Vietnam, a nation of approximately 75 million people, has been engaged in a process of market reform since 1986-87. Known in Vietnamese as "Doi moi" ("renewal"), the process is aimed at structuring Vietnam's regulatory, legal, administrative, business, investment, and foreign trade apparatus and policies to produce a market economy "with socialist characteristics."

The reforms have achieved impressive results. Vietnam's economy has grown close to 9 percent a year for the past five years. (In 1995, it grew 9.5 percent.) Industry is growing close to 15 percent per year. Foreign investment -- which stood at zero just a few years ago -- has climbed to around $20 billion in commitments and around $7.5 billion in actual inflows. Vietnam's foreign trade also is growing quickly, with exports and imports expanding 25-35 percent yearly. Vietnam exports significant amounts of coal, textiles, footwear, coffee, rice, seafood, and oil. Bilateral trade with the United States has grown rapidly and now exceeds $500 million a year. Overseas Development Assistance (ODA) also plays an important role in Vietnam, with capital commitments totaling around $1.5 billion per year and actual cash disbursements of $500 million per year.

With per capita incomes in the range of $250 per year, higher in World Bank "purchasing power parity" terms, Vietnam is still a poor country. However, urban residents may enjoy incomes two-to-three times higher. Around three quarters of Vietnam's population is engaged in farming (mostly wet rice production) and the overwhelming majority of Vietnamese live in villages, not cities. The agricultural sector is contributing an ever-shrinking proportion of national economic output, amounting to less than 30 percent of the total for 1995, as industry develops. Agricultural output is growing around 4 percent a year. Rural schools, hospitals, roads are poor and rural infrastructure continues to lag behind urban infrastructure, primarily because at so much new investment has been directed towards cities.

Most of Vietnam's growth and foreign investment has concentrated in Hanoi and Ho Chi Minh City (HCMC) and in the provinces directly to the north of HCMC. Hanoi, the capital, has undergone a significant boom but it has taken a distinct back seat in comparison. HCMC continues to attract the lion's share of investors and economic activity. Its experience dealing with westerners and with western-style business practices is a significant contributing factor. Vietnam's most successful export processing zone (EPZ) is located in HCMC, and many of the other functioning or planned EPZ's are in HCMC or close by. HCMC growth is starting to worry urban planners, as congestion and overcrowding may soon begin to impede its further development.

The most important growth areas in Vietnam's economy are services, especially tourism, hotels, restaurants, construction, informatics, and telecommunications; mining and manufacturing; oil and gas exploration; and power generation.

One of the crucial areas for reform in Vietnam is the law and the legal environment. The country has passed many new laws and law codes in recent years. For instance, after years of discussion, Vietnam promulgated a new Civil Code this year, which regulates everything from inheritance to mortgages. The new laws have increased transparency and measurably improved the business environment. The process is continuing, with changes to the foreign investment and tax laws due out this year and a new commercial code expected next year. Nonetheless, Vietnam's rapid progress has brought with it the problem of a patchwork of laws that sometimes don't fit well with each other, directly contradict each other, or are poorly understood and subject to conflicting official interpretations. The level of locally available legal services is still low, and many foreigners rely on western law firms, even are not authorized to dispense advice about Vietnamese law.

Administrative reform is also progressing in Vietnam. Of particular interest to westerners is a promised "streamlining" of procedures to license foreign investment and establish foreign representative offices. Although the central government ostensibly makes the final decision on most investments, in practice local authorities wield considerable influence.

The government plays a significant role in the economy and state-owned enterprises (SOE's) probably account for 40-45 percent of GDP. Vietnam's four state-owned commercial banks account for more than three-quarte rs of lending. The Communist Party of Vietnam believes the state sector should continue indefinitely as Vietnam's "leading" economic sector. Government regulatory agencies, particularly the Ministry of Planning, play an all-important role in licensing foreign investment. With government participation in the economy so extensive and intrusive, many private and foreign firms find themselves in the uncomfortable position of competing with their regulators.

State-owned firms are in the process of being reorganized into "general corporations" -- essentially monopoly cartels -- in areas that the government has deemed "strategic." These sectors include cement, steel, sugar, rice exporting, while other monopolies exist in telecommunications, financial services, importing and distribution.

With continued strong inflows of foreign financing, foreign direct investment (FDI) and ODA, the balance of payments has maintained an overall positive position in the capital account with fairly strong foreign reserves, equal to 10-14 weeks of the current account, especially the trade balance, has sharply deteriorated within the past year, with imports out-running exports at an annual rate of around $5 billion, or roughly 25 percent of GDP. The government believes this trend can be curtailed. In any event, it contends that a significant percentage of the import bill is being spent on capital equipment, which soon will be producing goods for export. International Financial Institutions (such as the International Monetary Fund and the World Bank) note that a worrisome amount of imports actually are consumption goods, bought on credit.

By joining the ASEAN Free Trade Area (AFTA) in 1995, Vietnam committed itself to reducing tariffs along with other AFTA member countries to 0-5 percent by 2006, and has begun to take steps to comply with this agreement. Vietnam also has made official application to the World Trade Organization (WTO) and to the Asia-Pacific Economic Cooperation organization (APEC). The country is engaged in negotiations with the United States that aim at concluding a bilateral trade agreement which will lead to Most-Favored Nation status for Vietnam. Vietnamese officials have stated many times that the country is committed to adopting international trading and business practices and integrating itself into the world economy.

Nonetheless, Vietnam still has significant tariff and non-tariff barriers to trade. Tariffs are relatively high and are based on imputed rather than actual cost. "Special consumption taxes" are applied to imported cars, alcoholic beverages, and tobacco. The government runs a complex system of trade licensing which applies to all imports and to exports of rice. No foreigners may engage directly in trade; only a relatively small number of Vietnamese firms (most of them state-owned) have this right. Licenses are required yearly for each commodity to be exported, and permits necessary for each shipment. Also, certain commodities (petroleum products, sugar, fertilizer, cement, and steel) are subject to special import surcharges, which the government says it needs to "regulate" these markets. Around 25 percent of the state budget comes directly from import taxes.

Vietnam's labor force is overwhelmingly young (more than half the population is under 25 years old), relatively well-educated (the literacy rate is said to be around 90 percent), and willing to work for low wages (the minimum wage is around $40 per month). Although literacy rates are relatively high, foreign employers in some sectors have noted the work force requires extensive training. Like everyone in Vietnam, including government ministers, workers have little experience working in a western business environment. Many new recruits for factory jobs are straight from the farm or at most one generation removed. Vietnamese workers are eager to learn, however, and perform well in many work situations. The country has experienced a number of strikes at foreign-run plants in recent years, but this seems to be the result more of management misconduct than of a fractious labor union situation.

Vietnamese infrastructure is improving slowly but is still basically deficient and, in many cases, dilapidated and far out-of-date. Specifically, Vietnam's roads, railroads, airports, power generation capacity, shipping, sea ports, telecommunications, schools, hospitals, and government buildings, are in poor condition. With help from international and bilateral donors, Vietnam has made improving its infrastructure a major economic priority.

Last update: March 1997 by VACETS