Vietnam Economy

Overview: Beginning in the 1980s, dire economic conditions forced the government to relax restrictions on private enterprise and sharply cut back on labor camp prisoners, many of them entrepreneurs. In 1986 Vietnam launched a political and economic renewal campaign (Doi Moi) that introduced reforms intended to facilitate the transition from a centralized economy to a “socialist-oriented market economy.” Doi Moi combined government planning with free-market incentives. The program abolished agricultural collectives, removed price controls on agricultural goods, and enabled farmers to sell their goods in the marketplace. It encouraged the establishment of private businesses and foreign investment, including foreign-owned enterprises.

By the late 1990s, the success of the business and agricultural reforms ushered in under Doi Moi was evident. More than 30,000 private businesses had been created, and the economy was growing at an annual rate of more than 7 percent. From the early 1990s to 2005, poverty declined from about 50 percent to 29 percent of the population. However, progress varied geographically, with most prosperity concentrated in urban areas, particularly in and around Ho Chi Minh City. In general, rural areas also made progress, as rural households living in poverty declined from 66 percent of the total in 1993 to 36 percent in 2002. By contrast, concentrations of poverty remained in certain rural areas, particularly the northwest, north-central coast, and central highlands.

In 2001 the Vietnamese Communist Party (VCP) approved a 10-year economic plan that enhanced the role of the private sector while reaffirming the primacy of the state. In 2003 the private sector accounted for more than one-quarter of all industrial output, and the private sector’s contribution was expanding more rapidly than the public sector’s (18.7 percent versus 12.4 percent growth from 2002 to 2003).

Despite these signs of progress, the World Economic Forum’s 2005 Global Competitiveness Report, which reflects the subjective judgments of the business community, ranked Vietnam eighty-first in growth competitiveness in the world (down from sixtieth place in 2003) and eightieth in business competitiveness (down from fiftieth place in 2003), well behind its model China, which ranked forty-ninth and fifty-seventh in these respective categories. Vietnam’s sharp deterioration in the rankings from 2003 to 2005 was attributable in part to negative perceptions of the effectiveness of government institutions. Official corruption is endemic despite efforts to curb it. Vietnam also lags behind China in terms of property rights, the efficient regulation of markets, and labor and financial market reforms. State-owned banks that are poorly managed and suffer from non-performing loans still dominate the financial sector.

Although Vietnam’s economy, which continues to expand at an annual rate in excess of 7 percent, is one of the fastest growing in the world, the economy is growing from an extremely low base, reflecting the crippling effect of the Second Indochina War (1954–75) and repressive economic measures introduced in its aftermath. Whether rapid economic growth is sustainable is open to debate. The government may not be able to follow through with plans to scale back trade restrictions and reform state-owned enterprises. Reducing trade restrictions and improving transparency are keys to gaining full membership in the World Trade Organization (WTO), as hoped by mid-2006. The government plans to reform the state-owned sector by partially privatizing thousands of state-owned enterprises, including all five state-owned commercial banks.

Gross Domestic Product (GDP): In 2004 Vietnam’s GDP was US$45.2 billion. Per capita gross national income was US$550. However, based on purchasing power parity (buying power for a basket of goods without regard for market exchange rates), Vietnam’s per capita GDP was approximately US$2,700. In 2004 the contributions to GDP by sector were as follows: agriculture, 21.8 percent; industry, 40.1 percent; and services, 38.2 percent. Reflecting Vietnam’s hybrid economy, industry ownership was mixed, as indicated by percentage of output, as follows: state-owned, 40 percent and declining; privately owned, 25 percent, but employing four times as many workers as the state-owned sector; and foreign-owned, 35 percent.

Government Budget: In November 2003, Vietnam’s National Assembly approved a total state budget of about US$12 billion for 2004, corresponding to about 26.5 percent of estimated gross domestic product (GDP). The government’s budget deficit, currently targeted not to exceed 5 percent, is rising but remains under control in the view of independent observers.

