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Vietnam’s Economy

Program 9910
March 9, 1999


Virginia Foote, President, US-Vietnam Trade Council

Faith Keenan, Hanoi Bureau Chief, Far Eastern Economic Review

Le Van Bang, Ambassador to the United States, Vietnam

This text has been professionally transcribed. However, for timely distribution, it has not been edited or proofread against the tape.

JEFF MARTIN: This is Common Ground.

VIRGINIA FOOTE: With the Asian economic crisis still firmly in place one country, Vietnam, is trying to make its economy more market friendly. In doing so it is swimming against the economic tide in the region and against its history.

And the isolation of Vietnam was profound until maybe 10 or 15 years ago. Their experience with foreigners in Vietnam, through history, has not been positive. Foreigners have not been there to help develop the economy.

MARTIN: In this edition of Common Ground, a report on Vietnam’s economy, and especially it’s economic relations with the United States.

FAITH KEENAN: I think they’re trying to find the Vietnamese way to the perfect economy that keeps the income gap relatively narrow and creates as much of an egalitarian society as you can.

MARTIN: Common Ground is a program on world affairs and the people who shape events. It is produced by the Stanley Foundation. I’m Jeff Martin.

You could say that China and Vietnam are on the same economic course. Both are Communist countries that have given up on central economic planning and are embracing market reforms. Both are trying to work their way into the world economic system. At the same time, both are holding on dearly to large state-owned enterprises. But the difference between China and Vietnam is size. And in economics, size matters. In fact in this case it matters a lot.

China, with its billion people and wealth of natural resources, has lots of business suitors. It has formal trade relations with the United States and frequently has a good bargaining position on trade matters. By contrast, Vietnam has a desperately poor economy, a still tenuous political relationship with the United States and importantly, no formal trade relationship with the United States. It has 75 million people and some good natural resources but it has little that makes it competitive with its Asian neighbors.

One of Vietnam’s highest priorities is to reach a trade agreement with the United States and to obtain Most Favored Nation trade status. The United States has taken a tough stance in the trade negotiations and Hanoi has recently given ground to the US position. Vietnam’s ambassador to the United States, Le Van Bang, said in a recent interview that every step toward building an economic relationship with the United States has been difficult.

LE VAN BANG: And we have the trade agreement going on for almost two years. I think that this trade agreement is a little bit difficult for both sides to negotiate. Why? Because we don’t understand the system of economic and trade relations in each country. Especially an American cannot understand Vietnam economic, legal system very well. And of course we don’t have a very well developed legal system. And therefore we work by feeling and trying and learning on that, so the last two years I think that we are negotiating, but we are learning. At this point I think that we know each other better and we come up with a draft and come up to some of the specific issue. So I think that in the future we might complete the negotiation. Soon.

MARTIN: How do you describe the way your economic system works here? It is a socialist country, but you’ve introduced a lot of market elements into your economy.

LE VAN BANG: Yeah. Well, I think that after the war, or even before the war, we conducted the centralized economy. Followed the example of the former Soviet Union. And after the war, ten years, we found out that that policy could not work. And our economy came to a very difficult period in 1986. So we began to look around and look into our policy and we changed our policy. And we have that one calling the renovation or “Doi Ma” in Vietnam. And the essential of that policy is that we honor the private ownership. And we welcome foreign investment to Vietnam. But at the same time we think that it’s more complicated than that. We have to change our legal system. We have to change our financial system. We have to change the, even the thinking of people, on doing business.

So from that time up to now we’ve traveled very far. We got a lot achievements through this new policy. We got enough food for people to eat. We have a surplus to export every year in rice. We got a lot of building going up in Vietnam. New economy and new roads every day. So the life in Vietnam is much better. But at the same time, because we are in a transition period there are still elements of the past economy, like the state economy or the control of the government or ministry on the economy. That cannot overnight change. So we change it step-by-step. We want to give stability in the country, especially political stability. And if you change the economy too quick it might have an impact on stability. So we do it in a way that the economy develop fast but at the same time you will have a stability in the political area.

