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166 | Part 3 Partner Country Perspectives

Market Economy with Socialist Orientation

in Vietnam and the Concept of the Social andEcological Market Economy

Le Dang Doanh

Historical Background and the Doi Moi Process in VietnamAs Vietnam gained independence on September , , Ho Chi Minh, in

Vietnams Declaration o Independence, quoted Tomas Jefferson in the AmericanDeclaration o Independence: All men are created equal. Te official names o thenew state, the Democratic Republic o Vietnam and, later, the Socialist Republic o

Vietnam, reflected the ideals o independence, reedom, and happiness o thesanmindoctrine o the Chinese leader Sun Yat Sen, instead o socialist ideals.

However, various historical circumstances led Vietnam to ollow a Soviet-styleeconomic model o central planning, with a brutal land reorm (-) andsocialist reconstruction (-) in North Vietnam. Despite serious criticism,afer reunification in , the Fourth National Congress o the CommunistParty o Vietnam (CPV) decided to lead the whole country to socialism ().Te Sixth Party Congress identified bureaucratic over-centralization and lackingmaterial incentives as the main weaknesses o the economic system; economicgrowth had been stagnant or negative as the ollowing table illustrates:

able : Sectoral GDP Growth Rateschain-linked index, base year

Year otal GDP Agriculture Industries Services . . . . . . . . . . . . . . . . . . . .

Source: Dang Phong ,Economic History of Vietnam -.

1Chinese, means literally three (time) peoples.

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With an acute scarcity o all basic necessities, the dream o equality and airnessin distribution o ood and goods was unrealistic, as the ollowing table shows:

able : Food Rations for Monthly Consumptionin North Vietnam 1963-1989

Categories Class o Rations Meat (kg) Sugar (kg)

Special AMore than

(not specified)More than .(not specified)

Minister and equivalent A

Vice Minister andequivalent B

General Director C .

Dep. Gen. Director C

Director D .

State employee E . .

Special worker DB . .

Hard worker I . .

Worker II . .

Light worker III . .

Children under years R . .

Children - N . .

Population N . .

Source: Dang Phong ,Economic History of Vietnam -.

Children and older, vulnerable citizens were the main victims o the manyyears o extreme hardship indicated by this rationing and coupon system.Moreover, in the s, inadequate policies led to rampant inflation o per

year, the supply o basic rationed oodstuffs and goods could not be sustained,and Vietnam was in a deep socio-economic crisis.

Tis internal situation and the collapse o the Soviet Union were the drivingorces behind the doi moi reorms begun by the Sixth National Congress o the

CPV: gradual transition to a market economic system, acceptance o a domesticprivate sector, and oreign direct investment, as well as development anddiversification o international economic relations.

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TeDoi MoiProcess and the Market Economy withSocialist Orientation

Afer more than twenty years o doi moi, Vietnam has established themain elements o a market-economy with socialist orientation, which hassome parallels to the social market economy in Germany. Te doi moiprocessintroduced the most glorious development period in Vietnams modern history,

with high economic growth, rapid poverty reduction, and improved humandevelopment. A new private sector is emerging.

Vietnam is an active member o ASEAN and APEC and joined the Worldrade Organization in January . Vietnam is now generally better placed to

reach its declared aims through this path o market economy and internationalintegration instead o central planning and autarky. However, socialist orientationis not only and not mainly a matter o the market economic system; it isan orientation o the whole social and political system intended to unoldthe strength, dynamism, and creativity o the people and compensate or the

weaknesses and ailures o the market economy. In a globalizing world, the stateand the market must work hand in hand to seize the opportunities and overcomethe challenges.

How successully Vietnam will be able to implement the socialist orientationwill depend on how efficiently market-economic principles and institutions canbe established in Vietnam, how well they unction, how market riendly the stateis, whether red tape, bureaucracy, and corruption can be eradicated, to whatextent reedom, democracy, and civil society can be developed, and i the socialistorientation can be sustained.

In , the Seventh Party Congress adopted a new party program to buildup socialism in Vietnam, a mixture o Ho Chi Minh ideology and the orthodoxsocialist model. Socialism was declared to be a society with a prosperous nation,

a strong state, a democratic society in equity and civilization. Te aim was toprovide a broad-based platorm or national unity and to strive or a bright utureor the whole nation. Te party program and the party statutes, adopted by theSeventh Party Congress, specified five characteristics and seven undamentalorientations or the socialist society in Vietnam.

Te five characteristics are: a society where the working people are the master; a highly developed economy based on modern production forces and

national ownership o the main means o production; an advanced culture with deep national characteristics; people are liberated from repression, exploitation, and injustices;

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working according to their abilities and consuming according to theirwork contributions; enjoying a prosperous, ree, and happy lie with thepossibility o developing their ull potential; ethnic races in the countryenjoy equality, solidarity, and mutual assistance or common progress;

friendly and cooperative relations with all nations in the world.

Te seven undamental orientations are: build up a socialist state o the people, through the people, and or the people,

based on the alliance between the working class, armers, and intellectuals,under the leadership o the Communist Party;

develop production forces, industrialize the country, and build up the

material-technical basis o socialism by steadily enhancing social productivityand improving the living conditions o the people;

develop an economy with multiple economic sectors operating accordingto the market mechanism with socialist orientation; the state-owned andcooperative sector is to increasingly provide the oundations or the nationaleconomy;

conduct the socialist revolution in ideology and culture, with Marxism-Leninism and Ho Chi Minh ideology as the guiding perceptions o the world;

exercise the policy of national unity; construct socialism and defend the fatherland are two strategic tasks; build up a party, which is clean and strong in politics and ideology, as a

leading orce or the socialist revolution.

In , the enth National Congress o the CPV (April -, )included some important changes in the program: it stopped requiring that

party members not be exploiters, thus allowing party members to open privatebusinesses, accepted that the private sector plays an important role and is one

o the driving orces o the economy, etc. Tese pragmatic changes bring theconcepts o market economy with socialist orientation in Vietnam and the socialmarket economy in Germany closer together.

Te enth National Congress also adopted various important and progressivemeasures to realize social progress and justice in every step o economicdevelopment as well as in every economic policy, to provide social equality ineducation, develop a learning society and provide education and training orthe whole lie, and to establish and consolidate the social saety net, providing

equal basic public services in education and training, employment, health care,culture and inormation, physical exercise, and sports etc. Tese aims are similarto the principles o the social market economy, as well.

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As an economy in transition rom central planning to market economy, itwas never possible or Vietnam to embrace a liberal economic model; a marketeconomy with socialist orientation was an appropriate choice or Vietnam.

Ecological Market EconomyVietnam is at the beginning o the industrialization process, but environmental

damage is already severe: deorestation, erosion in mountainous regions, waterpollution due to rapid increase o aquaculture, abuse o ertilizers, insecticides,and herbicides, uncollected solid waste, lacking ecological control in so-calledhandicraf villages and industrial villages in rural regions, industrial pollutionin urban regions, increased dust, and alarming increases o toxic gases are

widespread. Environmental degradation is becoming an increasing problem thatis undermining agricultural productivity, reducing the availability o clean wateror the rural population, causing health problems in rural and urban areas, andleading to a deterioration in living conditions in both urban and rural areas. Airquality is worsening in urban areas and in some industrial centers, resulting inincreased respiratory problems. All solid waste cannot be collected and processed.Industrial pollution is widespread. Deorestation is aggravating flooding andlandslides in mountainous areas. Flooding badly affects even several districts

o Ho Chi Minh City. Tese are the outcomes o both market ailures and theweakness o the state. Te Law on Environmental Protection was promulgated in, but more efforts are needed to actually implement it.

Climate change and a rising sea level could have major adverse impacts in low-lying river deltas o Vietnam. According to the Report o the Organization orEconomic Cooperation and Development on Global Warming, Vietnam will beone o the countries most affected by global warming. I temperatures rise by twodegrees Celsius, million Vietnamese will lose their home and land, and othe Mekong River Delta will be flooded over. I the sea level increases by .-.

meters, square kilometers o the Mekong River Delta will be lost and morethan , people will be affected. Vietnam is actively participating in worldefforts to stop global warming.

While it may not be the major immediate bottleneck to investment,deteriorating environmental conditions already impose social and economiccosts, and any urther deterioration will eventually discourage new investment(tourism, ship-building, cement, and high-tech industries could be among the

worst affected by any urther deterioration in the environment).

Te government has had some success with its reorestation programs, butmore needs to be done to improve water management in river basins and to bettermanage effluent rom all sources. Accelerating urbanization and industrialization

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Le Dang Doanh | 171

needs to be reflected in public investment plans and other policies to ensurethat secondary cities and towns have the inrastructure and services to attractthose leaving arming, and to attract business investors who will generatethe employment needed or an increasingly urbanized population. Failure toadequately develop secondary urban areas will lead to increased environmentaland social pressures in the major urban centers. Increased investment in masstransport systems and other public services will also be needed to minimizecongestion and other environmental problems in Ho Chi Minh City and Hanoi.More environmentally riendly sources o power need to be developed. In brie,an ecological element must be added to the Vietnamese market economy withsocialist orientation.

