Vietnam’s Integration into the Region and the Asian
Financial Crisis
Keynote Address
to EuroViet 4 Conference
University of
Passau, Germany
September 16, 1999
Carlyle A. Thayer*
University Rector, Deputy Ambassador (of Vietnam) to Germany,
I would like to thank Professor Vincent Houben, Dr. Martin Grossheim and the other organizers of Euro Viet 4 for the honor of inviting me to deliver this keynote address today. Before I commence my address I must state that the views are my own and do not reflect the views or policy of the Asia-Pacific Center for Security Studies, the Department of Defense or the U.S. Government.
Introduction
The theme of this conference is “The Economic Crisis and Vietnam’s Integration into Southeast Asia”. I approach this topic with a great deal of caution because of the large number of specialists, particularly economic specialists, in the audience. I am cognizant of the many papers devoted to various aspects of the conference theme which will be presented over the next several days.
My presentation tonight will be that of a political scientist and international relations specialist. I would like to carry forward several of the themes developed by the panels on Vietnam’s foreign policy held at the Euro Viet 3 conference in Amsterdam two years ago. Associate Professor Ramses Amer and I have been busy in getting the various contributors to update their papers. The edited collection, Vietnamese Foreign Policy in Transition, will be published by the Institute of Southeast Asian Studies in Singapore next month.
In 1986 Vietnam made the decision to embark on doi moi. This led to a remarkable transformation of its centrally planned socialist economy towards a market orientation and to a marked alteration in Vietnam’s external relations. Vietnam was a member of the “socialist camp” ever since the Democratic Republic of Vietnam was granted diplomatic recognition by China and the Soviet Union in 1950. After the Vietnam War Vietnam became increasingly integrated into the “socialist camp headed by the Soviet Union” as a result of increased funding for its successive five year plans. In mid-1978 Vietnam joined the Council for Mutual Economic Assistance and in November signed a 25-year Treaty of Friendship and Cooperation with the Soviet Union.
Although an attempt was made to integrate Vietnam and the other developing socialist countries - Cuba and Mongolia - into the CMEA structure, not much was accomplished. Approximately two-thirds of Vietnam’s trade was conducted with the Soviet Union. In reality, Vietnam incurred ever mounting debts to Moscow.
Because of Vietnam’s invasion and occupation of Cambodia in 1978-79, the ASEAN states, Japan, Australia, and others, imposed an aid, trade and investment embargo on Vietnam. The United States first imposed its economic embargo on North Vietnam in 1964 and later extended it to the whole of Vietnam following reunification.
Given this pattern of dependency on the Soviet Union, and isolation from regional states, it is remarkable to observe the transformations that have taken place since the collapse of the socialist system in Eastern Europe and the Soviet Union.
Vietnam, without major disruption, re-orientated its economy to the growth economies of East Asia: Japan, Singapore, Hong Kong, Taiwan and South Korea. In mid-1991, at the 7th national party congress, Vietnam moved to “make friends with all countries”. This was accomplished in the short space of four years. In late 1991 Vietnam and China normalized their relations. The following year Japan restored its development assistance to Vietnam. 1995 was a pivotal year. The United States, which a year earlier has lifted its embargo, now granted Hanoi full diplomatic recognition. Vietnam, a socialist state, became ASEAN’s seventh member. Finally, Vietnam and the European Union signed a framework agreement.
Vietnam’s integration into the Southeast Asia region was made possible by a number of factors. We should not forget the historical basis of present developments. Let me highlight a few salient episodes.
First, in the mid to late 1940s, Ho Chi Minh’s Democratic Republic maintained information offices in Bangkok and Rangoon and received both moral and material support from these quarters. Ho Chi Minh visited India and Burma in 1958. Pham Van Dong represented Vietnam at the 1955 Bandung conference of the Non-Aligned Movement held in Indonesia. These may be straws in the wind compared to later developments but they provide a valuable perspective about Vietnam and its identification with the region.
Second, it should be pointed out that after reunification in 1975, and the formation of the Socialist Republic of Vietnam the following year, Vietnam retained membership in the World Bank, International Monetary Fund and Asian Development Bank held by the former regime.
Third, during the period from mid-1976 until September 1978, Vietnam and ASEAN went through a period of flirtation. Vietnam stopped attacking ASEAN as “the son of SEATO” and sought to open and/or restore diplomatic relations with Thailand, Malaysia and the Philippines. It already had long-standing diplomatic ties with Indonesia. ASEAN even set up an Indochina Reconstruction Fund.