Inflation: In 2004 inflation was 9.5 percent, higher than the 3.4 percent rate measured in 2000 but down significantly from 160 percent in 1988. The long-term decline reflects the beneficial effect of fiscal and monetary reforms aimed at stabilizing the economy.

Agriculture, Forestry, and Fishing: In 2004 agriculture and forestry accounted for 21.8 percent of gross domestic product (GDP), and during 1994–2004 the sector grew at an annual rate of 4.1 percent. However, agricultural employment was much higher than agriculture’s share of GDP; in 2005 some 60 percent of the employed labor force was engaged in agriculture, forestry, and fishing. Agricultural products accounted for 30 percent of exports in 2005. The relaxation of the state monopoly on rice exports transformed the country into the world’s second or third largest rice exporter. Other cash crops are coffee, cotton, peanuts, rubber, sugarcane, and tea.

In 2003 Vietnam produced an estimated 30.7 million cubic meters of roundwood. Production of sawnwood was a more modest 2,950 cubic meters. In 1992, in response to dwindling forests, Vietnam imposed a ban on the export of logs and raw timber. In 1997 the ban was extended to all timber products except wooden artifacts. During the 1990s, Vietnam began to reclaim land for forests with a tree-planting program.

Vietnam’s fishing industry, which has abundant resources given the country’s long coastline and extensive network of rivers and lakes, has experienced moderate growth overall. In 2003 the total catch was about 2.6 million tons. However, seafood exports expanded fourfold from 1990 to 2002 to more than US$2 billion, driven in part by shrimp farms in the South and “catfish,” which are a different species from their American counterpart but are marketed in the United States under the same name. By concentrating on the U.S. market for the sale of vast quantities of shrimp and catfish, Vietnam triggered antidumping complaints by the United States, which imposed tariffs in the case of catfish and is considering doing the same for shrimp. In 2005 the seafood industry began to focus on domestic demand to compensate for declining exports.

Mining and Minerals: In 2003 mining and quarrying accounted for a 9.4 percent share of gross domestic product (GDP); the sector employed 0.7 percent of the workforce. Petroleum and coal are the main mineral exports. Also mined are antimony, bauxite, chromium, gold, iron, natural phosphates, tin, and zinc.

Industry and Manufacturing: Although industry contributed 40.1 percent of gross domestic product (GDP) in 2004, it employed only 12.9 percent of the workforce. In 2000, 22.4 percent of industrial production was attributable to non-state activities. During 1994–2004, industrial GDP grew at an average annual rate of 10.3 percent. Manufacturing contributed 20.3 percent of GDP in 2004, while employing 10.2 percent of the workforce. During 1994–2004, manufacturing GDP grew at an average annual rate of 11.2 percent. The top manufacturing sectors—food processing, cigarettes and tobacco, textiles, chemicals, and electrical goods—experienced rapid growth. Almost a third of manufacturing and retail activity is concentrated in Ho Chi Minh City.

Energy: Petroleum is the main source of commercial energy, followed by coal, which contributes about 25 percent of the country’s energy (excluding biomass). Vietnam’s oil reserves are in the range of 270–500 million tons. The World Bank cites the lower bound of the range. Oil production rose rapidly to 403,300 barrels per day in 2004, but output is believed to have peaked and is expected to decline gradually. Vietnam’s anthracite coal reserves are estimated at 3.7 billion tons. Coal production was almost 19 million tons in 2003, compared with 9.6 million tons in 1999. Vietnam’s potential natural gas reserves are 1.3 trillion cubic meters. In 2002 Vietnam brought ashore 2.26 billion cubic meters of natural gas. Hydroelectric power is another source of energy. In 2004 Vietnam began to build a nuclear power plant with Russian assistance.