Institutional IssuesTe final aim ormulated by the program o the CPV, to build a society where

people are liberated rom repression, exploitation, and injustice, and are enjoyinga prosperous, ree, and happy lie is not different rom the aim o the socialmarket economy concept in Germany. Tis declared aim is universal; it does notrelate to specific national conditions, and is appreciated. Te problem lies in theimplementation, or which the differences between the two systems in terms o

history and specific national characteristics, such as development levels, politicalsystems, and the roles and unctions o the state, must be analyzed in detail.Vietnam has fify-our different ethnic groups and various religions. Te Viet

or the Kinh account or o the population; they live mainly in the deltaand urban regions, while the ethnic groups are scattered in various mountainousregions rom north to south. Te Government o Vietnam has paid greatattention to the problem and continues its efforts to reduce poverty, with success.However, pockets o poverty persist in mountainous regions occupied by variousethnic groups.

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able : Poverty Rate across Regionsin percent

Northern mountains . . . . .

Northeast . .

Northwest . . .

Red River Delta . . . . .

North central coast . . . . .

South central coast . . . . .Central highlands . . . . .

Southeast . . . . .

Mekong Delta . . . . .

Vietnam . . . . .

Source: World Bank,Vietnam Development Report .

In , the average poverty rate in Vietnam was .; the rate was .in the northwest; . in the northeast; ., in north central Vietnam;. in the central highlands; and only . in the southeast.Tis gap shouldnot be underestimated, and the greatest efforts must be mobilized to provideinrastructure and education or these groups and include them in integratedmarket economy activities. Te various poverty reduction programs must beinstitutionalized and given legal backing in order to have durable and efficientimpacts in the long term.

2Ministry o Labor, War Invalids, and Social Affairs, http://www.vietnamweek.net(December 30, 2007).

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Le Dang Doanh | 173

Figure : Percentage of People below the Poverty Line

Source: World Bank, Vietnam Development Report .

able : Poverty Rates and Poverty Gap

in percent

Poverty rate . . . . Urban . . . . .

Rural . . . . .Kinh and Chinese . . . . .Ethnic minorities . . . . .

Source:World Bank, Vietnam Development Report .

Equality and prosperity must be shared by all ethnic groups as well by differentreligious communities. Social consensus and solidarity must also include therelations between employers and employees and between armers and the state.

A New Challenge: Increasing Labor ConflictsIn the past, under the centrally planned economic system, strikes were

unknown or extremely rare in Vietnamese society. However, according to areport by the Institute o the Vietnamese rade Union at a workshop on August, in Hanoi, there were strikes in Vietnam rom to ; o these,

0

10

20

30

40

50

60

70

80

90

100

1993 1998 2002 2004

p

ercentofpeoplebelow

povertyline

Kinh and Chinese Ethnic Minorities

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strikes or took place in oreign direct invested enterprises, mainly insmaller ones. Tis share increased to . in . Most, i not all, strikes werespontaneous, in other words, not organized by the trade union. Tey were thusillegal according to Vietnamese labor law. More seriously, some o the strikes

were violent and destructive o property. Seventy-seven percent o the strikeswere related to salary payment: employees believed that their salary was too low,bonus and over-time payments were not paid as promised or were delayed, etc.(Institute o the rade Union Vietnam ).

Te report revealed a huge gap o mutual understanding between oreignemployers and Vietnamese employees: o the interviewed employeesexpressed dissatisaction with payment, working conditions, and others matters.

Foreign investors complained about undisciplined behavior, high turnover oemployees, etc. Poor inormation exchange between the two sides, inefficiencyin the work o related local state agencies, trade unions, and others have beennamed as causes o the strikes. Proposals to amend the labor law have been made.I no appropriate and efficient actions are taken soon to reduce wild strikes to atolerable minimum, strikes could harm the business environment and turn someoreign investors away.

Industrialization: Not Always a Benefit to the Rural PopulationUrbanization and industrialization have taken their toll on rural and arableland. In the period rom to , , hectares o arable land wereconverted into construction land, affecting at least one million rural people or o total armer households (Dang Kim Son ). Te armers receivedlump sum compensation according to a state-fixed price and realized later thatthe very same piece o land had been leased or ten times the so-called market

price. Te rustrated armers were dissatisfied with the compensation and heldseveral demonstrations in big cities like Hanoi and Ho Chi Minh City. Te

landless armers became unemployed, which created social problems, an issuethat remains unresolved. Due to the large income gap between the urban andrural regions, young workers migrate to urban regions, either seasonally or

permanently, creating problems or both rural and urban regions. In the periodbetween and , the agricultural labor orce declined by . (DangKim Son ). In the province o Tai Binh, o the rural labor orce hasmigrated to urban regions, adversely affecting agricultural production as well associal and amilial development (uong Lai ).

