The Analysis of Vietnam Economy - Research Paper Example

1 Your The Analysis of Vietnam Economy Vietnam is a South-East Asian country having borders with the Gulf of Thailand, Gulf of Tokin, and South China Sea—which covered Laos, Cambodia and China (CIA, 2010). Vietnam is a home to more than 89 million people with agriculture, manufacturing and services being the main sources of income of the people. Vietnam economy has begun to witness dramatic economic development right from the mid 1990s when the Vietnamese Central Government decided to liberalize parts of the economy and spending hugely to jumpstart local production and investment. However, the main financial sources of financial inflow to the country have come from international donors and Foreign Direct Investments (FDIs). In 2010 alone, donors promised to prop Vietnam economy with a whopping sum of $8 billion. In order to let the economy feel the impacts of these donations, the Vietnamese Government has systematically devalued the country’s currency, so that local businesses can enjoy more exporting opportunities (CIA, 2010). It is imperative to look briefly into the history of Vietnam economy before one can discuss, elaborately, the modern economic advance in the country. After the US-Vietnam War, this developing South-East Asian country was plunged into poverty owing to 2 economic losses during the war ended. Worst still, the country lost some financial supports when the old Soviet Bloc stopped its financial assistance to Vietnam. This had spurred the Vietnamese Government to engineer rapid economic policies that were aimed at increasing local production, mainly agricultural products, which stood at 25 % of the country’s exports in 2000. Due to stimulus programs instituted by Vietnamese Government, more and more local entrepreneurs are going to into production and increasing the amount and variety of products exported by Vietnam. In 2007, Vietnam became a member of World Trade Organization, which increased the market reach for Vietnamese products and attracted more foreign investments into the country. Today, Vietnam economy is growing with GDP of $92.44 billion at a annual rate of 5.3% (in 2009). Today, the economy is dominated by agriculture at 51.8%, industry 40%, and services 38.7%. The Foreign Direct Investments (both foreign and domestic) are standing at $58.72 billion (in 2009) (CIA, 2010). The Vietnam economy has advanced greatly in the last decades, and the nature of the country’s economy has changed from a local economy to a market economy (Dodsworth 25-31). The adoption of a market economy in Vietnam has produced some transformation in the economic activities of the country. Market economy allows the pricing system in the country to be determined by the forces of supply and demand. However, the market economy in Vietnam is not the one that could be described as the free economy where the forces of supply and demand purely determine what prices things are 3 sold. Governmental influences are still visible in this officially Communist country: however, the extent of government economical planning has been minimized, and the influx of foreign investors has been shifting Vietnam economy towards perfectly free economy. However, such a status is not expected to be reached within decades. The Vietnamese Government has done series of economic planning to enhance the continuity of the current market economy in operation in the country. This was instituted in 1986 and termed doi moi economic planning procedures. Some of these procedures include but not restricted to: (i) initiating banking reforms—this helped the banking industry in Vietnam modernize and switched from the previously adopted Soviet-styled socialist banking structure. Modern banking processes were implemented in preparation to encourage international trade with future global partners; (ii) establishing liberalized agricultural policy—this is the most significant aspect of the reforms carried out by the Vietnamese government in the sense that agriculture has been the mainstay of the Vietnamese people, and farms are owned collectively with government controlling the pricing policy. However, these processes were reversed, and the market is left to decide the price of agricultural produce, and collective farms were banned; (iii) removal of Government subsidies—the government took a bold step by winding up the subsidy policy that offered financial incentives to state-owned enterprises. These enterprises were privatized and allowed to operate in the market economy; (iv) removal of trade barriers— 4 this is another area where the government had made a serious decision to facilitate Vietnam’s participation in global trade; (v) instituting enabling environment for investment—the Vietnam government has provided incentives to foreign investors that would like to operate in the country through enactment of investor-friendly laws and regulations (Alpert 63). Vietnam has also taken a dramatic step towards globalizing its economy by adopting dollar as the basis of its currency exchange (Dodsworth 29). This dollarization policy aims at attracting foreign investors and global trade partners, who also have the American dollar as the basis of their currency exchange. However, some unique steps had reportedly been taken by the Vietnamese Government in making the dollarization process successful. These include but not limited to: (i) legalizing foreign currency in the country so that the law that banned doing the same was repealed in 1988. The new law gave depositors the power to deposit foreign currency in the local banks. This has helped both the state-run and private or foreign-owned businesses to operate smoothly when dealing with overseas customers or business partners; (ii) harmonizing the interest rates—before 1989 when Vietnam adopted harmonized interest rate, there were multiple interest rates determined by the currency black markets. A unified interest rate was able to create interest in the foreign investors who believed in a stable and unified interest rate, which is one of the important attributes of free market economy. Over-reliance on currency black market 5 could cause discrepancies in prices, and could