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Vietnam - Economy (Notes)

ECONOMY Economic stagnation marked the period after reunification from 1975 to 1985. In 1986, the Sixth Party Congress approved a broad economic reform package called 'Doi Moi' (renovation) that introduced market reforms and dramatically improved Vietnam's business climate. Vietnam became one of the fastest-growing economies in the world, averaging around 8% annual gross domestic product (GDP) growth from 1990 to 1997 and 6.5% from 1998-2003. In 2004-2005, GDP grew over 8% annually. Vietnam's inflation rate, as measured by the consumer price index, which stood at an annual rate of over 300% in 1987, was below 4% from 1997 (except in 1998 when it rose to 9.2%) until 2003. However, in 2004 the consumer price index increased to 9.5%, dropping in 2006 to 7.5%. Average annual foreign investment commitment has risen sharply as a result of the U.S.-Vietnam Bilateral Trade Agreement and Vietnam's drive toward membership in the World Trade Organization (WTO). In 2007, investment commitment is expected again to reach $10 billion, matching the $10 billion level of 2006. The average Vietnamese savings rate is about 30%. From 1990 to 2005, agricultural production nearly doubled, transforming Vietnam from a net food importer to the world's second-largest exporter of rice. Foreign trade and foreign direct investment have improved significantly. The shift away from a centrally planned economy to a more market-oriented economic model improved the quality of life for many Vietnamese. Per capita income, $220 in 1994, rose to $726 in 2006 with a related reduction in the share of the population living in acute poverty. However, regional differences in average income are wide: $726 for the whole country on average but about $1,800 in Ho Chi Minh City and much lower than average in poorer provinces of the central and northern highlands. The East Asian financial crisis in the late 1990s slowed the pace of economic growth that marked the earlier part of the decade. While a return to pre-crisis levels of growth and development has been slow, the pace has picked up in recent years, primarily as the result of ongoing economic and trade liberalization. Vietnam's economic stance following the East Asian financial crisis first emphasized macroeconomic stability, then shifted its focus toward growth. While the country has moved toward a more market-oriented economy, the Vietnamese Government still holds a tight rein over major sectors of the economy through large state-owned enterprises and the banking system. The launch of the State Capital Investment Corporation at the end of 2005 is intended to make state-owned enterprises operate more competitively. The government has plans to reform key sectors and privatize state-owned enterprises, but implementation has been gradual. Greater emphasis on private sector development is critical for job creation. Urban unemployment has been rising in recent years, and rural unemployment, estimated to be between 25% and 35% during non-harvest periods, is already at critical levels. The December 10, 2001, entry-into-force of the Bilateral Trade Agreement (BTA) between the U.S. and Vietnam was a significant milestone for Vietnam's economy and for normalization of U.S.-Vietnam relations. Implementation of this agreement, which includes provisions on trade in goods, trade in services, enforcement of intellectual property rights, protection for investments, and transparency, fundamentally changed Vietnam?s trade regime and helped liberalize its economy. By virtue of the BTA, normal trade relations (NTR) status was accorded to Vietnam on a conditional basis. Bilateral trade between the two countries expanded dramatically, rising more than five-fold from 2001 to $9.6 billion in 2006. By requiring a range of reforms to Vietnam's trade and investment regime, the BTA also helped Vietnam prepare for the next major step in its integration into the world economy: membership in the WTO. Following the conclusion of bilateral negotiations with interested WTO members and completion of multilateral negotiations in 2006, the WTO General Council approved the terms for Vietnam's membership on November 7, 2006. Vietnam formally acceded to the WTO as its 150th member on January 11, 2007. Vietnam was granted unconditional normal trade relations (NTR) status by the United States through a Presidential Proclamation signed by President Bush on December 29, 2006. On January 11, 2007 the United States removed the application of quotas on textile and apparel imports from Vietnam consistent with the terms of our WTO bilateral market access agreement and treatment provided other WTO members. To meet the obligations of WTO membership, Vietnam revised nearly all of its trade and investment laws and guiding regulations. As a result, foreign investors and those seeking to sell goods and services to the increasingly affluent Vietnamese population will benefit from the improved legislative framework and lower trade barriers. Local firms that have heretofore enjoyed a range of protections, meanwhile, will experience increased competition. As 2006 drew to a close, the Government of Vietnam reasserted its goal of becoming a middle-income country by 2010. That would entail raising the average per capita income to at least $1,000 from the 2006 average of $726. Economic analysts, including those at the World Bank, believe that this goal is attainable. Agriculture and Industry Land reform, de-collectivization, and the opening of the agricultural sector to market forces converted Vietnam from a country facing chronic food shortages in the early 1980s to the second-largest rice exporter in the world. Besides rice, key exports are coffee, tea, rubber, and fisheries products. Agriculture's share of economic output has declined, falling as a share of GDP from 42% in 1989 to 20.4% in 2006, as production in other sectors of the economy has risen. Paralleling its efforts to increase agricultural output, Vietnam?s industrial production has grown. Industry contributed 41.5% of GDP in 2006, up from 27.3% in 1985. State-owned enterprises are marked by low productivity and inefficiency, the result of a command-style economic system applied in an underdeveloped country. Foreign direct investment (FDI) is a dynamic feature of Vietnam's industrializing economy. As of the end of 2005, cumulative implemented foreign direct investment totaled over $34 billion, helping to transform the industrial landscape of Vietnam. Vietnam has successfully increased exports of manufactured goods, especially labor-intensive manufactures, such as textiles and apparel and footwear. Subsidies have been cut to some inefficient state enterprises. The Government is also in the process of 'equitizing' (e.g., transforming state enterprises into share holding companies and distributing a portion of the shares to management, workers and private foreign and domestic investors) a significant number of state enterprises. However, to date the government continues to maintain control of the largest and most important companies. Despite reforms, the state share of GDP has remained relatively constant since 2000, at 38-39%. Trade and Balance of Payments From the late 1970s until the 1990s, Vietnam was heavily dependent on the Soviet Union and its allies for trade and economic assistance. To compensate for drastic cuts in Soviet-bloc support after 1989, Vietnam liberalized trade, devalued its exchange rate to increase exports, and embarked on a policy of regional and international economic re-integration. Vietnam has demonstrated its commitment to trade liberalization in recent years, and integration with the world economy has become one of the cornerstones of its reform program. Vietnam has locked in its intention to create a more competitive and open economy by committing to several comprehensive international trade agreements, including the Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA) and the U.S.-Vietnam Bilateral Trade Agreement (BTA). Vietnam's accession to the World Trade Organization will further integrate Vietnam into the global economy. As a result of these reforms, exports expanded significantly, growing by as much as 20%-30% in some years. In 2005, exports accounted for 63% of GDP. Imports have also grown rapidly, and Vietnam has a significant trade deficit (forecast to be $4.8 billion in 2006). Vietnam?s total external debt, accounting for 32.5% of GDP in 2005, was estimated at around $17.2 billion.