Fourth, and more important to our enquiry today, are the major decisions made by Vietnamese party leaders in 1987 and 1988,. Here I refer to Politburo resolutions nos. 2 and 13 which resulted in a strategic readjustment of Vietnam’s defense posture, and the multilateralization of external relations, respectively. Troops were withdrawn from Laos and Cambodia by 1989. Vietnam also sought to diversify its foreign relations and “be friends will all countries”, a theme given special emphasis by the seventh national party congress in 1991. In other words, Vietnam was well placed to further develop its relations with Southeast Asia once the Cambodian conflict had been settled.
Vietnam and ASEAN
In 1994 when Vietnam made the decision to apply for membership in ASEAN it did so with the prime strategic objective of securing of a more peaceful international environment in which to guarantee Vietnam’s national security against external threat. A secondary objective was to secure the most favorable external conditions for carrying out economic renovation. Vietnamese officials also state that two other factors accounted for Vietnam’s decision to join ASEAN to attract foreign investment, and as a catalyst to its domestic reform process.
Within these broad strategic objectives Vietnam specifically sought to transform its relations with ASEAN states from suspicion to trust and from competition to partnership my moving to resolve such problems areas as the repatriation of Vietnamese refugees, demarcation of continental shelves, overlapping territorial claims (involving Malaysia, the Philippines and Thailand) and fishing disputes. These legacies of history were seen as irritants which could impede the development of closer ASEAN-Vietnam relations. An improvement in Vietnam’s relations with ASEAN would also serve to change Vietnam’s image and increase its prestige in global affairs.
There were other, unspoken motivations, in joining ASEAN. Vietnam also sought membership in ASEAN to enhance its bargaining position with other states, specifically China and the United States.
Vietnam also set the broad objective of achieving external support for its economic development which it saw as a concomitant of an improvement in the strategic environment. In other words, a transformation in Vietnam’s political relations would also lead to a transformation in Vietnam’s economic relations which in turn would reinforce its domestic policy of renovation. As a first priority, Vietnam sought to integrate its economy with that of the Asia Pacific Region and global economy.
Joining ASEAN meant participation in the ASEAN Free Trade Area and gaining familiarity with the norms and practices of international trade. This in turn facilitated membership in APEC and, it is hoped, eventual membership in the World Trade Organization. As a member of ASEAN, Vietnam could also expect to learn from the developmental experience of its individual members. This would accelerate the development of a competitive market-orientated economy
As a member of ASEAN and a participant in AFTA Vietnam expected to benefit from increased trade and investment from these states. Even before membership in ASEAN, Vietnam began to reorient its exports to take advantage of the large Southeast Asian market. Vietnam’s participation in AFTA, it was thought, would result in trade creation and trade diversion benefits for Vietnam. For example, imports from ASEAN were expected to replace more costly domestically manufactured goods and even have the indirect affect of dampening the smuggling of Chinese goods. Vietnam expected that membership of AFTA would result in increased foreign direct investment to the extent that the ASEAN region as a whole was seen as stable and profitable market.
Impact of the Asian Economic Crisis
It is important to note that the Asian economic crisis of 1997-98 was one of four “typhoons” which struck Vietnam at that time. The first “typhoon” was the decline in Vietnam’s economic performance for the first time since the adoption of doi moi. Vietnam began to experience an economic downturn in mid-1997 prior to the onset of the Asian financial crisis. This was due to fundamental deficiencies in the Vietnamese economy such as a weak financial and banking system, lack of budgetary transparency, an inefficient state sector, bureaucracy, red tape and endemic corruption.
The second “typhoon” was emergence of widespread peasant unrest in the northern province of Thai Binh in the final quarter of 1997 and extending into early the next year. There were other rural “hot spots” but none so severe as Thai Binh. The third “typhoon” was in fact a real tropical storm, the worst in fifty years, which lashed Vietnam in late 1997. The fourth “typhoon” was the impact of the Asian economic crisis on Vietnam in 1998. This resulted in a mark drop off in foreign investment and trade, especially from the former growth economies of East Asia - South Korea, Hong Kong, Japan and Thailand.
Taken together these events — declining economic growth, rural unrest, natural disasters and a regional economic crisis — and their after effects — will continue to pose a severe challenge to ‘performance legitimacy’ as the basis of one-party rule in Vietnam in the coming years.
