Buffeted by natural and man-made calamities, Vietnam somehow managed to escape relatively unscathed and in the end achieved a creditable performance in 1998. But the worst may be yet to come, warns noted economist Le Dang Doanh

Vietnam does have a storm season, but 1998 has been a bruising year even for a nation long accustomed to weathering natures fury. There were more disasters than just the natural ones, of course, but the multiple impacts of the regional financial crisis were as severe as those of typhoons, drought and floods. But things could have been worse. The economy still posted a GDP growth of about 6% and the country has maintained its socio-economic stability. In the context of the economic situation in neighbouring countries, these are substantial achievements.

However, every achievement had its downside. Agricultural production has grown by 3%, but the cost of irrigation to fight the drought and damage to such cash crops as cofke and pepper have not been fully taken into account. The 11.5% increase in industrial production, given the handicaps of stiffer competition and more difficult distribution conditions, represents a commendable effort. But the improved output of crude oil and power has been offset by a decrease in the production of numerous other commodities hit by low rates of consumption, such as cement and steel, or competition from imports, such as ceramic sanitary wares. Local manufacture of urea fertiliser, in particular, ground to a temporary halt owing to higher production costs compared with the rest of the region.

Remarkably, production in the public sector has grown by 8.7%, in the private sector by 6.3% and in the foreign-invested sector by 22%, proving that efficient production and goods with a sharp competitive edge can still secure a market share in a crisis-hit economy. But attempts at restructuring and cutting costs by the service sector, including tourism, aviation and post and telecommunications, have not prevented a major slide, attaining a growth rate of just 6%. Given its high profile in the national economic structure (42% of GDP), this disappointing result has considerably slowed down the national growth rate.

However, the most obvious effects of the economic crisis on Vietnam have been the reduction in exports and foreign direct investment. Exports have risen by about 0.3% compared with 1997. Apart from the outstanding success of rice and crude oil, output of many manufactured and processed items have registered a steep decline. The primary reason for the fall in exports is the contraction of traditional markets in Asia, the destination of up to 60% of Vietnamese exports. Major trading partners such as Japan and South Korea have cut their imports of Vietnamese garments and textiles, leather goods and marine products.

Because supply exceeds demand in the world market, the price of many items, crude oil in particular, has sharply declined. Therefore despite the increase in the quantity of crude oil exports, up 34% compared with last year, foreign currency revenue as actually fallen by 18% a loss in real terms of $588m. Other exports, such as garments and textiles and leather goods, have posted similar results. The crisis as also meant that competition between countries in the region as become increasingly fierce in terms of prices, delivery conditions and so on. Vietnam has tried to find new markets for its exports in Europe and Australia, but these efforts have not made up for the slump in the Asian market.

Foreign investment has obviously decreased, the implementation of investment projects already licensed has slowed down, and a number of hotel and high-rise building projects have been put on hold. Total realised foreign investment capital is estimated at $1,735m, a fall of 40% compared with last year.

Total investment by society as a whole is estimated to have increased by 3% compared with 1997, but the real figure is lower if price rises are taken into account.

These reversals could not have been predicted as the year began on a bright note with a meeting between Prime Minister Phan Van Khai and the international and domestic business community, a positive step towards establishing a dose and secure relationship between business and government. In order to implement the Resolution of the with Plenum of the Central Party in December 1997, the government proceeded with an integrated programme to introduce numerous new policies, extend the list of businesses that can deal in direct exports, and reform state-owned enterprises.

However, the Prime Minister's intentions have not yet been fully translated into action by some industries and authorities. Many progressive policies have not been implemented. Great potential advantages in land, labour and public savings have not been mobilised effectively.

The need of the hour then is to take a realistic look and highlight weaknesses in order to devise proper policies and measures to rectify them. The economy showed signs of a slowdown in 1996, even more so in 1997, and the 25% fall last year put the decline beyond doubt. The current population growth of 1.64% and GDP growth rate of 6% pose a new challenge for Vietnam: how to balance its rate of consumption with its reserves. The reduction in exports has made the trade deficit a crucial issue. In particular, the imbalance in current account payments has placed pressure on the exchange rate of the dong. The Fall in foreign investment as increasingly stemmed the flow of foreign currency, leading to the necessity for ad hoc solutions such as limiting imports and making more effective use of foreign exchange for urgent requirements.

Exposure to competition has revealed weaknesses in the economic mechanism and management aparatus. The V th Plenum of the Party in mid-1998 evaluated the cultural life of the country, focusing on ethics, corruption and the consumerist lifestyle a number of government officials and company directors in particular were chastised for adopting. The Plenum emphasised the dire need for thrift to combat the crisis.

Low productivity, high production costs and overheads which conceal a multitude of unnecessary expenses have made it difficult to corner even the domestic market.

Bureaucratic red tape and corruption are still with us. Large scale economic scandals that have come to light in recent years are only the tip of the iceberg, and make a case for much deeper economic and administrative reform.

Prospects for 1999

The stress that the Party's VIth Plenum in late 1998 placed on the agricultural sector indicates a major shift in thought at the national policy making level.

This sector will spearhead the government's efforts to deal with the crisis. Growth rate targets for next year set GDP at 5-6%, agricultural output at 3.54%, industrial production at 10-11%, the service sector at 4.5-5.5%, exports at 10% and imports at 2.7%. These are all thoroughly considered objectives in view of the regional economic crisis and are based on the continued progress of firm and comprehensive renovation. Their ultimate aim is Vietnam's gradual integration into the international community.

The economic crisis can be overcome step by step, but it would be naive to rule out the possibility that things could get even worse.

Failure to seize the opportunity presented by the crisis will compound matters as countries in the region will be far more competitive than ever after undergoing radical reforms. Without vigorous and in-depth changes at both macro and micro-level, the economy of Vietnam will then be in an even less favourable competitive position. Macro-economic reform must focus on restructuring the banking sector, controlling foreign exchange and dealing with outstanding debt, in order to generate a smoother circulation of capital flow in the economy and provide the secure capital foundation which business requires.

The mobilisation of sources of funds must begin with land, which is still used in a less than efficient way and is often extensively misused. The programme to reform state owned enterprises will continue; the equitisation scheme is likely to improve the efficiency of this most important sector of the economy. Controlling monopolies and creating an environment for fair competition for business, especially the private sector, are urgent priorities. But economic reform will be effective only if it is carried out in conjunction with administrative reform streamlining the state apparatus and its staffing levels, radically improving working methods and cracking down more effectively on corruption. These are testing times. But every Vietnamese knows that gold has to be refined by fire. History has shown that we have the will to prevail in the most adverse circumstances. We can make history repeat itself in 1999.

(C) Vietnam Economic Times - 1998