Vietnam_and_Asean

Vietnam economy and its approach to ASEAN integration By Kwan Ming Wei, U081988X What are major national objectives and developmental challenges of the country' Vietnam has been nicknamed the lone tiger of Asia when it comes to its development story (Robertson, 2007). This is a country that emerged strongly despite going through the First, Second and Third Indo-China War, and the Cambodian Vietnamese war which left her economically more barren than before. The late liberalisation of Vietnam worked coincidentally in favour, as the untapped market was relatively more attractive than the more matured economies of Singapore and Hong Kong. Vietnam aimed to reduce poverty and increase economic growth in the 1980s through the policy of Doi Moi (“renovation”). This involved the replacement of central planning with a regulated market economy. Vietnam achieved respectable success within a span of 15 years from 1990-2005, a consequence of the realization of their national objectives. “Poverty was reduced from about 75% of the population in 1984 to 58% of 1993 and 37% in 1998”( Glewwe, Agrawal, & Dollar, 2004, p.7.). Vietnam has achieved poverty reduction and increased growth from 1990s to the present date hence the next challenge is to sustain growth. The number of poor households in Vietnam in early 2001 still accounted for over 17 percent (or 2.8 million) of the population” ( Glewwe, Agrawal, & Dollar, 2004, p.7.). Vietnam’s strategy of eliminating poverty is through economic growth, as mentioned in the Comprehensive Poverty Reduction and Growth Strategy (CPRGS) (Phan, 2002). The government feels that economic growth is a means of generating resources to tackle poverty; hence they were quick to embrace an economy oriented approach to increase the standard of living. Although complimentary education systems and aids were introduced, the economy was given the highest importance as the government believed in the trickle down effect. Vietnam achieved phenomenon results within a short span of time, averaging a GDP growth rate of 7.6%, from 1991-2006. This growth rate is the highest in South East Asia, second only to China globally (Robertson, 2007, p.7). Vietnam was a rice importer in the mid-1980s, but the lifting of many restrictions on overseas exports helped her attain the position as the world’s third largest rice exporter by 1992 and in the late 1990s, the second largest exporter of coffee. Vietnam also escaped from the Asian Financial Crisis relatively unharmed, suffering a brief drop of 5.8% of 1998 and 4.8% in 1999 ”( Glewwe, Agrawal, & Dollar, 2004, p.7.).. This is because the financial markets were non-existent and the currency was pegged to the US dollar. This cushioned the impact of the crisis as the overstretched banking systems and currency fluctuations were the main culprits. By 2000, growth was back to 6.8%. The tremendous growth after liberalisation is fuelled by foreign direct investments, with the amount peaking at $8497.30 million USD in 1996. (Vietpartners, 2007.). The inflow of foreign capital and technology was a crucial component of the Vietnam success story, hence the challenge that Vietnam faces in sustaining economic growth will be the need to continuously attract FDI. The presence of FDI is vital to reduce poverty, as the employment level at the city and provincial level by MNCs have increased substantially. The expansion of businesses will help Vietnam tremendously by expediting the growth process. Domestically, there are several areas that Vietnam needs to work on in order to increase their attractiveness to foreign investors. They are namely the inefficiency of State-owned enterprises (SOE) as well as land and tax regulations. Firstly, state owned enterprises have been present due to a mix of natural monopolies and state interest in dictating the economy after the Vietnam war. Many SOEs are either in a state of indebtedness or weak financial position. This is because remuneration of SOE managers are not directly linked to the profit of the enterprise. As such, there is limited incentive to maximize their enterprise’s profitability (Kokko, & Sj?holm, 2000). In mid 1997, the government announced that SOEs would not need to adhere to the strict collateral requirements imposed by the increasingly cautious banks. This led to the continued loaning of money to loss-making SOEs despite the failure to repay old debts. “Most of the SOEs operate in import substituting sectors, where Vietnam does not have strong comparative advantages in” (Kokko, & Sj?holm, 2000). SOEs were given autonomy to develop their short and long term plans, but are confined within the developmental guidelines given by the government. As such, there is no incentive for them to develop an edge in the market. The profits were transferred to the government budget and the losses covered up by the government expenditure (Ngu, 2002). Furthermore, the state of capital was poor, with most factors of production being archaic. These factors led to the state of inefficiency in SOEs. As a condition to being an ASEAN member, Vietnam was obligated to remove trade restrictions under the AFTA. However, there was apprehension that the SOEs may not be able to perform with the increased competition. Researchers A . Kok ko and F. Sj?holm(2000) have raised doubts about the profitability of large state owned firms, drawing evidence from the success of Taiwan and China through their small and medium sized enterprises. In terms of