MARTIN: Virginia Foote, President of the US-Vietnam Trade Council, says that Vietnam is trying to follow a course similar to China’s, but working from a smaller base.

VIRGINIA FOOTE: Vietnam is still a very poor country. The average per capita income for Vietnam is $320 or so a year. So they are starting from a very low base. They are about 80 percent agricultural and most people live in the countryside. And 20-30% of the economy is in more the industrialized or state-run sector.

They are hoping to join sort of the international economic community. They have agreed to join WTO. They are trying to negotiate an agreement with the United States for MFN status. And it’s led to an assessment of what kinds of reforms do they want to take; how quickly can they go through those reforms. There’s much discussion now in looking at how Eastern Europe went through economic reform and whether sort of shock therapy is a model, or whether a more measured step-by-step approach makes more sense for Vietnam. In that sense I guess they are looking more at the China model. But I think they are trying to take lessons from countries in Eastern Europe. They look at Russia as being a negative example and the difficulties, that the standard of living has gone down in Russia before coming up. And Vietnam can’t really afford that. And they are also looking at their ASEAN neighbors and how growth and development has come there.

FAITH KEENAN: The phrase that the Vietnamese usually is similar to what the Chinese say about their economy. It’s a socialist-oriented market economy. Now what does that mean? I think both countries are trying to sort that out.

MARTIN: This is Faith Keenan, Hanoi Bureau Chief for the Far Eastern Economic Review.

KEENAN: What the Vietnamese will also say is they want this market economy led by the state. And indeed the state has increased its share of GDP. I mean the state sector and the state-owned enterprises. And that’s partially due to the foreign investment because the joint venture partners are almost always state firms and it’s only been in the last year that they started to divide the statistics. But the state sector, if you just take it as a whole, is growing.

There’s ambiguity. Since 1986 the Vietnamese see that perhaps that’s not working. The original Stalinist model of large industry, import substitution, might not be working, which is why they did start to open up the economy. But I think given the troubles in the region, all the countries in the region that had open capital accounts have suffered as a result, they relied mainly on foreign and they had developed stock markets very quickly and money flew out as fast as it had flowed in. And so the Vietnamese are very, are now doing a lot of soul searching as to whether, is this the best model? I mean, they used to look to Korea and Taiwan as models. Korea, it hasn’t held up. The trade bills are not the best example. Korea is having just as bad as problems as the other countries in Southeast Asia. Taiwan looks better. But I think they’re trying to find the Vietnamese way to the perfect economy that keeps the income gap relatively narrow and creates as much of an egalitarian society as you can in keeping with traditional Marxist ideas. But I—to me it’s a fluid situation and it’s a very intense debate within the Party now. More so because of the regional economic problems. Do you open up and have the economy grow or do you close up and protect things and keep stability?

MARTIN: Has the regional economic problem had a palpable on Vietnam? Or is there economy enough and detached enough from the region that it hasn’t had a direct affect on their economy?

KEENAN: Definitely. If you look at foreign investment and exports. Two-thirds of their foreign investment was coming from the region. Korea was a big investor; Singapore; Malaysia was in there (not as big); Japan. Japan is also retrenching. Exports to, mainly with the region. And those countries aren’t able to absorb those exports. So those are Vietnam’s two main sources of foreign exchange, in addition to official aid. So it’s been critical.

FOOTE: The investment numbers for ’96 were, there was about $9 billion worth of foreign investment in Vietnam. ’97 it went down to $4 billion. This year it may hit $1.5 billion. So it’s been a dramatic downturn. The growth numbers for Vietnam, unlike for many of their neighbors in the region, GDP in Vietnam is still growing. I think it will probably grow 3 or 4 percent this year. Which is not as high. They had been enjoying growth rates of 7-9 percent in the last ten years, since they started their economic reform program. So the numbers are coming down. But they are still positive numbers. They are not negative numbers. And that’s unusual in the region.