Vietnam’s Response: 4th Plenum (December 1997)
In December 1997 Vietnam responded to the ‘two typhoons’ of rural unrest and a downturn in the economy by convening the fourth plenary session of the party’s Central Committee. This meeting brought to an end the period of leadership transition that had been under way since the eighth national party congress in 1996. But it did not resolve internal party factionalism between reformers and conservatives.
The fourth plenum appointed Le Kha Phieu as party Secretary General replacing Do Muoi. The plenum also accepted the resignations of Do Muoi, Le Duc Anh and Vo Van Kiet from the Politburo. They were promptly appointed advisers to the Central Committee. Although these leadership changes have been hailed by the official media as marking a decisive transition to a younger leadership, it is clear that Do Muoi and Vo Van Kiet continue to exercise considerable behind-the-scenes influence.
Despite Le Kha Phieu’s military background, and his reputation as a strong proponent of disciplinary measures to deal with endemic corruption, he has not emerged as a strong leader after more than a year and a half in office. Rather Phieu has had to play the role of consensus builder among the party’s factions. Also, Phieu is reported to have deferred to Do Muoi on a number of occasions. Phieu must play a cautious role if he wants to be appointed for a full five-year term at the ninth party congress scheduled for 2001.
Vietnam’s system of collective party leadership continues to constrain the decision-making process. This is having detrimental effects on the ability of Prime Minister Phan Van Khai to carry out a comprehensive package of economic reforms. The result has been a gradual and piecemeal response to the challenges of Asia’s financial crisis by the party’s Central Committee.
Since the onset of the Asian financial and economic crisis in mid-1997 the Vietnam Communist Party has convened five meetings of its Central Committee to fashion a policy response. The fourth plenum in late 1997 set the scene for subsequent meetings. It identified the major ills besetting Vietnam’s economy — bureaucracy, corruption, inefficiency, and wastage. It also identified such problem areas as declining foreign investment, low domestic saving rates and the lack of export competitiveness.
The VCP responded by reaffirming its commitment to accelerate ‘comprehensive and uniform renovation’ but at a pace that Vietnam will determine and with the added insurance that political stability and Vietnam’s unique national character will be preserved. For example, the plenum endorsed the restructuring of state owned enterprises as a major priority but underscored that the process would be gradual. This goes against advice received by major international financial institutions and donor countries.
The fourth plenum also stressed the importance of mobilizing domestic capital and encouraging foreign direct investment. Labor-intensive export processing industries are to have first call on capital generated by these sources. But the plenum was cautious about opening up Vietnam’s capital market.
In late 1997 Hanoi’s leaders concluded that Vietnam was in a relatively good position to withstand the impact of the Asian financial crisis. In their view Vietnam’s low level of regional economic integration coupled with the inconvertibility of the dong would insulate Vietnam. By mid-1998 it was clear they had been overly optimistic and that economic targets set by the eighth congress would have to be lowered.
By mid-year export growth had declined by one-third compared to the previous year. Foreign investment had fallen to one quarter over the same period while foreign investment fell to one quarter of what it had been. These negative trends reflected Vietnam’s dependency on its regional neighbors with whom it conducted sixty percent of its trade and on whom it relied for seventy percent of its foreign investment.
5th Plenum (July 1998)
Vietnam’s deteriorating economic circumstances were addressed by the party Central Committee’s fifth plenum in July 1998. This meeting stressed the importance of mobilizing internal capital resources to make up for the short fall in foreign investment. Vietnamese economists estimated that US $7 billion in private capital lay untapped in Vietnam. But the most remarkable policy response of the fifth plenum was to focus its attention on ideological and cultural issues and to defer a consideration of economic policy.
6th Plenum, first session (October 1998)
This economic review was conducted by the Central Committee at its sixth plenum held in October 1998. Although the final communiqué noted that Vietnam’s ‘economic growth rate has slowed and output and trade have become less effective’. Nonetheless, it declared that Vietnam had achieved a ‘big success’ in maintaining political stability and attaining a six percent GDP growth rate in 1998. In short, Vietnam’s leaders concluded that they have the internal strength to withstand worsening regional economic conditions in 1999.
