behind the soft reform is the recognition of the fundamental flaw of Vietnam’s socio-economic system under the neo-Stalin model. The government initiated a stronger form of reform to move towards a market economy especially by opening up to foreign direct investments (FDI). Figure 1: Vietnam’s reform process Vietnam’s overall reform process Hard Reform Socialism: 1976-1986 Soft Reform Socialism: 1986 onwards (1981-1985) Economic ‘Renovation’ (1986-1990) Subsequent Five-Year Plans In addition, Vietnam’s gradualist approach to transition can be further broken into a four-stage process within the two periods (Figure 1 above). The first stage is the Pre-stage, which is the period before the transition process takes place. An important feature was the distortions to economic structures and prices due to central-planning. It lasted till 1979 when the Vietnamese economy was on the verge of collapse . The second stage is that of Fence-breaking, which is a period when, the process of transition takes place with an increase in unplanned economic activities. New and direct linkages between customers and suppliers were formed. It lasted till early 1981, with the passage of two decrees that institutionalized the transition . (namely: 25-CP and CT-100). The third stage is the Formal transition itself. This stage involves the recognition of the transition by the government and to assist in the development and expansion of market-oriented activities. It lasted till the abolition of the two-price system in 1989 . The fourth stage is the Post-stage, characterized by a market economy that cannot be reversed and the emergence of factor markets, the fast growth of the free market in jobs . 4. Evaluation of Vietnam’s Economic Development Plans Priorities were given to heavy industry development on the basis of agriculture and light industry development as shown in Table 1 and 2 below. According to the plan, Vietnam either had to solve the consequences of the war or renovate the southern economy as well as the achieving some economic targets. With these goals in mind, Vietnam raised capital investment to develop a production force with the main activities of expanding and building State-owned business, especially heavy industry. However, the results from the expansion of socialism economic sector, the renovation of production relations and the building of material and technical bases were not as projected. Close central control and poor management of the economy led to a decline in industrial and agricultural production. The natural calamities in 1977 and 1978 left the agriculture sector devastated. Invasion of Cambodia in December 1978 and subsequent Chinese retaliation (February 1979) sent the economy into further doldrums. Furthermore, it resulted in a curtailment of aid from China; and trade and investment embargoes from Western countries. Life became difficult for the people. All the targets for the plans were not met as shown in Table 3 and led to the breakdown of the neo-Stalin model hence signal the emergence of “fence-breaking” activities. Furthermore, the government realized that a bureaucratic centralized economic plan lacked real fundamentals and acknowledged later that it was a mistake for not concentrating sufficient investments on agriculture when Vietnam is overwhelmingly a rural economy Table 1: Sectoral Composition of State Investments, 1976-80 Total (Millions of Dong, at 1970 constant prices) 2,979.4 3,719.7 4,064.5 3,964.5 3,712.9 Agriculture 20.0 23.7 22.7 20.1 19.0 Capital Construction 5.4 5.1 5.6 4.5 5.4 Source: Nien Giam Thong Ke 1982 (Hanoi: Tong Cuc Thong Ke, 1983), pp.223;230. Source: Tri, V.N., “Vietnam’s Economic Policy since 1975”, 1990, p.76 Table 2.1 Table 2: Sectoral Investments in Industry, 1976-80 (In millions of Dong) a: Figures in parentheses are percentage shares in total investment calculated by the author. Source: Nien Giam Thong Ke, 1982, p.206 Source: Tri, V.N., “Vietnam’s Economic Policy since 1975”, 1990, p.86 Table 2.3 Table 3: Output of some Principal Industrial products, 1976-80 Electricity (billion kwh) 3.06 5 3.65 Cement (thousand tons) 743.7 2,000 636.6 Cloth (million metres) 218.0 450 174.4 Chemical fertilisers (thousand tons) 434.8 1,300 361.7 Source: Nien Giam Thong Ke, 1982, p.187-89 and Vietnam Courier, January 1977, pp.6-7 Source: Tri, V.N., “Vietnam’s Economic Policy since 1975”, 1990, p.96 Table 2.5 During this period, the country experimented with changes in the management mechanism including a more patient socialism renovation. In agriculture, Vietnam applied forms of production contracts to farmer groups and individuals. As these forms responded to demands in ownership, there were well received by farmers. In the industrial sector, the government encouraged the rights in active production, business operation and financial self-control of State-owned enterprises (SOEs). The government also recognized the roles of the private sector. In 1985, an effort to remove central subsidies with the launch of ‘Price-Salary-Money’ policy failed to meet targets. It had also resulted in hyperinflation. Strict currency exchange in the same year had also failed to curb inflation. Instead, inflation became higher. By the end of the plan, many of the plans did not meet targets. (Refer to table 4 below) Table 4: Summary of the results for the Third FYP (1980-1985) Targets Unit Results in 1985 Ratio to projected goals (%) Phosphatic fertilizer 10,000 tons 4.5 112.5 Transported goods Million tons 553.7 103.3 Transported passengers Million people 378.5 118.3 Population growth rate % 20.8 Not fulfilled Source: General Department of Statistics As a result of wars and failures of the 2 five year plans, the country fell into a serious crisis and high inflation rate. The economy did not develop even though it had a low growth rate. The country had to rely on overseas aids and hyperinflation occurred with prices increasing at geometric progression. However, it is during this period that gave rise to new waves of economic thinking, which brought about the ‘Doi Moi’ policies in the forthcoming five-year plan. Fourth Five-Year Plan, otherwise known as the ‘Doi Moi’ (1986-1990) The policy aimed at having self-sufficiency in food production and improving the standards of living of the people. During this period, the State embarked on 3 major economic programs: food and food stuff production; consumer goods production; and export oriented goods production. The core of the policy is to liberalize the production forces. Thereby, reducing state intervention in business and encouraged