Crude oil is Vietnam’s leading export, totaling 17 million tons in 2002; in 2004 crude oil represented 22 percent of all export earnings. Petroleum exports are in the form of crude petroleum because Vietnam has a very limited refining capacity. Vietnam’s only operational refinery, a facility at Cat Hai near Ho Chi Minh City, has a capacity of only 800 barrels per day. Several consortia have abandoned commitments to finance a 130,000-barrel-per-day facility at Dung Quat in central Vietnam. Refined petroleum accounted for 10.2 percent of total imports in 2002.

Services: In 2004 services accounted for 38.2 percent of gross domestic product (GDP). During 1994–2004, GDP attributable to the services sector grew at an average annual rate of 6.0 percent.

Banking and Finance: Vietnam’s first stock exchange, known as the Ho Chi Minh City Securities Trading Center, was established in July 2000. By the spring of 2005, the number of companies listed on the exchange had reached 28, representing a total market capitalization of only US$270 million. In March 2005, Vietnam opened an over-the-counter exchange, known as the Hanoi Securities Trading Center. The purpose of the second exchange is to expedite the process of equitization (partial privatization) of state-owned enterprises. Although these exchanges are still very small, officials have set the goal of expanding their combined market capitalization to 10 percent of gross domestic product by 2010 and gradually phasing out restrictions on foreign ownership of shares. In September 2005, Vietnam’s prime minister announced that the limit on foreign share ownership would rise from 30 percent to 49 percent.

Vietnam’s banks suffer from low public confidence, regulatory and managerial weakness, high levels of non-performing loans (NPL), non-compliance with the Basel capital standards, and the absence of international auditing. Since 1992 Vietnam’s banking system has consisted of a combination of state-owned, joint-stock, joint-venture, and foreign banks, but the state-owned commercial banks predominate, and they suffer from high levels of NPL, most of them to state- owned enterprises. Consequently, in September 2005 Vietnam decided to equitize all five state- owned banks—a change from previous plans to equitize only two of them. In addition, Vietnam plans to boost the transparency of its financial system by establishing a credit-rating agency and performance standards for joint-stock banks. Large foreign banks are balancing their strong interest in serving multinationals in Vietnam and frustration with continuing restrictions on their activities. Although Vietnam is a cash-based society, 300 to 400 automated teller machines (ATMs) have been installed, and about 350,000 debit cards are in circulation.

Tourism: In 2004 Vietnam received 2.9 million international arrivals, up from 2.4 million the previous year. The annual increase represented a strong rebound from a slight decline in 2003 attributable to the severe acute respiratory syndrome (SARS) epidemic in Asia. From 1999 to 2004, tourism rose by 63 percent. Most of the visitors in 2004—27 percent—came from China, with 8–9 percent each coming from the United States, Japan, and South Korea. The Vietnam National Administration of Tourism is following a long-term plan to diversify the tourism industry, which brings needed foreign exchange into the country.

Labor: In 2004 the unemployment rate in urban areas was 5.6 percent, down from 5.8 percent in 2003 and 6.0 percent in 2002.

Foreign Economic Relations: Vietnam is an observer to the World Trade Organization (WTO), but it aspires to full membership as early as mid-2006. Joining the WTO is vitally important because membership will free Vietnam from textile quotas enacted worldwide as part of the Multifiber Arrangement (MFA) of 1974. The MFA placed restrictions on the import by industrialized countries of textiles from developing countries. For China and other WTO members, however, textile quotas under the MFA expired at the end of 2004, as agreed in the Uruguay Round of trade negotiations in 1994. Partially as a result, Vietnam’s textile exports stagnated in 2005.

Economic relations with the United States are improving but are not without challenges, even beyond Vietnam’s aspirations to join the WTO. Although the United States and Vietnam reached a landmark bilateral agreement in December 2001 that boosted Vietnam’s exports to the United States, disagreements over textile and catfish exports are hindering full implementation of the agreement. Further disrupting U.S.-Vietnamese economic relations are efforts in Congress to link non-humanitarian aid to Vietnam’s human rights record. Barriers to trade and intellectual property are also within the purview of bilateral discussions.