Te migrants do not have the same legal status in the new regions as theoriginal residents: without residential registration (ho khau), they cannot accesspublic services; they cannot even obtain a legal marriage registration, and their

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Le Dang Doanh | 175

children cannot attend public schools, etc. Tis discrimination is so serious thatthe National Assembly decided in to change ho khau registration, butimplementation takes time.

Tese examples illustrate the act that there are many development problemsthat need to be addressed in order to implement the socialist orientation andcreate equal opportunities or all.

Legal and Regulatory ReformTe principles o the market economy, such as the reedom to engage in

business, equal ooting, and competition, have been only gradually accepted inVietnamese official documents through a long and difficult internal discussion

in the last twenty years. Te Enterprise Law o and has successullyimplemented the reedom to engage in business according to law, as provided byarticle o the Vietnamese constitution, and has helped develop the private sectorin Vietnam. But several market economy practices like auditing, accounting, andcredit rating o companies are under-developed and insufficiently implemented.Te Competition Law was promulgated in , but its implementation in

practice so ar has been insufficient and has had no tangible impact on businesslie. o date, no anti-monopoly law has been promulgated, and the state-owned

monopolies in public utilities like electricity, airlines, and telecommunicationsare not sufficiently controlled and monitored. Tere is no redistribution omonopolist profit; the Law on High Income ax has led to redistribution o onlya very small share o real income.

Corruption A Persistent ProblemTere is little transparency or openness; there is no independent, private press.

A right-to-inormation law, as proclaimed in article o the constitution, hasnot yet been promulgated and is still under preparation. Different interest groups,

such as the major state-owned conglomerates, influence political decisions andenjoy excessively high profit, especially through access to lucrative land plots,credits, and investment projects.

Te declared principle o equal ooting was and continues to be overshadowedby the leading role o the state sector. State-owned enterprises produce oGDP, but use o the economys total assets, o the total credit supply,and o official development assistance and have privileged access to land andbig state investment projects.

Signs o crony capitalism instead o a ree market economy are visibleeverywhere, including in the real estate market and in the equitization o state-owned enterprises (SOE); the impact o this phenomenon is still emerging and

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developing. Inequality between different social groups and regions is rising. In aneconomy where cash payments comprise an estimated o total transactions,according to various estimates, including by the State Bank o Vietnam, controlo income is only symbolic and redistribution rom high-income to low-incomegroups through income tax will only start in . Te outcome is obvious: in, o companies reported that they have to make extra-legal paymentsto operate their business. Tis figure has remained stable since , when theProvincial Competitiveness Index started (Vietnam Competitiveness Initiativeand Vietnam Chamber o Commerce and Industry ).

In , or the first time, the Central Commission o Internal Affairs o theCentral Committee o the CPV permitted a study on corruption Sixty-three

percent o the interviewed entrepreneurs admitted that they requently paidbribes. Tis is so-called small-scale, daily corruption, which affects all people andenterprises, as able indicates.

Table 5: Most Corrupt Government Agencies

Investment Climate Survey Diagnostic Study on Corruption

raffic policeCustoms department

ax departmentLand administration agencyMarket controllerConstruction permit authoritiesImport/export license authorities

Land administration agencyCustoms department

raffic policeax departmentRegulators in constructionConstruction permit authoritiesHealth carePlanning and investment agenciesRegulators in transportationEconomic police

Source: Based on data rom the World BankInvestment Climate Survey (ICS)and ona report presented at the workshop o the Central Commission o Internal Affairs o theCommunist Party o Vietnam on November th, in Hanoi. In the case o the ICS,rankings are based on the share o respondents declaring that corruption is widespread or gifs arerequired to get a avorable decision. Only agencies with a share in excess o are reported.

An anti-corruption law was promulgated in , and a high-rankingNational Committee to Prevent and Fight against Corruption, chaired by thePrime Minister Nguyen an Dung, was established in . Sixty-our such

committees at the provincial level, chaired by the chairman o each provincialpeoples committee himsel, were established in . Te real impact o thisanti-corruption campaign has so ar been limited. It should be noted that

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Le Dang Doanh | 177

daily corruption affects poor people the most, because they have to pay adisproportionately high share o their income or bribes.