But it’s also—I agree with Faith—it’s, there’s the question of how much of the difficulty, the economic difficulty that Vietnam is having now is due to the Asian financial crisis and how much of it is due to Vietnam maybe not moving fast enough on its economic reform and therefore attracting foreign investors and trade. And I think that is something that is very much being discussed in Vietnam, is what moves should they take? Are they simply in a historic moment that is really, there’s not much they can do, or are they at a position, in a position now where they really need to make some of these tough decisions for their economy in order to come out of the financial crisis in a better place than they are currently.

MARTIN: Let me ask you a basic factual question. You mentioned about the investment, the foreign investment in Vietnam and that it has come down quite a bit. Who are the investors? Where are the investors coming from and who are Vietnam’s primary trading partners?

FOOTE: It has been about 70% of the foreign investment in Vietnam has come from other Asian countries. The US is a minor player in this. We are about the—the numbers shift around a little bit—but we are the 7th or 8th largest investor, with $1.2 billion worth of investment since the US lifted the embargo. Whereas total foreign investment is about $30 billion. So we are a, the US is a minor player. Singapore has been the number one investor but Taiwan, Singapore, South Korea are all up in the top.

MARTIN: Let’s talk a little bit about the US relationship with Vietnam in the economic sphere. Ginny, you head the US-Vietnamese Trade Council. What is our trading relationship like with them.

FOOTE: It’s modest. We lifted the embargo about four years ago now. We were late coming in. And we have not extended MFN status to Vietnam. Vietnam is one of five countries….

MARTIN: We should say—

FOOTE: …I’m sorry…

MARTIN: MFN, Most Favored Nation status.

FOOTE: Most Favored Nation.

MARTIN: Right.

FOOTE: Which is normal trade relations basically. There are only five countries in the world that the US does not extend normal trade relations to. And what it means is basically there are very high tariffs imposed on Vietnamese products coming into the United States. Which has the effect of limiting the kinds of investments that American companies would put into Vietnam. For example, a lot of the engine of growth in other countries in Southeast Asia and in China have been driven by American companies coming in to do electronics or garments or some of the other products that then get imported back to the US. Vietnam is not an attractive place for those sorts of investments because there’s not Most Favored Nation status.

Because Vietnam is a Communist country, a socialist country, in order to get MFN status from the United States there has to be a trade agreement. And that’s where we are now. We are negotiating a highly technical, very difficult, comprehensive trade agreement with Vietnam that’s quite difficult and the standards are very high. And I hope we will finish this process in the next 6-9 months. And get it through Congress and get MFN extended. But it’s, this is going to be a tough couple of months ahead.

MARTIN: We’ll break for a moment here. You are listening to Common Ground. In today’s program we are talking with Virginia Foote of the US-Vietnam Trade Council, and Faith Keenan of the Far Eastern Economic Review, about Vietnam’s economic emergence.

Printed transcripts of Common Ground and audio cassettes of this program are available. Listen at the end of the broadcast for details on ordering. Common Ground is a service of the Stanley Foundation, a non-profit, non-partisan organization that conducts varied programs and activities meant to provoke thought and encourage dialogue on world affairs.

MARTIN: Vietnam is of course best remembered in this country as the enemy in the infamous war of the 1960s and early ‘70s. For some people the idea that we would have economic relations with Vietnam at all might still come as a surprise. My interview with Faith Keenan and Virginia Foote picks up on that note.

Why should Americans be concerned about this? Why should they be interested in what our economic relationship with Vietnam is like? It’s a relatively small country a long way off. And basically what do they have to offer us?

KEENAN: That’s a good question.

FOOTE: Well, it’s small country but it’s 80 million people. It’s not an insignificant country.

MARTIN: This again is Virginia Foote.

