Southeast Asia - Articles

Vietnam: Exploited or Empowered?

Harnit Kaur Kang
Research Officer, SEARP, IPCS
email: harnitkaur_kang@yahoo.com

The past decade has seen Vietnam transform into a focal point for major Foreign Direct Investments (FDIs) from Asia, the EU and USA.  The problem however, is that as with many Newly Industrializing Countries (NICs), Vietnam’s trade liberalization has been accompanied with an enlarging trade deficit. This is indicative of a country’s infrastructural incapacity, undersized industries, lack of diversification and the inability of its companies to produce and compete at the optimum levels. This beckons the question; does the WTO prioritize the needs of western MNCs over the readiness of a developing economy? If not, then does the culpability lie with the state for not doing enough to ready itself for the rigors of global commerce? Are more FDIs the answer? Is Vietnam following an exploitative model of development or has it truly been empowered after its economic reforms?

There are two key harbingers for jumpstarting economic development in the NICs today.  The first is to improve relations with the most influential power in the world, i.e. USA and secure with it a bilateral trade agreement (BTA). The first shall assist in accomplishing the second requirement i.e. membership to the World Trade Organization (WTO). By submitting to the stipulations of the WTO, NICs secure approval for integration into the world economy. Being hailed as the newest emerging success story from Southeast Asia, Vietnam did just so and in that order. Committing Vietnam to a free market economy was the cause of much disagreement and debates among the reformers and conservatives in Vietnam, especially as the BTA with USA was being finalized in 2000.

What took precedence at the time was not internal economic readiness but the regional geopolitical competition. Vietnam got anxious as China ascended in ranks as a major trade partner of USA. This was a cause for concern since the giant next door neighbour and fellow communist state produced a lot of the same goods as Vietnam. According to World Bank estimates, USA’s tariffs on Vietnamese goods which were at 40% would plummet to less than 3%, as a result of the BTA, swelling Vietnam’s exports to US$800 million annually. In return, Vietnam lowered its own trade barriers and provided guarantees on FDIs and exclusive rights to US businesses in order to gain access to the world’s largest importer (USA). 

However, one of the questionable aspects of the BTA was a plan that for the first nine years would permit USA’s banks to form joint ventures with Vietnamese counterparts. Unfortunately, there was and still is local under-confidence in Vietnam’s Communist-led government’s economic management due to its inability thus far in building revenue. Due to this trust deficit, it is possible that an over-stretch was made in the liberalizing policies such as emulating the loose and unrestrictive lending policies of the US banks. Nevertheless, when the global economic recession hit, it was the state’s budget as well as money lent from state banks that compensated for the misadventures of the private enterprise. The State Bank of Vietnam (SBV) followed a tough love approach wherein it threatened closure to many small banks which had in 2008 contributed to skyrocketing inflation due to their freewheeling lending policies. 

Statistics from the Vietnam Ministry of Planning and Investment indicate that imports have risen 38%, i.e. by US$17.6 billion, whereas exports have fallen further 1.6%, i.e. US$14.1 billion in the first quarter of the 2010 fiscal year. This has been a whooping US$1 billion more than what the Vietnamese government had anticipated. The current trade deficit of US$14.1 billion constitutes roughly 20% of Vietnam’s total export value. The surge in imports to Vietnam has been attributed to a drastic increase in prices of goods in the world market. As of 2010, FDI companies constitute 53% of Vietnam’s exports whereas local companies contribute 49%. In 2009, this balance was literally in reverse with local companies contributing a larger value at 53% whereas FDI companies constituted 47% of Vietnam’s exports. Yet, despite the expanding share of FDI companies in Vietnam’s exports; the trade deficit has in fact increased.

Vietnam today faces the challenge of punching above its weight in the process of integration with the world economy and transition towards free private enterprise. Increasing the role and number of FDIs or State Owned Enterprises (SOE) shall digress from the optimum path of development. Instead, Vietnam’s government should now introduce measures to bolster privatization oriented not, towards FDI companies but local homegrown ones. Much of the excitement for Vietnam externally is not due to a 6.5-7% GDP growth rate but because this is a resource rich, relatively untapped market in Asia.  Currently, Vietnam exports comprise coffee, rice, rubber, footwear, electronic equipment, and wooden products; i.e. mostly agricultural and unprocessed goods. Diversification of the economy requires the support of the state behind local private companies more than foreign MNCs. This should be particularly borne in mind for a crucial resource like crude oil which presently comprises 10% of Vietnam’s exports. Vietnam’s trade deficit shall not go away in the near future but in the meantime this NIC should empower itself by boosting privatization internally for homegrown companies before an inundation by FDIs.

Email :
Please leave your comments Input text you see on right:  (Case Sensitive)