Which way are economic prospects for Vietnam headed? Just two years ago, foreign investors enthusiastically touted the country's potential: a hard working, literate people, a large untapped consumer market, and a land brimming with natural resources. At the same time, business people realized the pitfalls of Vietnam, namely the official corruption, murky legal environment and shaky government commitment to reform--but they had either underestimated these drawbacks or expected that things would be worked out.
In recent months, the general mood of investors has shifted remarkably. For many, the pitfalls of doing business have gotten worse. A U.S. executive summed up the prevailing view: "I can honestly say that enthusiasm for this market is dipping to an all time low."
This articles examines the reversal in investor attitudes by examining two main complaints: the shaky legal system and the government's (non) commitment to reform.
The "Legal" System
Complaints of Vietnam's legal system can be summarized as follows: the laws which are needed are not passed, those laws which are passed are deficient, and the laws already in place are not consistently enforced.
Consider the laws which are not passed. For a market economy to function, timely and accurate financial information must be available to all parties. No investor can be expected to pour money into a project in which that investor has little information. To date, no acceptable set of accounting standards has been passed by the government. Similarly, for privatization to get seriously underway, a stock exchange must be in place. The government talks continuously about "equitizing" firms, allowing a kind of direct ownership, but is unwilling to set up the means for ownership shares to be valued and exchanged. The government's plan to open a stock market has been delayed several times with 1999 now the tentative date for the launch.
Even when laws do get passed, however, it seems that little gets resolved. The current land law gives investors "certificates of use" of up to 30-50 years, but no firm title to the land. As a result, investors cannot be sure of their property rights into the future. Not surprisingly, many investors shy away from long-term projects.
The new mining law is similarly deficient. Under the new rule, investors apply for an investment license only after they have an exploration license. The timing means that an investor bears the initial expenses of the project (the exploration costs) without a definite claim to the benefits.
Laws on land use and mining explain partly why foreign investors are wary of Vietnam's legal codes. The fundamental defect of the legal system, however, goes must deeper, beyond the wording or merits of a particular law. Any law can be revised and made to sound better. The ultimate question is whether the laws in general will be enforced and enforced consistently. On this point, foreign investors have realized that the proliferation of laws in Vietnam is meaningless in the absence of a legal ethic in the law-makers. The government in Vietnam has demonstrated that it does not respect the very laws it creates; and authorities often interpret as they see fit. When the public security descended on store fronts with English signs during the mini-war against "social evils" last February, the justification was an existing rule on the books.
In an another ominous trend, Vietnamese joint-venture partners (who are very well connected politically) have sometimes sought "legal" redress to intimidate and extort foreign partners. The Australian firm Westralian Sands saw its assets confiscated and its executives' passports revoked during a dispute with the local partner. The local partner was the Ha Tinh People's Committee.
Commitment to Economic Reform
During the 1980s, most of the less developed countries of the world liberalized their economies and undertook varying degrees of economic reform. Hanoi launched its own effort in earnest in 1989. Understanding the motivation for "doi moi" is crucial to understanding the nature and viability of economic reform in Vietnam.
When Mikhail Gorbachev became Soviet leader in March 1985, Hanoi was a member of Comecon, the communist trading bloc. It received annual aid of several billion rubles from the Soviet Union for being a dependable client state. By 1989, the communist world was collapsing, communist economic ties were disintegrating, and the Soviet Union no longer subsidized Hanoi. To maintain its power and placate the nomenklatura, the Vietnamese Communist Party(VCP) was forced to turn westward and adopt nascent market policies. That created the obvious "contradiction."
To explain a communist society taking on capitalism, the VCP adopted the phrase "market economy in the direction of socialism." Building "socialism," of course, is the stated objective of a communist party and the VCP had to justify its monopoly on power. But clever words do not reconcile free markets with pervasive state control.
Experiencing firsthand the paradoxical "market economy in the direction of socialism" has been the wake up call for the business community. Hanoi calls on investors to set up businesses in Vietnam, but then wants to set up "party cells" in each enterprise; It pledges to make things easy for business people, but then requires foreigners to go through the maze of resident permits, business visas, and work permits. It talks openness, but then tries to classify routine information like trade data "state secrets," (as it did in September 1995).
Evaluating the economic prospects of Vietnam requires, therefore, an understanding of the motivation behind the current economic policy. Unlike in eastern Europe or parts of Latin America, economic reform was not introduced in Vietnam because pro-market reformers were swept into power. Instead, "doi moi" was invented to serve the interests of those already in power. And the paramount interest of Vietnam's rulers is to stay in power. The deep problems and uncertainties that beset the economy flow from this fact.