FOOTE: It is, I think it’s, if you look at Vietnam just in terms of an economic relationship it’s difficult to make the case that Vietnam is very important. It’s certainly not important to our economy. It is important though that the region, Southeast Asia has certainly been the source of a lot of agony for many years for the United States and obviously for the countries in the region. And I think the hope is that by bringing Vietnam into a broader and deeper with the United States that that has long-term impacts on the stability of the region and the prosperity of the region and the development of the region. And the relationship has been much more driven by the Vietnamese desire to have a relationship with the United States. The US is still—sometimes it seems as if the war ended just a few months ago rather than 20 years ago, and the debate that goes on here about relations with Vietnam. The war is very much in Vietnam’s past. They are seeking a relationship with the United States. For a variety of reasons. But they admire our technology, they admire our markets, they are looking to our markets. They admire our educational system. And I think we have quite a bit to offer Vietnam. And Vietnam very much wants this relationship with the US.

KEENAN: Can I add to that? What’s in it for the US? A trade relationship would enhance the broader relationship, provide investment opportunities. It is 75 million people, the third largest at least in—well, Southeast Asia, after Indonesia. And there is also a strategic consideration. Indonesia was always sort of the leader and the counterweight of ASEAN to China. Because of the instability there now there’s no essential leader in Southeast Asia. Would Vietnam be that leader? I think it’s too early to say . And clearly the relationship isn’t there yet. And there’s the historical baggage, not only between the US and Vietnam but between Vietnam and China. Vietnam clearly, that, its most relationship has been historically, and clearly would like to have a relationship with the US to balance that as well. But it’s a tricky balance and it will be a while I think before both countries get there.

MARTIN: Do you agree with Ginny’s point that the war is still more with us on our side than it is with the Vietnamese?

KEENAN: Oh, I think so. But I think also people tend to underestimate, overestimate the ability of the Vietnamese to forgive and forget. I think clearly the Vietnamese are very pragmatic. They need to develop their economy. They do want access to the US market. Where else can you look to export now? Eastern Europe, forget it. Russia, no. Europe, perhaps. But it’s a pragmatic consideration. I do think there’s still a lot of underlying bitterness. You don’t see it very much on the surface in Vietnam but I think there’s also a lot of—within certain segments of the leadership you still have people in charge who were in prison under the French, who led the war against the Americans, who, you just can’t erase all of that history quickly. And many of these people are still very much, they’re Marxists, they’re ideologues. They don’t necessarily think a relationship is to their benefit. I mean this again is the debate going on within the Vietnamese hierarchy. And has gone on for decades. You have those who think we should, the should open to the West and that would promote economic development, and those who think that they would rather have a different kind of economic model.

MARTIN: Is that changing any with the change of generation?

FOOTE: I think that the new generation is certainly more exposed to the West, Western culture and Western influences than the older generation. And the isolation of Vietnam was profound until maybe 10 or 15 years ago. So that this, there is a, I think it’s less directed at the United States than it is directed at foreigners. Their experience with foreigners in Vietnam, through history, has not been positive. Foreigners have not been there to help develop the economy. Therefore it’s something of an implausible notion that foreign investment would be beneficial to Vietnam as well as beneficial to the investors there.

But I think there is an enormous national pride in Vietnam. There is a moral sense that the distribution of income in the United States and in some other countries is unacceptable. That the, that what people are paid to do certain activities or certain commercial enterprises does not represent what is good for Vietnam. And these are, I think the next generation shares some of these concerns. That how far can the distribution of income widen, or how wide can it get before it’s hard to accept and understand and explain to the older generation. And I think this is going to be a transition that will take place more slowly.

MARTIN: On the investment side what’s attractive for investors in Vietnam? Is it relatively inexpensive labor? Beyond that what kinds of things are investors looking for from Vietnam?

KEENAN: I mean, that’s the main thing, I think anybody is looking for. And also a market. That’s why you have so many consumer products companies there, like P & G and like Coke. I mean those are the ones that always go into a market first. But I think that’s the difficulty. What does Vietnam have to offer that other, that companies cannot find in other countries in Southeast Asia since the currencies have devalued. Thailand, Malaysia—not Indonesia because they’re too many political stability problems and questions there. But Thailand and Malaysia you look at and they have infrastructure. They had a more welcoming government, especially in Thailand until recently—well, not so much Malaysia. Malaysia would still like to have foreign direct investment if not portfolio. But they have better developed infrastructures, the devaluation makes their labor cheaper. So this really puts pressure on Vietnam. How can Vietnam compete? It’s, there are too many hassles and not a big enough market. I mean, people will put up with those kinds of bureaucratic hassles in China, but not Vietnam.