employment, the private sector accounts for a larger portion of national employment. (Tongzon, 2002.) The capital/labour ratio of the private sector is less than that of the state’s, which means that the same amount of capital can provide more employment opportunities than the state sector. This indicates a greater capacity for employment generation in the private sector. The equitisation process through Initial Public Offering (IPO) therefore, allows firstly, an avenue for foreign investors to influence the management of the company and secondly, a more competitive environment. Financial accountability drives the firm to maximize profits and operate in a more perfect competition environment. “The Vietnam stock exchange has been vibrant with 110 listings as of 2007, and was valued at US$17.6bn as of April 2007” (Robertson, 2007). The exchange is a direct facilitator of foreign investment and a push factor for the government to advance the SOE reform. “Vinamilk, the nation’s leading producer of dairy-based products, conducted its IPO in 2003. and achieved a foreign ownership of 44% out of a cap of 49%” (Roberson, 2007). This successful IPO should spur the government to move in the same direction. The increase in capitalization of the stock exchange market is a direct result from the IPO listings. This also reflects the success of privatization. Hence management of the securities market is vital to attracting foreign investments, which is needed for the continued growth of Vietnam. Next, land ownership laws have been a constant obstacle for foreign businesses to operate in Vietnam. “In a 2005 survey of 6200 businesses, 40% of the firms leasing land did so from a state entity” (Robertson, 2007). The transactions often involved the government and there is little transparency and efficiency. Furthermore, Vietnamese law does not recognize land ownership, but only the rights to use land. Foreign businesses that are keen to acquire property can only do so via a state issued lease with full price paid up front, or in a designated Industrial Zone. They are not allowed to participate in the domestic market. The only means of getting land outside an industrial zone is through a joint venture with a local partner (Robertson, 2007). Also, the dual-registration system requires a single piece of property to have a title for both the land and the building attached to it (Tongzon, 2002). This obstructs plans to develop the land and hinders the later transaction sales of it. The tax system in Vietnam is complicated, with self-assessment being impossible. Businesses need to consult tax officials and there is often a great deal of discretion used in determining the level of taxation. As such, there is low transparency and little efficiency. Businesses are unable to estimate their taxes, hindering accounting and administrative operations. As of 2009, the corporate tax rate is 28%, as compared to Singapore with a tax rate of 17% (Channelnewsasia, 2009). The relatively high taxation rate is a consideration for potential businesses who wish to operate in Vietnam. The deregulation and policy reforms are still a work in process, requiring further decentralization and transparency to retain foreign interest in the country. How does Vietnam approach the ASEAN integration' According to Nguyen Phuong Binh and Luan Thuy Duong (2001), there were three reasons that made Vietnam join ASEAN. Firstly, it was for peaceful and friendy relations with neighbouring countries. Secondly, it was for economic co-operation and thirdly for enhanced standing in the Asia Pacific region and the world. Vietnam wanted to overcome the legacy of mistrust with its ASEAN neighbours due to the Vietnam war and the occupation of Cambodia. By joining the organization, Vietnam was signaling her openness and desire for peace. “Vietnam sought ‘security with’ rather than ‘security from’ Southeast Asia” (Thayer, 2004). Vietnam embraced the entry into ASEAN enthusiastically, as the government saw the potential in enhancing relations in an era of heightened regionalism and cooperative security after the Cold War. As a proof of Vietnam’s sincerity, trade reforms were carried out, defence spending was slashed and over two-thirds of its military was demobilized. “Prior to membership, Vietnam joined various ASEAN committees on cooperation, health services, population and maritime transportation” (Thayer, 2004). Vietnam also attended the ASEAN Ministerial Meetings as an observer. The effort made was important to gain trust and diffuse any ‘irritants’ to the ASEAN community. In line with the policy of Doi Moi declared in 1986, Vietnam saw the importance of the ASEAN as a catalyst to its economic liberalization. Prior to her entry into ASEAN, 60% of foreign trade was with ASEAN states and Singapore was the biggest trading partner in 1994.