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Asian Analysis - Vietnam 1-Sep-2002 



Vietnam After The Trade Agreement With The US

The trade agreement between Vietnam and the United States, ratified late last year, is changing the economic face of Vietnam.

Vietnams prime objective--a larger market for its exports is already being realized. Although overall exports were down by nearly 7 per cent in the first five months of 2002, the level of garment exports to the US has exploded. It already exceeds the total value of such exports during all of 2001. Reflecting the increased activity in this sector, importation of foreign fabrics have risen nearly 200 per cent compared with the same period last year. FedEx has seen a 30 per cent increase in its US bound priority cargo since December. Nike reports vastly increased production of footwear bound for the US.

None of this is surprising. Vietnam is the perfect export platform; it has large numbers of workers, and jobs must be created for 1.2 million new employees each year. Foreign investors easily acknowledge that Vietnamese workers are among the best in Asia. Vietnam will have to manoeuvre around China, which is well ahead of Vietnam even in those areas where Vietnams immediate strengths seem to lie--garments, footwear, and light manufacturing. Even so, investors in Vietnam should easily find pockets of opportunity.

Vietnam has also agreed to a broad relaxation of investment conditions, the results of which will be profound, if less immediate. The adjustments are to be phased in gradually. