Economy & Economic Structure of Vietnam

Like China, Vietnam has made a rapid transition from a command economy to one that is heading for open-market free trading. But it still has a very long way to go to get there. In spite of this, there are a vast number of foreign companies that can see the enormous market potential for business investments in Vietnam.

In spite of considerable efforts to industrialise the country especially in the north, Vietnam’s economy is still dominated by agricultural production. This is also the sector where economic reforms have so far had most success. Vietnam recently turned from being a rice-importing nation into the world’s third largest rice-exporter.

Economic liberalisation started in 1987. Since then a number of measures have been taken to gradually turn the country’s centrally-planned economy into a market economy.

Most importantly, foreign investment is now encouraged and the new constitution guarantees that enterprise with foreign invested capital will not be nationalised. A number of laws have been passed to create the legal framework for foreign investment. Bilateral investment protection treaties and double taxation treaties have also been signed with a number of countries.

While the country’s long-term growth prospects remains good, short-term problems such as the lack of adequate infrastructure, especially in the transport network and communications system as well as in the financial sector, and governmental bureaucracy remain handicaps. The World Bank has suggested that Vietnam will have to allocate at least US$7 billion to US$10 billion for infrastructure development by the year 2000.

Despite the Doi Moi policy, Vietnam had continued to maintain stringent controls over flows of money & currency to its economy. It has also yet to launch its stock market. These two factors actually turned out to be blessing for Vietnam. The currency speculators and hedge funds who wrecked havoc in several Asian countries, left Vietnam unscratched. However, Vietnam already had its share of problems loans in its banking sector as early as 1995/96. This lead to a severe credit and liquidity crunch, followed by bankruptcies and a serious slowdown of investment built-up. The lustre of Vietnam, as an emerging tiger economy, has faded a lot. The Government will need to continue to prime the confidence pump, and bring back the enthusiam into the economy.

Investment Rating

After years as a closed economy, Vietnam opened up to foreign investment in 1987 with the promulgation of the foreign investment law, considered one of the most liberal in the Asia-Pacific region. The opportunities the country has to offer have been greeted enthusiastically by foreign investors, and since 1988 investment pledges have reached over 1,200 foreign investment projects having an aggregate investment capital of over US$16 billion. Foreign trade has also mushroomed. Over 700 foreign companies from over 40 countries are now investing in Vietnam.

Not surprisingly, Vietnam is often referred to as Asia’s next tiger, and there is no doubt that its emerging economy offers foreign businesses a range of exciting trade and investment opportunities. However, to succeed in Vietnam, the foreign businessman must have patience as well as be willing to make long-term commitments. The foreign investor needs to be aware of the possible problems and pitfalls which may be encountered, just as they may be encountered in the early stages of any rapidly developing economy.

    Vietnam can offer the following attractions and advantages:-
    Abundant mineral and natural resources;
    Active government encouragement of foreign investment;
    Cheap labour and a literate workforce;
    Potential for tourism;
    A potentially important consumer market with a population of nearly 75 million;
    A central location in the fast-growing Asia-Pacific region;
    A comparatively liberal foreign investment law which continues to be refined;
    Attractive tax incentives for foreign investors;
    The Government’s success in bringing a previously weak local currency and high inflation under control. Both have been remarkably stable since 1992;
   
    Once an adequate legal and infrastructural framework has been created, Vietnam may well have similar or greater growth rates than that enjoyed by, inter alia, Thailand and China over the recent years.

•     The foreign investor needs to be aware of the following difficulties:-
•     Poor infrastructure. There are severe problems with roads and the railway system, port facilities, bridges, water and electricity supply, sewage and drainage. Official statistics are not always consistent. Communications and the banking system also need further development;
•     Bureaucracy and corruption;
•     A lack of experience in business, accounting and taxation concepts. Contracts are not always treated with respect and are difficult to enforce;
•     Legal uncertainties due to the lack of a system to resolve civil and contractual disputes and the authorities’ occasional unfamiliarity with laws resulting in regulations that are constantly changing or that contain internal contradictions;
•     A shortage of hard currency;
•     Difficulty in obtaining third-party finance for projects. The prime reason for this is the difficulty in getting security for loans in the absence of a land title system;
•     Language barriers and cultural differences;
•     All foreign investments have to be licensed and the application process can be long and arduous due to frequent conflicts between the central and local governments with their own agendas.

However, it is important to point out that although Vietnam is a challenging place for the foreign investor, progress is being made in nearly all of the above areas and the pace of change over the last few years has been remarkable.