In the last ew years, ransparency International has included Vietnam in its worldranking, the Corruption Perception Index (CPI), as the ollowing graph shows:

Figure : Corruption Perception Index

Source: ransparency International, http://www.transparency.org/policy_research/surveys_indices/cpi

According to ransparency International, the ranking o Vietnam in the CPIhas declined, as an increasing number o countries have been included in thesurvey: Vietnams position went rom th among in , to th among, to th among in .

CompetitivenessTe Global Competitiveness Report o the World Economic Forum (Lopez-

Claros et al. ) could provide a comprehensive and reliable basis or evaluating thebusiness environment and thus the efficiency o the market-economic institutions andthe government. Te gap between the Global Competitiveness Index (GCI) rankingo Vietnam and that o other Asian economies is widening: Singapore ranked th,Malaysia st, Tailand th, and China th, while Vietnam ranked th, indicatingthat other economies in the region are more efficiently reorming than Vietnam.

Following are the World Economic Forum rankings or Vietnam since :

0

20

4060

80

100

120

140

160

2000

2001

2002

2003

2004

2005

2006

2007

year

rank

Singapore Malaysia ailand

Vietnam Philippines Indonesia

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able : Vietnams Competitiveness

Out o countries/economies



Score(outo )


Score(outo )

Global CompetitivenessIndex

(.) . .

Institutions . .

Inrastructure . .

Macroeconomic stability . .

Health and primary

education . .

BusinessCompetitiveness Index

Sophistication ocompany operations andstrategy

Quality o the nationalbusiness

Source: Lopez-Claros et al. , World Economic Forum.

able : Key Components of the Global Competitiveness Index for Vietnam

Indicators Ranking

Group of basic components

. Institutional organization

. Inrastructure

. Macroeconomic stability

. Primary education and health care Group of efficiency components

. University education and training

. Efficiency o goods market

. Efficiency o labor market

. Sophistication o financial market

. echnology readiness

. Size o the market Components of business innovation and sophistication

Source: Lopez-Claros et al. , World Economic Forum.

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Le Dang Doanh | 179

Efficiency o the public administration is a major actor in developing abusiness environment and providing support or people. Since , the VietnamCompetitiveness Initiative (VNCI), in cooperation with the Vietnam Chambero Commerce and Industry (VCCI) and with the support o the United StatesAgency or International Development (USAID), has issued an annual report onthe Provincial Competitiveness Index (PCI) in Vietnam. It is based on surveysconducted on ten indicators (market entry, land access, transparency, time costs,inormal payments, SOE bias, proactivity o provincial leadership, private sectordevelopment policy, labor training, legal institutions). Te PCI ocuses on privatedomestic small and medium-sized enterprises (SMEs) only; no SOEs or oreign-invested enterprises have been included. It can provide a basis or comparative

analysis as well as an indicator o the dynamism o reorms since .In , registered companies rom all provinces replied to the survey. An

appropriate number o manuacturing, fishery, and service SMEs were selected. Terewere at least answers rom every province, which provided a statistically significantbasis or analysis. Te outcome was very interesting as ollowing graph illustrates.

Figure : Provincial Competitiveness Index (first and last three ranks)

Source: Vietnam Competitiveness Initiative and Vietnam Chamber o Commerce and Industry ,

http://pcivietnam.org/reports.php.

37.96

38.19

40.18

70.14

72.96

77.2

0 10 20 30 40 50 60 70 80 90

Dak Nong

Lai Chau

Cao Bang

Vinh Long

Da Nang

Binh Duong

Province

We ighted Provincia l Competitiveness Index

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Despite the act that Vietnam has a centralized state with a unified legalsystem, there are huge differences between the provinces when it comes toimplementing this legal system. Te best province, Binh Duong, has a score(.) twice as high as the worst province, Dac Nong (.). Tis means thatthe market economy with socialist orientation operates much more efficientlyin Binh Duong than in other provinces and that there is enormous potential orthe public administration in Vietnam to apply best practices rom the provinceo Binh Duong to the other provinces. Some provinces, such as Ha ay, havebeen progressing rapidly, while the capital, Hanoi, has occupied a very modest

position or two consecutive years.Whether Vietnam will be able to achieve its declared aim o developing

the economy to a middle-income and then to a high-income economy anderadicate poverty depends on the role and unction o the government, itseiciency and proessionalism, the ight to reduce corruption, improvemento education and training, and last, but not least, the continuing reormso the SOEs. he predominance o resources in the state sector, in general,and the state-owned conglomerates, in particular, are the ocal points in this

process.