The sixth plenum set priority on agriculture and rural development. It noted that Vietnam still had plentiful untapped domestic resources that could be used to spur development. In particular, it highlighted the mobilization of domestic savings and funds from overseas Vietnamese as sources of investment. The plenum indicated that an effort would also be made to revitalize rural cooperatives in an effort to reassert central control after a period of prolonged decentralization.
The sixth plenum clearly indicated that Vietnam’s leaders have once again backed away from adopting a comprehensive reform package being urged upon them by international financial institutions and donor countries. This is because the central concern of the leadership is to maintain internal stability and party unity while preserving Vietnamese culture and values in the face of the intrusive forces of globalization. These concerns have been heightened by a marked rise in citizens’ complaints about corruption and continued rural unrest in 1998.
On October 15th, in the midst of party Central Committee meeting in Hanoi (and in Beijing), it was announced that Prime Minister Phan Van Khai would pay his first official visit to China from 19th-23rd October. On the eve of Khai’s departure the Chinese news agency issued a hard-hitting review of the state of Vietnam’s economy. Citing Vietnamese economists and policy makers, Xinhua noted that ‘1999 will be a tough year in comparison to 1998’. Xinhua concluded, ‘The Communist Party and government [of Vietnam] must now face the truth and acknowledge that economic targets will not be achieved this year. Alternative approaches to maintain economic stability have now been raised and need serious executive consideration’.
While in Beijing Phan Van Khai and his counterpart, Zhu Rongji, discussed the course of economic reforms in their respective countries. Both concluded that the maintenance of ‘socialist stability’ was the key factor. This statement underscores the central concern of the VCP that too rapid economic change could lead to political instability.
On his return from Beijing, Prime Minister Khai stated in an interview with Tuoi Tre (Youth), newspaper that Vietnam would carefully study the Chinese model of reform. Proposals would be drawn up and submitted to the party Central Committee for consideration, he said.
Both China and Vietnam share a very important common interest: the successful development of their ‘socialist market economies’. They stand alone among the five remaining socialist states as most likely to succeed in this ideological endeavor. Dinh Ngo Liem, a retired diplomat and senior party official, wrote an article in Nhan Dan newspaper (16 October 1998) in which he enumerated four basic similarities between reforms in China and Vietnam. His list included:
• pursuing socialism while taking into account the specific conditions of each country;
• renovation and reform as the basis for boosting economic development and stabilizing the political situation;
• mobilizing domestic resources while also making use of international cooperation; and
• leadership of the communist party.
During 1998 Vietnam also faced challenges from outside the country. In mid-year Vietnam released its first defense white paper, ‘Vietnam: Consolidating National Defense, Safeguarding the Homeland’. This document highlighted three major threats faced by Vietnam: falling economically behind other countries in an increasingly competitive global environment; the threat of peaceful evolution (political subversion); and territorial disputes, particularly in the South China Sea.
In October, Foreign Minister Nguyen Manh Cam delivered a major report on Vietnam’s foreign policy to the National Assembly. This report noted that the Asian economic crisis had caused political and social instability and the rise in bilateral tensions among some members of ASEAN. In addition, Cam noted that ‘the intention to replace the principle of non-interference in each other’s internal affairs with the principle of constructive interference has emerged’.
Vietnam has now concluded that membership in ASEAN has not brought all the benefits expected when Vietnam joined in 1995. Vietnam has decided to be more proactive in advancing its national interests within ASEAN, in other multilateral institutions, and by developing strong bilateral relations with selected partners.
Sixth Plenum (Second Session) - January/February 1999
The Vietnam Communist Party (VCP) held the sixth plenary meeting (second session) of its Central Committee from 25th January to 2nd February to discuss ‘fundamental and urgent issues’ concerning party-building. In other words, the meeting focused on ways and means to improve the efficiency and administrative performance of the VCP in implementing Vietnam’s reform program.
The first session of the sixth plenum met in October the previous year. This meeting discussed socio-economic policy for the next few years. It is highly unusual if not unprecedented for the Central Committee to hold a split session. The second session was postponed at least twice.
The second session of the sixth plenum was held under the shadow of several important developments. Firstly, the VCP announced a bumper crop of 106,000 new recruits in 1998. This intake exceeded all years since 1986 when ‘doi moi’ was adopted. More than half of the new members were under thirty years of age.