foreign and domestic private investment. The State’s investment capital for basic construction was reduced by 10% over the five years of 1981 – 1985. Some of the achievements include agrarian reform such that land use rights were given to farmers; independent accounting for State-owned enterprises whereby the State no longer bears the losses of SOEs. SOEs are responsible for their contributions to state budget and their own expenses; encourage private sector through gradual reduction in trade restrictions. Perhaps the most important is the enactment of a new foreign capital investment law whereby provisions were made in favour of investors in Vietnam in January 1988. Thereafter, Vietnam experienced consistent and rapid increase in FDI. Vietnam has also been successful to reduce the hyperinflation rate of 300% in 1988 to about 10% in 1992 through sound monetary policies and liberalization of the exchange rate of the local currency to the US dollars in March 1989 (allowing it to devalue sharply). In 1989, Vietnam can be truly considered a market economy when price subsidies on all items were removed. In the banking sector, restructuring was carried out and foreign banks are allowed to operate in Vietnam As these policies were implemented during the late 80s, their impacts are limited though the economy gained some definite achievements. Productions recovered and the economy grew. The old management mechanism had gradually changed into a new one. The private sector emerged around 1987 and contributed about 60% of GDP in 1992. Details of significant policy changes are shown in Table 5 (Appendix). Vietnam became the seventh member of the Association of Southeast Asian Nations (ASEAN) on 28 July 1995 and indicated its intention to join the ASEAN Free Trade Area (AFTA) . From this perspective, Vietnam can obtain enormous benefits both politically and economically. In political terms, Vietnam can align itself to share the security and political interests with other ASEAN countries. In turn, it can create a stable and conducive region for economic development. Moreover, it allows Vietnam to be integrated with the region as part of its transition to a market economy. In economic terms, Vietnam should enjoy substantial economic growth and investment due to its comparative advantages such as a good source of cheap labour and natural resources and a large domestic market. As such, Vietnam can complement the capital-rich and technology-rich countries. However, there are some areas for further improvements before Vietnam can enjoy the benefits of free trade. Although Vietnam has embarked on privatization of some of its SOEs but the process has been slow and cautious. Next, Vietnam’s public administration and existing economic still geared for a centrally-planned economy thus may hinder its ability to fully take advantage of the opportunities under ASEAN and AFTA In addition, Vietnam has sought World Trade Organization (WTO) accession in January 1995. The benefits of joining WTO can encourage better allocation of resources towards industries with the highest comparative advantage; enhanced learning technology through interaction with the rest of the world; greater flexibility via trade and less wasteful rent-seeking activities by groups seeking government assistance and protection. Therefore, it can boost the overall economy of Vietnam. Moreover, to join WTO, a country needs to commit itself to free trade henceforth by doing so Vietnam can increase investor confidence to invest in the country leading to a rise in per capita income. Also, there are good reasons to focus on the impact of Vietnam’s WTO accession on agriculture and rural development since 80% of the population live in rural areas, 40% of exports are agricultural-based and more than a quarter of GDP is generated by farmers . The economy had come a long way from a totalitarian non-price system to the border of the free-market world through commodity marketization, price control abolition, developing factor markets, and diminishing state enterprises. On the "but" side, there are dangerous bends ahead such as dynamic instability, skills and institutional gaps, complacency, and special interest groups (e.g., peasants, cadres, managers) demanding protections and interventions just like the old days. These potential dangers are real with a devastating potential for turning the clock back. In addition, like the other transitional economies, Vietnam has experienced negative side effects from the shift to the market in the areas of social services, the environment, and income distribution. Another area of concern is environmental degradation and the most serious problem is widespread deforestation, causing loss of topsoil, loss of natural water and air filtering capacity, increased flooding, and siltation of reservoirs. Similarly, the clearing of mangroves, coral reefs, and lagoons along the coast to make room for shrimp farms and rice paddies has reduced aquatic breeding grounds and natural barriers to storm damage and in some areas of the Mekong delta has exposed acidic soil. Other market-driven causes of environmental damage include chemical fertilizers and pesticides, unregulated disposal of hazardous waste by rapidly expanding numbers of small and medium enterprises, and the lack of waste water treatment plants in the growing urban areas. As a result of decades of war and international isolation, Vietnam stands among the poorest nations on earth in terms of standard of living with a per capita income in 1996 of $1,100 using international purchasing power parity . After more than ten years of economic liberalization, a policy officially endorsed at Vietnam's Sixth Party Congress in 1986, have brought considerable benefits to the country and its population. In general terms, Vietnam's reform path has been similar to China's. The transition began in agriculture in 1981, when cooperatives were allowed to contract production to households. The full reform program, "doi moi" (renovation), was initiated in 1986. It continued decollectivization, removed price controls, legalized markets and private enterprise, but had its full effect only after the collapse of the Soviet Union and the CMEA trading bloc in 1989. Once Vietnam began trading in the global market it quickly became a major exporter of rice and other agricultural products. Trade also stimulated rapid growth in the industrial and service sectors, which both exceeded agriculture in shares of GDP by the late 1990s. Bibliography: Word Count: 2797
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