Privatization a Slow ProcessWhile the equitization process has progressed very slowly (in only o the planned equitization o SOEs were implemented), establishmento state-owned conglomerates proceeded quickly. o date, the ollowing eightconglomerates have been created:

. Vietnam Coal & Minerals Group;. Electricity Vietnam Group;. Vietnam Post and elecommunications;. Vietnam Shipbuilding Industry Group;

. Vietnam Rubber Group;. PetroVietnam;. Vietnam Insurance (Bao Viet);. Vietnam National extiles and Garment Group (VINAEX).

Tese conglomerates control a very high share () o the total assetso the SOEs. Tey enjoy a monopoly position (or example, Vietnam Coal &Minerals Group, PetroVietnam) or de-acto monopoly position, by controlling

the predominant share o the market (or example, Electricity Vietnam Group,Vietnam Post and elecommunications).

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Le Dang Doanh | 181

Te legal ramework and criteria or an economic conglomerate is notclearly defined. Article o the Enterprise Law defines an economicconglomerate as a large-size corporate group. Conditions, organizationalmanagement, and operation o economic conglomerates are to be stipulatedin detail by the government, but so ar, no guidance rom the government hasbeen available. Afer establishment, the conglomerates quickly expanded theiractivities into banks and securities companies, and diversified into hotels, realestate, power plants, etc. by establishing holding companies. Former PremierMinister Vo Van Kiet warned against careless handling o these state-ownedconglomerates by making a comparison with the South Korean chaebols.

By the end o , the State Bank had allowed the establishment o our joint-

stock banks that report to these state-owned conglomerates. Tere is concernthat the state-owned conglomerates could use their power to arbitrarily imposetheir will and restrict the duties and responsibilities o the banks with respect to

project evaluation, credit risk rating, etc. It would be a major systemic ailure toallow such conglomerate-dominated banks to mobilize financial resources orthe seemingly boundless ambitions o these conglomerates. Even without theirown banks, the South Korean chaebols destabilized the South Korean economyin .

SubsidiarityTe subsidiary principle underlying Germanys social market economy is

similar to the concept employed in Vietnam. Te enth Congress o the CPVencourages all peoples to get rich according to laws and urges them to overcomethe tendency o passively relying on state subvention. Because o limited resourcesand nearly unlimited demand, the state is unable to provide subsidies to all needy

people. Fortunately, traditional amily cohesion and solidarity and the dynamismo most o the Vietnamese has meant that they have mobilized their own ability

to help themselves instead o relying on the expected subsidy rom the state.

Economic Outlook

Vietnams economy achieved high growth rates in the last decades, but theefficiency and competitiveness o the economy are low.

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able : GDP Growth Rates and its Contributing Elementsin percent

Malaysia(-)

Korea(-)

HongKong

(-)

Singapore(-)

aiwan(-)

Tailand(-)

Vietnam(-)

GDPgrowth rate

. . . . . . .

Contributedby:

Capitalizedasset

. . . . . . .

Labor orce . . . . . . .

otal actorproductivity

. . . . . . .

Source: General Statistics Office o Vietnam .

Te contribution o total actor productivity to the Vietnamese economyis the lowest among the economies o the region; most o the growth has been

contributed by investment and the increase o capital assets. Despite higheconomic growth in the last decade, Vietnam is still a low-income economy,with GDP per capita at US in . Vietnam aims to leave the ranks olow-income economies in by reaching US (Ministry o Planning andInvestment ).

Tere is no doubt that Vietnam will soon become a middle-income country,but it remains an open question whether Vietnam can then overcome the so-calledmiddle-income trap, which is also aced by other South East Asian countriessuch as the Philippines, Indonesia, and others. Crony capitalism and vested

interests could produce low efficiency, a high income gap, financial instability,etc. Te triad miraclenightmare crisis, which periodically affects these SouthEast Asian economies, could be repeated in different orms in Vietnam. Tereis no guarantee yet that Vietnams economy is immune to this trap. It is obviousthat such crony capitalism is hardly compatible with the socialist orientation.

Te Vietnamese population increases by . million each year and will reach million in . Moreover, the rapid increase o the population in the MekongRiver Delta and in mountainous regions increases the burden on education

and health care tremendously. Tis demographic pressure complicates therapid improvement in wealth and human development as the ollowing tableillustrates:

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Le Dang Doanh | 183

able : World Ranking of Per Capita GDP

Singapore Hong Kong

aiwan

South Korea

Malaysia

Tailand

Philippines

Indonesia

China

Vietnam

Source: Te Economist,Pocket World in Figures -.