Secondly, the VCP was faced with a new round of internal party dissent spearheaded by very senior retired officials. Foremost among this number was General Tran Do, former head of the party’s Ideology and Culture Commission. General Do has been continually vocal since peasant unrest in his native province of Thai Binh turned violent in late 1997. General Do was expelled from the party. This provoked a renewed round of protests and even one resignation by a former high-level military historian.
Thirdly, the sixth plenum (second session) was held amidst speculation of major changes in party and state leadership sparked by the death of Politburo member, and former Minister of Defense, Doan Khue.
The sixth plenum focused its attention on ways to counter the degradation in the party’s ranks caused by corruption, excessive bureaucracy, ‘individualism’, and internal disunity. The plenum resolved to launch a three-year ‘criticism and self-criticism’ campaign designed to rid the party of its degenerate members and restore unity.
In the meantime party officials have been tasked with drawing up guidelines on the question of the extent to which a party member and his/her family members can participate in private economic activities.
The sixth plenum postponed the question of a leadership change until a later date. In the meantime a task force has been set up to design a plan to slash the party and state bureaucracies. This will be presented to the next Central Committee meeting.
7th Plenum (August 1999)
The most recent Central Committee plenum, the 7th, met in Hanoi from 9th-16th August. Its main concern was on “issues relating to the organization and apparatus of the political system, wages and social allowances funded by the state budget, and preparations for the upcoming ninth national party congress”. This will be the major focus of domestic activity in Vietnam from now until the ninth congress scheduled for the first quarter of 2001.
The above developments suggest that the VCP will be preoccupied with internal matters over the next year and a half. The party Secretary General, Le Kha Phieu, will face mounting pressure from both the left and right to take action against corrupt high-ranking officials and internal party dissenters. The pace of decision-making is likely to slow. In this climate Vietnam is not expected to embark on any new bold efforts to kick start a process of ‘doi moi two’. Before turning to this subject, I would like to digress. In 1998-99 Vietnam’s precarious economic position became a matter of internal party debate. It is now clear that the Politburo reached a consensus to make the necessary concessions to obtain a trade agreement with the United States. I would like to discuss this development briefly.
United States-Vietnam Relations
Since the normalization of diplomatic relations, Vietnam has taken determined steps to remove the MIA-POW issue as an irritant in bilateral relations. In February this year President Clinton affirmed that Vietnam was "fully cooperating in good faith" in all areas where the United States has sought progress. It has fully assisted in conducting joint searches. In addition, it has mounted unilateral efforts, provided archival material, and located individuals with experience in Laos who can contribute to trilateral search efforts.
Vietnam has moved to cooperate more fully with the United States in immigration matters. After some initial difficulties, Vietnam permitted refugees in overseas camps to return to Vietnam for processing for emigration to the United States under the Resettlement Opportunity for Vietnamese Returnees (ROVR) program and expedited the processing of former re-education camp detainees.
Vietnam’s policy change and positive action on this contentious matter enabled President Clinton to twice waive the Jackson-Vanick amendment to the Trade Act of 1974, which bars certain types of funding to countries that restrict emigration. The waiver was first granted in March 1998 and was extended in June 1999. As a result of these waivers, U.S. export promotion and investment support programs offered by the Export-Import Bank, Overseas Private Investment Corporation, Department of Agriculture and Trade and Development Agency were permitted to start up and continue their activities.
Vietnam has taken small steps to address U.S. concerns about human rights matters. In 1998 it announced two large-scale amnesties which included most of the prominent prisoners of conscience. Since 1995, Vietnam has also held seven regular human rights dialogues with American officials. The issue of human rights abuses, including religious persecution, has by no means been resolved. But Vietnam has been astute enough to prevent it from becoming the focal point in bilateral relations.
On 25th July this year, the United States and Vietnam announced that they had finally concluded negotiations on the text of a Bilateral Trade Agreement. Negotiations commenced in September 1996 and in April 1997 the U.S. presented Vietnam with a full draft agreement. Nine separate rounds of negotiations were held. The final product is one hundred pages of text. This is considered to be the most complex trade agreement in U.S. history.
Substantial progress was reached during the eighth round of negotiations held from 14th-18th June. But the final breakthrough came at the ninth round including one seventeen hour marathon session. On several occasions when an impasse developed, the U.S. sought the intervention of Deputy Prime Minister and Politburo member Nguyen Tan Dung.
Dung, a clear representative of a new generation of Vietnamese leaders, was touted as a possible replacement for party secretary-general Do Muoi in 1997. He stepped aside after it was clear he lacked a clear majority. Dung was appointed to the new Politburo Standing Board when it was created after the eighth party congress in 1996. He was removed in late 1997 when Le Kha Phieu assumed the party leadership role. It is clear that Dung supports economic reform efforts and has convinced his Politburo colleagues that now is the time to open up to the outside world. American trade officials repeatedly praised Dung for his positive interventions in the final negotiating round.
The bilateral trade agreement contains four major chapters including services (accounting, banking, insurance, and telecommunications), intellectual property rights, trade and goods (tariffs and quotas), and investment (equal footing for American investors). Vietnam was extremely reluctant to give the U.S. access to certain protected sectors, such as telecommunications. The chief sticking points at the last round were non-tariff barriers and tariff reduction schedules. Vietnam sought a eight year time frame, the U.S. insisted on four years.
A BTA will give Vietnamese goods access to the American market on a “normal trade relations” basis. The World Bank estimates that Vietnamese exports to the United States will double in the first year from U.S.$470 to nearly one billion dollars. Vietnam will export mainly . The U.S.-Vietnam BTA will also take Vietnam a giant stride forward in World Trade Organization membership.
In return for these benefits, Vietnam will open its market to U.S. companies in areas that have been heavily protected. But, because of presently existing corruption and heavy handed bureaucracy, analysts do not expect a marked inflow of U.S. investment immediately as the trade agreement takes effects.
In addition, U.S. investors will be able to exercise sole ownership over certain enterprises. In the long run Vietnam will be exposed to stiff competition and world best practices. It is likely the state run sector will be hit badly as inefficient companies go to the wall. Unemployment is likely to rise.
The agreement in principle is not the final step. There are a number of technical matters that need to be cleared up. It is expected these will be reached by September. Then the agreement must be translated and approved by the respective legislatures of both countries, the U.S. Congress and Vietnam’s National Assembly. At least sixty days notice is required for Congress to take action.
[Added reference: Politburo has rejected the draft BTA, Prime Minister Phan Van Khai unable to initial an agreed text with President Bill Clinton in Wellington, New Zealand at APEC Summit]
Time is of the essence as American officials warn that if there is slippage into the year 2000, the trade agreement could get caught up in presidential election year politics. Most observers feel the trade agreement will pass through the U.S. Congress without much opposition. This assessment is based on the margin of votes to support President Clinton in his waiver of the Jackson-Vanick amendment.
In the long term Vietnam will be better placed to integrate into the world market. During this process party conservatives are likely to be highly sensitive to their loss of control. Not only is their residual distrust of Vietnam’s former adversary, but Vietnam’s ideologues are viscerally opposed to the intrusive forces of global capitalism. Foreign diplomats based in Hanoi, whom I interviewed late last month, cast doubt on Vietnam’s ability to actually meets its commitments under the BTA. They put forward the view that Vietnam will make almost any concession to get the agreement and then will drag their feet on implementation.
Why Doi Moi 2 is Unlikely
As noted earlier, in 1997 Vietnam experienced a decline in foreign direct investment, a fall in exports and a consequent drop in its economic growth rate for the first time in seven years. This dramatic change in Vietnam's fortunes occurred prior to the region-wide financial crisis.
Vietnam's economic downturn had many internal causes such as a poor investment climate resulting from excessive bureaucratic red tape, a Byzantine system of rules and regulations, and pervasive corruption. But the root causes of Vietnam's problems were more fundamental. These included government favoritism for 6,000 inefficient and debt-ridden state-owned enterprises (SOEs) and a weak and corrupted financial and banking system. In short, Vietnam had developed many of the structural weaknesses that contributed to the financial crisis in neighboring states.
The decline in Vietnam's economic growth sparked repeated calls by officials from donor countries and international financial institutions as well as Vietnamese and foreign economists for Vietnam to step up the pace and expand the scope of its economic reform efforts.
In late June 1997, for example, U.S. Secretary of State Madeleine Albright paid her first visit to Vietnam. She conveyed her disappointment at the slow pace of economic reform to senior Vietnamese officials whom she met. At a Hanoi press conference she declared, "Over the past decade, the policy of renovation — 'doi moi' — has served Vietnam well. But what is needed now is 'doi moi 2'."