Given neighboring China’s rapid economic ascendancy, Vietnam’s economic relationship with China is of utmost importance. Following the resolution of most territorial disputes, trade with China is growing rapidly, and in 2004 Vietnam imported more products from China than from any other nation. In November 2004, the Association of Southeast Asian Nations (ASEAN), of which Vietnam is a member, and China announced plans to establish the world’s largest free- trade area by 2010.

Imports: In 2004 Vietnam’s merchandise imports were valued at US$31.5 billion, and growing rapidly. Vietnam’s principal imports were machinery (17.5 percent), refined petroleum (11.5 percent), steel (8.3 percent), material for the textile industry (7.2 percent), and cloth (6.0 percent). The main origins of Vietnam’s imports were China (13.9 percent), Taiwan (11.6 percent), Singapore (11.3 percent), Japan (11.1 percent), South Korea (10.4 percent), Thailand (5.8 percent), and Malaysia (3.8 percent).

Exports: In 2004 Vietnam’s merchandise exports were valued at US$26.5 billion, and, much like imports, were growing rapidly. Vietnam’s principal exports were crude oil (22.1 percent), textiles and garments (17.1 percent), footwear (10.5 percent), fisheries products (9.4 percent), and electronics (4.1 percent). The main destinations of Vietnam’s exports were the United States (18.8 percent), Japan (13.2 percent), China (10.3 percent), Australia (6.9 percent), Singapore (5.2 percent), Germany (4.0 percent), and the United Kingdom (3.8 percent).

Trade Balance: In 2004 Vietnam ran a merchandise trade deficit of US$5 billion, or 16 percent of imports.

Balance of Payments: The current account balance was negative US$1.4 billion in 2004. Vietnam last registered a slightly positive current account balance in 2001.

External Debt: In 2004 external debt amounted to US$16.6 billion, or 37 percent of gross domestic product (GDP).

Foreign Investment: From 1988 to December 2004, cumulative foreign direct investment (FDI) commitments totaled US$46 billion. By December 2004, about 58 percent had been dispersed. About half of FDI has been directed at the two major cities (and environs) of Ho Chi Minh City and Hanoi. In 2003 new foreign direct investment commitments were US$1.5 billion. The largest sector by far for licensed FDI is industry and construction. Other sectors attracting FDI are oil and gas, fisheries, construction, agriculture and forestry, transportation/communications, and hotels and tourism. During the period 2006–10, Vietnam hopes to receive US$18 billion of FDI to support a targeted growth rate in excess of 7 percent. Despite rising investments, foreign investors still regard Vietnam as a risky destination, as confirmed by a recent survey by the Japan External Trade Organization of Japanese companies operating in Vietnam. Many of these companies complained about high costs for utilities, office rentals, and skilled labor. Official corruption and bureaucracy, the lack of transparent regulations, and the failure to enforce investor rights are additional issues impairing investment, according to the U.S. State Department. Vietnam tied with several nations for 102nd place in Transparency International’s 2004 Corruption Perceptions Index.

Foreign Aid: The World Bank’s assistance program for Vietnam has three objectives: to support Vietnam’s transition to a market economy, to enhance equitable and sustainable development, and to promote good governance. From 1993 through 2004, Vietnam received pledges of US$29 billion of official development assistance (ODA), of which about US$14 billion, or 49 percent, actually has been disbursed. In 2004 international donors pledged ODA of US$2.25 billion, of which US$1.65 billion actually was disbursed. Three donors accounted for 80 percent of disbursements in 2004: Japan, the World Bank, and the Asian Development Bank. During the period 2006–10, Vietnam hopes to receive US$14 billion–US$15 billion of ODA.

Currency and Exchange Rate: As of December 2005, one U.S. dollar was equivalent to about 15,913 Vietnamese dong (D). The relationship between the U.S. dollar and Vietnamese dong is important because the dong, although not freely convertible, is loosely pegged to the dollar through an arrangement known as a “crawling peg.” This mechanism allows the dollar-dong exchange rate to adjust gradually to changing market conditions.

Fiscal Year: Calendar year.