Education

Vietnam had a long tradition o valuing education. Article o the Vietnameseconstitution provides a clear statement: Primary education is compulsory and

ree. Under the centrally planned economy, education was generally ree touniversity level, but access to universities was limited through selection exams.Health care was also ree or those who could get access to public hospitals.Education and health care are considered the main pillars o the socialistorientation in the market economy o Vietnam.

Te Government o Vietnam steadily increased the education budget by per year, to o total budget expenditures, equivalent to US. billionor o GDP, in and to o total budget expenditures in . Teollowing table shows the total expenditure on education in Vietnam in absolute

terms and as a share o GDP, as well as government expenditure or education asa share o GDP.

3See also Vu Quang Viet 2006 and www.thesaigontimes.com , World Bank, Vietnam DevelopmentReport2005, 2007, and Harvard 2008.4See Vu Quang Viet 2006 and www.thesaigontimes.com (December 2, 2008).

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Table 10: Education Financing in Vietnam in the Period between 2000-2005

otal educationexpenditure in billionVND

, , , , , ,

As a share o GDP () . . , . . .

Govt budget expenditureor education as share oGDP

. . , . . .

Source: Vu Quang Viet .

Estimates indicate that the population must spend at least US. billionadditionally, which is equivalent to . o GDP, or education (Vu Quang Viet). According to ollowing comparison, Vietnam spends the highest share oGDP on education:

able : Education Financing in Vietnam and Selected Economies

Vietnam USA France Japan Korea OECD

otal expenditure oneducation as share oGDP ()

. . . . . .

From govt budget , . . . .

From the population

and other sources . . . . . .

Share o educationexpenditure ()

From govt budget

From populationand other sources

Source: Vu Quang Viet .

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Le Dang Doanh | 185

Since , the government has intensified the so-called socialization oeducation, health care, cultural activities, etc. For the ordinary citizen, socializationhas meant a greater financial contribution to education. Indeed, the press hasreported on to items or which money is collected rom the parents ostudents rom kindergarten to university. Te outcome is worrisome: amilies

with many children can hardly afford to send all their children to school. Forexample, or a primary school student in Hanoi, a parent must pay at least VND, per month. With an average monthly income o VND . million,the parent could not send two children to school or twelve years, because the

payment increases progressively with the level o the school class.Vietnams education record is poor and lags behind the regional average,

despite the high level o education expenditure as a share o GDP. Only othe population has completed or more years o education. In the Mekong RiverDelta, . o the adult population are illiterate; . are literate, but could notfinish their primary education (our years); finished primary school; .finished their secondary education (eight years); . completed high school(twelve years) (Institute o Development and Strategy Studies ). Only o Vietnams young people between and are able to attend university, whilethis ratio is in China, in Tailand, and in Korea.

Te quality o education and training is below that required by the businesscommunity. Nearly all oreign investors have to invest in re-training o recruitedstaff (World Bank a). According to the Ministry o Labor, War Invalids,and Social Affairs (MoLISA), only o the labor orce have been trained and. had only short-term (three months) training courses (MoLISA ).According to a survey by JERO published in May , an acute shortageo highly qualified workers in inormation technology, finance and banking,auditing, law, etc. has been reported by oreign investors.

Health Care SystemBeore , Vietnam succeeded in establishing a three-tier (commune, local,

and central) health care system, which operated efficiently during the war.Health care was generally ree in all public health care centers, but dependingon ones position in the political system, the quality o health care was drasticallydifferent.

Given the low GDP per capita, the perormance o Vietnams health caresystem, measured by childhood mortality and lie expectancy, is relatively

good. Between and , the inant mortality rate declined rom . per

5See http://www.vietnamweek.net (December 30, 2007).

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thousand to .; the mortality rate or children under five ell rom . to .per thousand. Accordingly, lie expectancy at birth increased rom . to .years (World Bank ).

In , there were hospitals run by different levels o governmentand an additional hospitals owned and operated by the private sector atotal . beds or every , persons. Tere are now , health staff oall categories or million Vietnamese. About o the doctors working in

private hospitals are employees in state-owned hospitals, too. Te salaries o thepublicly employed doctors are too low, around US- per month, whichis under the subsistence level (World Bank b). Public hospitals, especially

well-known central clinics, are desperately over-crowded; two patients (or even

more or children) must share a hospital bed, and amily members must take careo the patients and must fight or reasonable service. Tis imbalance betweendemand and supply provides ertile soil or bribery and abuse o power by thehospital staff. Illness is one o the major causes o poverty or misery in Vietnamand is one o the most serious concerns o the population.