Albright then detailed what steps she felt Vietnam should take: "The key… is for Vietnam to remove barriers to trade and investment, reduce the role of inefficient state monopolies, and create a legal framework in which foreign investors will have the confidence and local entrepreneurs may thrive. This is not just an American view. To participate and prosper in today's global marketplace, societies must strive to ensure that their markets are open, contracts are honored, corruption is curbed, and competition is fair."
The need for Vietnam to step up the scope and pace of its economic reform effort was highlighted in the World Bank's annual report released in November 1997 and entitled, Vietnam Deepening Reform for Growth. According to Andrew Steer, the Bank's Country Director for Vietnam, "recent trends… clearly indicate the need for Vietnam to embark on a greatly deepened economic reform program and speed up progress on its long and difficult transition to a successful market economy."
The World Bank's assessment was endorsed by the fifth meeting of the international donor community that met in Tokyo in December. According to a press release issued after the meeting, "Donors and the [Vietnamese] Government felt that the beneficial effects of the first phase of economic reforms have begun to run out and that a reinvigorated agenda of reforms now needs to be implemented urgently."
As if by way of response, the fourth plenary session of the Vietnam Communist Party's Central Committee, which met in December, reaffirmed Vietnam’s commitment "to accelerating comprehensive and uniform renovation" in order to overcome the country’s pressing economic problems.
However, a year later, it was evident that there was a gap between rhetoric and reality. In light of peasant disturbances in Thai Binh province (and elsewhere) in the latter half of 1997 and early 1998, and particularly in light of the Asian financial crisis that had sparked massive social unrest in Indonesia, Vietnam chose to give priority to social and political stability. As a consequence the momentum of its reform program stalled.
According to a World Bank memorandum on Vietnam issued in late 1998, the external shock of the Asian financial crisis amounted to a "kick in the stomach" which it estimated was equivalent to the loss of US $3 billion or 12 percent of Vietnam's GDP.
According to the World Bank, "the economic situation is quite serious for Vietnam — threatening to undermine and reverse the remarkable progress… that was achieved over the past decade. Vietnam can still avoid a worsening situation, but this will require stepped up reform of both policies and programs, and change in the pattern of support from the international community."
For the first time the World Bank signaled that certain types of financial assistance would be contingent on Vietnamese reform efforts. This new policy was endorsed by the sixth meeting of the international donor community that met in Paris in December.
The donor community agreed to provide US $2.2 billion in development assistance. An additional US $500 million was made contingent on Vietnam's adoption of an "accelerated 'doi moi' program."
The donor meeting obtained Vietnam's endorsement of a three-point program to accelerate structural and sectoral reforms in 1999:
• comprehensive state enterprise reform program with timetables and targets for SOEs to be restructured, merged, equalized, divested, and liquidated;
• restructuring plan for the whole banking sector, including comprehensive restructuring of the four state-owned commercial banks, and
• comprehensive three-year trade reform program, with key milestones for each year.
Although Vietnam agreed to the three-point program of structural and sectoral reforms, it is highly unlikely that Vietnam will move at the accelerated pace and within the time frame advocated by the donor community. The three-point program first must be sold to the conservative and cautious Central Committee. In this case the devil is in the detail. There are plenty of grounds for obstruction by a body that is habitually concerned about foreign intervention in Vietnam’s internal affairs.
Vietnam’s pragmatic reformers face an uphill battle with the ideological conservatives in matters concerning overseas development assistance. While the former may see the wisdom of the World Bank and IMF reform package, they will face opposition from the latter who are very sensitive when perceived matters of sovereignty are at stake. Besides, the conservatives actually believe the world "owes" Vietnam such assistance because of the wartime sacrifices it has endured.
The conservatives will argue that if Vietnam could overcome such difficulties in the past it can do so again. In communist parlance they are guilty of "voluntarism", the belief that human spirit and effort can overcome all obstacles.
So far, Vietnam has proceeded in a piecemeal fashion. It has addressed aspects of the donor community's reform program but has held back from throwing its full weight behind "doi moi 2". This was clearly evident in the government's economic report delivered to the fifth session of the National Assembly (tenth legislature) in early May 1999.
According to Deputy Prime Minister Nguyen Tan Dung, Vietnam had achieved many positive results — a positive growth rate of about 4 percent and the maintenance of political security and social order. "It is also clear proof," he argued, 'that our party's and state's lines and policies on the renovation process are correct."
Dung mentioned a number of weaknesses and shortcomings and forecast that these would result in lower growth rates in the future. On the crucial matter of SOE reform, Dung failed to spell out a comprehensive reform program along the lines advocated by the World Bank and international donor countries.