FOOTE: Product-wise, the, Vietnam is exporting a lot of oil now. They’re the second or third largest rice exporter onto the world market. They’re exporting a lot of coffee. They have high quality coal. So they have natural resources that are where their primary source of hard currency is now on the world market.

MARTIN: You were talking before, Ginny, about the trade agreement. You said in the next 6-9 months, you know, hopefully this thing will get worked out and Vietnam will get Most Favored Nation status. What are the hurdles?

FOOTE: Well, the hurdles are that we are asking Vietnam to basically allow foreign investors to come in and invest and trade on a level playing field with Vietnamese companies. Right now Vietnamese companies are protected in the sense that only Vietnamese companies can export and import. Vietnamese companies can be involved in certain sectors of the economy, foreign companies cannot. This is true, this has been true in many economies around the world. And what we are asking Vietnam to do is to accept the principle of getting away from this distinction between local companies and foreign companies. But that we would then—we, the United States—would then give Vietnam flexible time periods to phase out these distinctions. That’s a sort of summary that’s maybe too quick, but the hard part for Vietnam is that they feel that their infant industries, their infant companies, are in no way able to compete with American foreign companies coming in and therefore were they to open the door quickly their economy would collapse. I think right now the two sides, the US is asking Vietnam to do too much too quickly; the Vietnamese are offering too little too slowly; and the rhetoric is high. But many countries have gone through this. I think something can be put together and proposed and that the US will be more flexible on time frames than we have been so far. I’m hopeful about it. But it’s, this is not going to be an easy process.

MARTIN: Okay. How important is our economic relationship with Vietnam in our total relationship with Vietnam? I mean, where does it rank as opposed to our military relationship with them, our political relationship with them? Is it a key element in moving our overall relationship forward? Or is it a relatively smaller part?

KEENAN: I think it depends on who’s perspective you’re looking at it from. I think for the Vietnamese it’s key. That’s what they want. They want an economic relationship. For the US, I would say it’s more strategic. I mean, yes, it, I think it’s less important for the US vis-à-vis Vietnam. It would help to have a trade relationship and have it easier for foreign companies, American companies to be able to do business in Vietnam. But I think there are other considerations for the US and they come down to strategic in Southeast Asia.

FOOTE: Yeah, I would agree. I think that the process of normalization, which started almost ten years ago now between the US and Vietnam, there has been a very clear and sort of linear path. And political normalization came first, and how we were to normalize, and under what conditions, and who would do what, and what would be the reward, has been quite carefully spelled out. Mostly by the US dictating the terms. And now the Vietnamese very much want economic normalization and feel they need and want MFN status. And therefore this is the issue on the table. I think if we don’t succeed, it will have a negative impact on the overall relationship because we have succeeded at every other step. Things have taken longer than I think both sides had hoped, certainly than I had hoped. Every thing is more difficult than one thinks it ought to be. But as we head into a presidential season in the year 2000 I think it will be more difficult for the US to put much attention to a trade agreement with Vietnam. So I’m sort of anxious that we get this thing done in 1999 because I think it will be even harder in the year 2000. And at that point then I think the Vietnamese could feel we’re souring on the relationship or we’re not moving quickly enough. And I think they will be disappointed.

MARTIN: Our guests in this edition of Common Ground have been Faith Keenan, Hanoi Bureau Chief for the Far Eastern Economic Review, Virginia Foote, President of the US-Vietnam Trade Council, and earlier, Le Van Bang, Vietnam’s Ambassador to the United States. For Common Ground, I’m Jeff Martin.

Our theme music was created by B.J. Leiderman. Common Ground was produced and funded by the Stanley Foundation.

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