Transnational Law Blog

As the Dong Falls, Vietnam Faces a Harder Test at the Time of Global Crisis

The Financial Times recently reported that the Vietnam's dong is depreciating steadily as budget deficit and account imbalance grows with "chronic current account deficit that reached $8.4bn, or 9.3 per cent of gross domestic product, in 2008". Vietnamese government is facing the threat of not gathering enough money for its $80bn fiscal stimulus package as bonds and other commercial tools are falling flat. Investors are holding onto foreign currency due to the uncertainty of the dongs mostly credits to growing trade imbalances and insufficient foreign reserves.

This is a predictable test that most developing countries face at this stage of development, and is what economists considered as the "original sin," for which domestic currency is not used for foreign loans and on long term domestic loan contracts. Reliance on foreign currency for domestic exchange and long term loans make the country highly vulnerable to exchange shock and speculative attack which were the major drivers of the 97-98 Asian financial crisis. The Vietnamese government has little choice, and each option carries relative cost. Raising more reserves will temporary slow down growth, but this must to be done to boost investor's confidence on domestic market and to provide a stable macro economic framework for further development. Vietnamese government must find the outlet to do this- better now than later.

Back to the Same Starting Point

It is that time of my life once again, where I return to my root and start working on Vietnam's economic reform. Not that I have never attempted to escape from this subject to gain more breadth on other regions. Yet, this time I found myself coming back to that same initial starting point from my undergraduate years to look closer into Vietnam’s economic performance and its shortcomings. Why don't I want to work on China, India etc? Why Vietnam again?

In my senior year at UC Santa Cruz, I wrote a senior thesis on trade relationship between Vietnam and China and how these two trade regimes complement and compete with each other in the world market (US and Europe). Although this first experience with academic research was extremely influential and rewarding, I have never reread the paper since it was finished. For some seasons, it isn’t something that I feel particularly proud of other than the fact that I was the first student who ever wrote a senior thesis in the Economic Department at UCSC and was invited to give a lecture on the paper in the very class that I had sat on just a year before then. I guess part of the reason for such attitude is the fact that I further understand how complex and significant the problem is in understanding the reform structure and trade relationship that Vietnam sustains within the regional and global economy. My gaining knowledge made me become ever humble with the unknown and unlearned phenomenon of Vietnam’s developing process.

Some time last week, I decided to write my Master thesis on Vietnam's economic reform again. While searching for data and literature, I was bombarded with so much information that I hadn’t exposed to in quite a few years. There is this bittersweet flavor in digging through the economic literature of Vietnam's trade reform, WTO benefits, FDI and institutional framework of the country. It's sweet because I am working toward a set goal with challenging and applicable subject matter, but bitter from seeing how much more that the country needs to catch up and yet, the institutional and legal framework is too lacking to bridge any major economic gap in the near future. For now, here are a few issues:

1. What are the market failures and advancements created from government subsidies in major sectors?

Political economist, Mushtaq Khan, identifies four major market failures in Vietnamese economy: failures in capital markets, labor markets, land markets and knowledge (information) markets. Given our limited knowledge of how these limitations were addressed by Vietnamese government historically, it’s still the matter of further studies to prioritize and strategies how Vietnamese government should undertake these limitations. For instance, what makes the country’s state owned enterprises profitable- a paradoxical phenomenon for most emerging markets.

2. How Vietnam’s export led growth strategies prevents technological catch up necessary for industrialization? What are the roles of FDI and government subsidies in Vietnam long-term economic development?

It is unquestionable that FDI and trade agreements in the past two decades have driven the country's economic growth. Yet, there is one major concern within this growth format namely the existence of significant constraints in technological acquisition.  So far, major exporting sectors such as garments and agriculture not only require minimal skilled workers but also import limited technological transfer. The NICs (newly industrialized countries) all went through similar starting point but later managed to move up the ladders through technological advancement. Korea, Singapore, Taiwan and Hong Kong all are currently manufacturers of high-tech electronic and computer components. The Vietnamese government needs to focus its policies to reinvest and to lure FDI into industries that could provide higher skill training and importing technology, but that seems easier said than done.