Vietnam's reluctance to step up reforms raises several intriguing questions. Why was it possible to successfully push through comprehensive reforms — "doi moi 1" — in 1986? If it was possible to get consensus on such a major reform effort then, why isn't it possible now?
Vietnam adopted “doi moi 1” in 1986 because of a confluence of internal and external factors. Undoubtedly the key factor was the major economic crisis that Vietnam faced and the failure of previously adopted policy instruments to address fundamental structural issues.
Party conservatives compare calls for “doi moi 2” with the "big bang" approach to the reform of socialist economies in Eastern Europe and the Soviet Union. They argue that such policies will only result in internal instability in Vietnam. Indeed, they argue, especially in light of NATO intervention in Kosovo, that imperialist forces still hold the objective of overthrowing communist regimes and rolling back socialism.
Party conservatives are extremely reluctant to quickly equitize state-owned enterprises for fear of generating unemployment and discontent among their support base. There are considerable vested interests in the present system of state-owned enterprises that involve party members at national, provincial and local levels.
Perhaps more importantly, party conservatives are not committed to the development of a free market and the dominance of the private sector. Such reforms would undermine the basis of their power. They seek instead to maintain state control over the economy. Vietnam’s current party leaders see a “doi moi 2” as potentially more threatening than the status quo. In fact, they argue that Vietnam has achieved success in maintaining social and political stability and positive growth rates. In their thinking Vietnam's limited integration with the global economy was a blessing in disguise. Because of a weak financial market, the lack of a stock exchange, and the non-convertibility of the dong, they argue, Vietnam was spared the worst effects of the regional economic crisis. In sum, the adoption of “doi moi 2” would undermine the basis of one-party rule, while the preservation of the status quo offers the possibility of prolonging the party's hegemonic position.
By maintaining the status quo Vietnam risks being left behind other regional economies when the effects of the current financial crisis pass. Vietnam's relatively favorable economic picture has more to do with the controls it has imposed than with sound economic fundamentals. Without fundamental reforms Vietnam's economy will slide into deep recession. Social and political stability will be put at risk.
Conclusions
Domestic and regional developments in the late 1990’s have presented Vietnam with its most difficult set of challenges since the mid-1980s when it embarked on a domestic reform program known as doi moi and an external policy of diversifying and multilateralizing foreign relations. Domestically, Vietnam’s leaders are confronted with the difficult choice of determining the pace and scope of reform efforts at a time of great uncertainty caused by the Asian economic crisis.
Vietnam’s recovery and future development prospects also depend on encouraging foreign direct investment and seeking new markets. Europe and North America have been targeted. The U.S.-Vietnam bilateral trade agreement holds the potential to really open up Vietnam’s market and speed not only its membership in the WTO but its economic integration into the global economy.
Vietnam’s leaders face a difficult choice. They can place a premium on political stability at the expense of urgent economic reforms. This choice may undermine the ‘performance legitimacy’ of the regime because unaddressed economic reforms will only handicap Vietnam in the future. Or, Vietnam’s leaders can embark on fundamental economic reforms, which entail a degree of risk, to ensure that they are not further behind once the current Asian financial crisis is over and regional states resume economic growth.
Vietnam faces several major hurdles to its regional integration. On the domestic front it must forge consensus and overcome the resistance of party conservatives to the development of the private sector and reform of SOEs. Even more fundamentally, Vietnam needs to reform its system of one-party rule and collective decision-making to allow younger and more appropriately educated and experienced officials to rise to the top.
Externally, Vietnam faces an ASEAN inconsiderable disarray due to its untimely enlargement and a growing rift between its members. Politically, ASEAN is divided between its politically open and politically closed states. Economically, the Asian economic crisis has slowed the pace of regional integration and put in doubt the timetable for tariff reductions under AFTA. If Indonesia defaults on its commitments, this may encourage Vietnam to do so as well.
Vietnam is formally committed to developing a market-orientated economy albeit under state control, opening up its economy, and integration with the regional and global economy. The Asian financial crisis has raised serious doubts in the minds of some party leaders and they have deliberately slowed the pace and scope of this process. The current picture is a very mixed one indeed as Vietnam tries to insulate itself from the adverse effects of globalization, preserve its national identity, and integrate with a regional of great economic and political diversity.