Government health care spending constitutes . o GDP, while total healthcare spending reached . o GDP in . Tis means that the patient andthe amily had to make payments equaling . o GDP, more than double

government spending on health. Per capita health spending increased romUS. in to US in , but the government pays only US o thatUS (World Bank ).

Te public hospitals in Vietnam receive their income rom three differentsources: the central or provincial budget, payments rom patients and their amily,and heath care insurance. By , around o budget spending or healthcare was undertaken by provincial governments, leading to significant differencesbetween better-off and poorer provinces. Most troublesome are the direct out-o-

pocket payments rom patients to the hospital staff or quasi-legal or completely

illegal ees: there are no norms or standards, no regulations, no receipts orthese payments. According to various surveys, these payments comprise ototal household spending on health care, the remaining is or medicines ortechnical charges or X-rays or scanning, etc. (World Bank ).

Health care insurance covered o the population in and has nowincreased to around . Tere are programs or ree health care services orthe poor, but considering the huge imbalance between demand and supply, thelikelihood that the poor (non-paying patient) can access the same quality health

services as the paying patient is quite small (World Bank b). Vietnams healthcare system must be urther reormed to implement the socialist orientation orthe poor.

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Le Dang Doanh | 187

Emerging issues in In , the year that it began to implement its commitments to the World

rade Organization (WO), Vietnam achieved a GDP growth rate o .and attracted US. billion in oreign direct investment (FDI). Exports grewby . and reached US. billion, but imports grew by and reachedUS. billion. Te trade deficit reached a record high o US. billion,and the current account deficit rose to an alarming level.

Figure : rade and Current Account Balances

Source: General Statistics Office o Vietnam , www.gso.gov.vn.

Te high FDI inflow reflects the increasing expectation o oreign investorsthat the Government o Vietnam will implement the WO commitments and

the business environment in Vietnam will steadily improve. As the ollowinggraph shows, the disbursement o committed FDI is slowly increasing in absoluteterms, but declining in relative terms, rom around in to in .Te positive development is that more FDI is being attracted to central Vietnamthan previously.

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Figure 5: FDI Commitments and Disbursements

Source: Ministry o Planning and Investment o Vietnam .

Inflation in was ., the highest in years, negatively affect the living

conditions o vulnerable groups o people. Especially the ood price increaseo. has had a tangible impact on living conditions o the poor. Te year

was typical in the sense that various social groups did not equally benefit romthe high economic growth rate.

Figure : Components of Inflation in

Source: General Statistics Office, www.gso.gov.vn.

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Le Dang Doanh | 189

Te external debt to GDP ratio reached in , but has declined againsince then. As two-thirds o this debt is on highly concessional terms, the debtservice to export ratio remained stable at .

Figure : Vietnams External Debt

Source: International Monetary Fund a, Country Report No. /.

In , Vietnam reduced different taxes, resulting in a relative declineo income rom import tariffs, which was, however, over-compensated by therapidly increasing trade volume.

Figure : Sources of Budget Revenues in and

Source: Ministry o Finance o Vietnam, Budget Plan and , www.mo.gov.vn.

PI: personal income tax; CI: corporate income tax.

!

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Budget revenue was relatively unaffected in the first year o WO membership,but was still very dependent on crude oil, while the share o personal income taxas a means o income redistribution was very modest. Te revenue rom propertyrose by only , not at all proportionately to the high increase in real estate priceso - (depending on location), and the real estate market grew strongly.

Te income gap widened in the first year o WO membership: salaries orproessionals in banking and securities soared by - (VND - million amonth), while salaries or workers in the garments industry increased by andnet income o armers in central Vietnam declined (MoLISA ).

ConclusionVietnams market economy with socialist orientation has many parallelsand similarities to the concept, principles, and final aims o the social andecological market economy o Germany. Tere are problems in the institutionalarrangements and unctions o both the market economy and the role o the statein Vietnam. Despite impressive economic growth and social progress, there aremany crucial issues in education, health care, and environmental protection.

As the preceding outline o emerging issues has indicated, the social and

economic situation in Vietnam remains ragile. Vietnam is not yet immuneto the trap o low wages or to the trap o middle-income economies. It is thusimperative that the reorms required to ully implement the market economy

with socialist orientation be pushed quickly and decisively orward.Trough efficient implementation o reorms to unold the reedom, creativity,

and dynamism o the Vietnamese people and by sustaining macroeconomicstability in a globalizing world, Vietnam will hopeully continue its progress inimplementing a market economy with socialist orientation.

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Le Dang Doanh | 191

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