3. Two years after Vietnam’s access to the WTO, what are the benefits and barriers to country’s development process?

Jan 11, 2007 marked a major hallmark in Vietnam's trade regime for its official access to the World Trade Organization (WTO). According to the STAR-Vietnam: “Overall exports to U.S. grew at about 20% in 2007. Exports of primary products declined by 4% largely due to a 33% decline in petroleum exports. Clothing exports posted a 28% growth – 10% increase from 2006’s.” The economy as a whole grew 8.4% in 2007 and approximately 7% in 2008.” Having said that, couple with high inflation (26.7 at its peak) in 2008, the real estate bubble and the global credit crisis later in the year, it is extremely complicated to single out how Vietnam’s access to the WTO enhances the country’s growth rate in 2008. One interesting aspect of these numbers is the correlation between WTO access and global demand for food, raw materials and cheap labor of the past two years. It is questionable if WTO’s access is in fact the main driver of Vietnam’s trade. In addition, WTO access may further create barriers for the government to effectively use subsidies and rents to further its industrialization process.

Source: Star-VN

4. What are the standing of Vietnam’s institutional reform in enhancing property rights and enforcing commercial contracts? Being far from the standard of other developed countries, what can be done to speed up institutional reform in Vietnam? Are there lessons from China’s legal reforms?

 The country's legal reform has seen itself drastically transformed since 2001. Yet, the country still needs to bridge a considerable gap to effectively offer a stable legal framework to lure foreign investors as well as to improve banking and financial sectors. The reform process was indeeded has been closely replicated China's given China started its economic reform 12 years ahead in 1978. However, policy makers should not forget there remains considerable difference between the two economies.

Hopefully, my research will paint a clearer picture than where it appears to be at the moment. For this reason, lots of entries on this topic are forthcoming.

Doi Moi Persists

This from Opinio Juris:

The Working Party on the accession of Vietnam to the WTO completed its discussions today in Geneva and decided to approve Vietnam's application to join. Final approval by the WTO General Council should occur before the end of the year and Vietnam would become the 150th member of the WTO, leaving only Russia, Ukraine, and Iran as the major economies still outside the WTO system. Vietnam had to swallow some fairly major concessions to join, but as this NYT article suggests, world trade is benefiting Vietnam in fairly dramatic ways. So this is probably worth it, at least for Vietnam. We'll see how the U.S. Congress feels about this deal for Vietnam, though, since its approval of permanent normal trading status would be required eventually, and a Democratic Congress is unlikely to sign on.

Additionally, here's the report from Financial Times.

The Next China

Comparing Vietnam to China

Dan Harris of China Law Blog did an excellent post discussing which country will be the next China, and his conclusion was China. Harris has admitted that he looks at China through rose colored glasses, but his analysis of why other countries will not be able to duplicate China's success anytime in the near future is well worth reading.

The post, entitled, "China is the Next China, Now; Vietnam May Be the Next China Someday", pointed out three distinct features that have made China an economic success: (1) political stability; (2) a large population, i.e. workforce; and (3) a supportive infrastructure. Harris argues that although other countries may have one or two of these elements, none currently have all three.

Though there are emerging market countries with stable governments, I see infrastructure and size as distinguishing China - not to mention that for places like Shenyang and Chengdu the "Chinese model" is their model. It is an easy blueprint for both the public and private sectors.

Like Vietnam, other nations come close. India and, to a lesser extent, Russia have size, but they do not have infrastructure. I have spent much time in Russia and I can attest that outside of Moscow and St. Petersburg, its infrastructure is, for the most part, a disgrace. Its airports, roads, internet and telephone system are sub par. I hear India's infrastructure is terrible as well. Russia's population is declining and crime there is rampant. I am convinced both Russia and India will continue to thrive economically, but I am also convinced neither will become the next China.

Again, I am a huge believer in Vietnam's potential. Strong growth is predicted and it is working towards membership in the WTO. But right now, Vietnam's physical and governmental infrastructure, though improving, is just not nearly as advanced as China's nor do I see it becoming so during the next decade. Because of this, a large number of companies either cannot or will not consider Vietnam for their outsourcing. Not yet, anyway.