(Thayer, 2004) Hence, it made good sense for Vietnam to be officially part of ASEAN since the FDI flow and technological transfer fitted perfectly with her economic policies. Furthermore, the trade and aid embargo imposed by the US was lifted immediately after 1995, providing backwind to Vietnam’s development. In 2000, Vietnam made a Bilateral Trade Agreement with the US, gaining access to the American market. Vietnam has gone on to achieve a trade volume of US$9.7 bn in 2006, a six-fold increase over the figure recorded in 2001. (VietnamNet Bridge, 2007) Vietnam participated in the ASEAN Free Trade Agreement and under the Common Effective Preferential Tariff (CEPT) scheme, was obligated to apply a tariff rate of 0 to 5% for intra-ASEAN trade. Although initially reserved due to the situation of SOEs making up the larger portion of economy, Vietnam gained as trade with other ASEAN members rose. Vietnam’s major imports from ASEAN include oil and capital goods, while exporting textile, garment and leather. Vietnam also benefited from technology transfers and gained increased knowledge of international trade. Furthermore, with the rise of China, Vietnam positioned itself well with its comparative advantage of cheap skilled labour. Intel, Nike and Canon are just some of the major investors who set up manufacturing and assembly plants there. The equitisation result of SOEs is a good measure of Vietnam’s efforts towards ASEAN integration. In 1992, the number of SOEs was reduced by half to 6300(Thayer, 2004). By 2002, 4704 were left and by 2007, only 1807 were left. (Pacific Lottery Corporation, 2008 ) Considering the removal of state subsidies to protect the SOEs and subsequently the privatization altogether, it is clearly evident of Vietnam’s eagerness to integrate with the ASEAN. In summary, Vietnam’s role in ASEAN can be considered as a motivated and a self-initiated partner. This is a steep contrast from the pre-ASEAN period as Vietnam was constantly a source of criticism for its invasion in Cambodia and its security concerns with China. Vietnam’s shift away from the political emphasis into an economic emphasis is an important factor why integration thus far has shown such positive results. Vietnam’s decision to de-escalate the Spratly dispute in South China Sea through ASEAN’s diplomatic agreement with China is also proof of the country’s contribution towards the stability of the region. What would be the future of the ASEAN integration' Moving forward, the future of ASEAN integration is optimistic. Vietnam’s firm commitment to the cause of the organization is evident from her efforts at market liberalization and the political stability in the post war period. The government’s role is vital in continual efforts to privatize the SOEs and strengthen business laws in order to promote a more business friendly environment. A cause of concern however, lies in the increasing trade between Vietnam and non-ASEAN members. This is especially evident after her entry into the World Trade Organisation. The larger trade partners include China and US, which may post a diversion to trade volumes with ASEAN. In 2006, US investment banks JP Morgan and Morgan Stanley initiated coverage on Vietnam, reflecting the positive attention that the country is gaining internationally. Also, according to a survey conducted by the Asian Business Council, Vietnam ranked third for investment attraction among Asian nations in the 2007-2009 period, after China and India (Vietpartners, 2007). Vietnam obtained a score of 3.37, while Philippines obtained 3.47 in the Global Competiveness Index in 2005 according to the Word Economic Forum. In 2008, Vietnam obtained a score of 4.10, while the Philippines obtained 4.09. This indicates that Vietnam is catching up well, and the move to liberalize is reaping dividends, enhancing Vietnam’s world standing and attractiveness as an investment target. Vietnam is well tracked to benefit from the Asia growth story, as a proud member of the ASEAN. With the 16th ASEAN summit to be held in Hanoi for a second time, Vietnam may be ready to take on a bigger role within the ASEAN. Bibliography Tongzon ,J.L. (2002). The Economies of Southeast Asia (2nd ed.). Edward Elgar, UK: Edward Elgar Publishing, Inc. Glewwe, P., Agrawal, N., & Dollar, D. (2004). Economic Growth, Poverty and Household Welfare in Vietnam. The World Bank, Washington, DC. Robertson, S.C. (2007). Vietnam: Open for Investment. Retrieved 1 March, 2010, from KPMG in collaboration with Economic Intelligence Unit: http://www.kpmg.com.vn/files/ VN_OpenForInvestment.pdf Freeman, N.J. (2002). Foreign Direct Investment in Vietnam: An Overview. Retrieved 1 March, 2010 from http://www.freewebs.com/suoihoa/tesi/FDI%20in%20vietnam%20-%20Globalisation%20and%20Poverty.pdf Thayer, CA. (2004). Vietnam’s regional integration: The costs and benefits of multilaterism. Retrieved 1 March 2010 from http://www.scribd.com/doc/18263876/Thayer-Vietnams-Regional-Integration Kokko, A., & Sj?holm, F. (2000). Some alternative scenarios for the role of the state in Vietnam. 13(2), 257-277. Phan, V.K. (2002). The Comprehensive Poverty Reduction and Growth Strategy (Document No. 2685/VPCP-QHQT)). Retrieved 1 March from World Bank: http:// siteresources.worldbank.org/ INTVIETNAM/.../cprgs_finalreport_Nov03.pdf Global Competiveness Index in 2005 and 2008. Retrieved 2 March 2010 from World Economic Forum: http://www.weforum.org FDI Registered Capital, (2007). Retrieved 2 March 2010 from Vietpartners: http://www.vietpartners.com/Statistic-FDI.htm Pacific Lottery Corporation, (2008). Vietnam Facts slide 14. Retrieved 2 March 2010 from http://www.pacific lottery.ca VietnamNet Bridge, (2007, June). Vietnam and US trade expanding. Retrieved 2 March 2010 from http://english.vietnamnet.vn/biz Channelnewsasia, (2007) Government to lower tax burden for businesses. Retrieved 2 March 2010 from http://www.channelnewsasia.com/stories/singaporelocalnews/view/404196/1/.html/ Ngu, V.Q. (2002). The State-Owned Enterprise Reform in Vietnam: Process and Achievements. Visiting Researchers Series (4). Retrieved 2 March 2010 from http://www.iseas.edu.sg/vr42002.pdf