lead to financial losses on the part of the investors; (iii) establishing appropriate exchange rate policy—it was imperative that a rigid exchange rate policy was needed to regulate the currency market so as to discourage black marketers from taking over the currency trade again. Hence, by the end of 1991, Vietnam has put in place official exchange rate, which serves to control the entire currency market (Dodsworth 31); (iv) making anti-inflation policy—this was required to put inflation under check as high inflationary condition would drive foreign investors away from the country; (v) designing banking reform processes—Vietnam Government also thought inevitable to revitalized the banking industry by carrying out some strategic re-structuring that were aimed at liberalizing the industry and making the banks ready for global competition (Dodsworth 31). Though the advancement of Vietnamese economy towards greater global participation does not happen that fast: three years after becoming a member of World Trade Organization (WTO), Vietnam has slugged through different periods of economic activities, sometimes performing according to both internal and external economic forecasts, sometimes lagging behind. But the country has clinched some strategic trade agreements with some fast developing countries. These trade agreements will surely help Vietnam to move forward in reaching its economic goal for the millennium. Some of these trade pacts include the ones with the United States, Australia, South-East Bloc, Russia and some 6 European countries (USA International Business Publication 201). The outcomes of these trade alliances include the provision of larger market reach for domestic Vietnamese companies that would want to export their products to overseas; provide Vietnamese local companies the required raw materials that would be needed in manufacturing and industrial purposes; establish frameworks for greater cross-border trade activities, and so on. Vietnam has a lot to gain from these trade agreements if the principles of the alliances are properly implemented. Undoubtedly, there are some hurdles that may derail the successful implementation of these trade agreements. Take for instance, the United States strongly requested for grassroot democratic process as a criterion for expansive business relationship with Vietnam. However, the Communist structures in Vietnam are still much in place, even though they are changing gradually; but the country has not reached a stage that it could be purely referred to as a democratic country as reports of human rights abuse and undemocratic governance are rife in the country (USA International Business Publication 201-222). Other factors that may slow down the possibility of reaping the benefits of trade agreements in Vietnam also include poor poverty-reduction policy, underdeveloped infrastructures and social re-organization. If all the factors outlined in the foregoing are properly considered and implemented, it is possible for Vietnam to begin to enjoy the benefits of International business or trade agreements in a short period from now. 7 The history of foreign direct investment in Vietnam dated back to the war-time era when foreign forces invaded Vietnam for either business or political influence. As a result of this, France and Russia exert some influence on the trade practices in Vietnam of those days. The war with the United States changed the dynamics of business activities of Vietnam (as Americans purportedly invaded Vietnam to eradicate the Soviet Union from spread its tentacles in Asia). After these wars, Vietnam has found itself at the crossroads of either following the foreign influences or creating its local identity, as far as business or trade practices are concerned. And this is what the leadership of the country began to do in the 1980s when many reforms were carried out in the banking sector, private and government-controlled enterprises, and so on. However, Vietnam’s first set of foreign direct investors after the massive reforms are its Asian neighbors, predominantly, China, Singapore, Thailand, and other countries in South-East Asian bloc. Trading in commodities and cross-border services were the first sources of foreign income for Vietnam. But such small-scale business changed when Vietnam established industrial estates in its major cities, which had attracted manufacturers from Malaysia, India, South Korea, Thailand and so on. This situation had proved that Vietnam could become a global player in industry growth. This may have lured other countries to initiate or implement trade agreements with Vietnam. This involved countries like the United States, Australian, European bloc, and Russia (McCullough 50-95). Vietnam has utilized the benefits of these international business relationships to develop its infrastructure and acquire practical knowledge about 8 how to train its working population to withstand global competition in this millennium. Now, Vietnam is offering incentives and providing laws that will create comfortable business environment for the foreign businesses operating within its jurisdiction. Recent studies have revealed that Japanese companies are also flocking into the country to do business as more concessions are granted by the Vietnamese Government (McCullough 75-112). These concessions are what foreign investors are looking for: they include laws that will relax governmental control of the economy, liberalization of the economic activity and provision of tax and property incentives. Another interesting point that drives foreign investors into Vietnam is the large population of the country, which is over 89 millions, providing unique opportunity for the foreign businesses to sell their products and services to the local consumers. Cheap labor is still an advantage in Vietnam: workers’ salaries are still as low as they could be when compared with the salaries of workers in the developed world. Foreign investors also utilize the past relationship Vietnam had with Russia, United States and France to push their own products into these countries. This accounts for why the Foreign Direct Investments (both foreign and domestic) are standing at $58.72 billion (in 2009) (CIA, 2010). There is every possibility that this trend is going to continue for years to come as Vietnam moves closer to complete democratization of its government and win the confidence of nations like the United States and its business allies. There are still some questions begging for answers whenever the issue of foreign investment in Vietnam is concerned: (i) How are the Vietnamese people adjusting to this new idea of market 9 economy? (ii) Are the effects of the newly developing economy observable in Vietnamese people through poverty reduction and improvement in the standard of living? (iii) Will there ever going to be a democratic Vietnam that every country in the world will be confident to deal with? Some progress has been recorded in the politics of Vietnam as parties are allowed to contest elections without being restricted. This was not the case when one party-the Communist Party from the north overran any other party to control the affairs of the state. Interestingly, the power of the Prime Minister has been drastically reduced in recent years, unlike before when a dictatorial Communist leader would force itself over the Vietnamese people. Why the democratization process is necessary for international trades with Vietnam is that: (i) it gives the foreign investors the confidence they need before investing their hard-earned capital in the country. This means that their investments would not be put at danger as the case is in countries ruled by dictators. The recent nationalization of foreign companies in Venezuela is a typical example of what could happen in an undemocratic nation; (ii) democracy also presents level-playing environment for both the host government and the foreign investors to hold meaningful discussions before any harsh trade laws and regulations could be implemented. A country that does not recognize the democratic ideals will act unilaterally, even if such an action would be at the detriment of foreign investors in the country. However, Vietnam’s slow dance into democratization still gives investors the peace of mind that their interests would not be jeopardized. 10 The general belief is that when the democratic process in a country is incorruptible and functional, it will then be possible for the people in such a country to reap the dividend of democracy through poverty eradication, educational development and infrastructural development (Abuza 45-92). Hence, more foreign businesses can migrate into Vietnam to do business in a better environment full of educated people, well-trained workforce and liberalizing laws and regulations. The trade and foreign policy of any country is directly associated with the kind of political processes going on in the country. Today, not many investors are confident enough to invest in Cuba, while a Southern American investor can go all the way to Africa for investment, wherever the government in place holds and demonstrate democratic values. Vietnam is not excepted from similar expectations from foreign investors, since their successes will be measured by how many Vietnamese people are will and ready to utilize their products, and how well-structured are the social factors in the country. Without all these issues being taken into consideration, Vietnam will spend decades to come in vain trying to win their hearts of foreign investors, who are basically skeptic of the future of their businesses in Vietnam. In conclusion, Vietnam has already emerged as a force to reckon with in international trades, considering the volume of agricultural and manufacturing exports that are exported annually from the country to Asia and the rest parts of the world. Apart from its strategic location that wedges it among China and Thailand—two fast developing Asian 11 economies, Vietnam has spread its market reach to other countries in Europe, Africa and both North and South America through partnerships and trade agreements. The increase in the production capacity of Vietnam shows the reality that more and more foreign companies are flocking into the country to take advantage of its huge population of 89 million and increase their profitability. To facilitate this level of economic development, the Vietnamese government has taken serious efforts to create a comfortable environment for the in-coming investors by liberalizing the economy through rapid reforms in banking, interest rate policy, exchange rate policy and other necessary instruments or facilities that are directly linked with the trade and foreign policy of the country. Of more importance to the foreign investors are the issues of unification of interest multiple interest rates and the provision of official exchange rate to wipe out undue power by the operators of currency black markets. The perceived democratization of Vietnam may also have encouraged foreign investors to consider the country as a viable place for investment, in as much as their investments would be duly protected and unjust and harsh business laws would not be suddenly enacted by the people at the helms of affairs. No doubt, the issues highlighted above are instrumental to the current economic advance Vietnam is experiencing and may enjoy for a long time, if the Vietnamese government continues to pursue its democratization goal. This will also help the Vietnamese people to enjoy some improvement in their standard of living; poverty will be drastically reduced through economic prosperity. A feature that will pull many more investors into the country. Cited Works Abuza, Zachary. Renovating Politics in Contemporary Vietnam. Boulder, CO: Lynne Rienner Publishers, 2001. Print. Alpert, William. The Vietnamese Economy and Its Transformation to An Open Market System. New York: M.E. Sharpe. Central Intelligence Agency. The World Factbook: Vietnam, 2010. Web. 10 November 2010. Dodsworth, John. Vietnam: Transition to A Market Economy. Washington, D.C.: International Monetary Fund, 1996. Print. McCullough, Cameron. Foreign Direct Investment in Vietnam. Hong Kong: Sweet & Maxwell Asia, 1998. Print. USA International Business Publications. Vietnam Financial and Trade Policy Handbook. Washington, D.C.: USA International Business Publications, 2009. Print. Read More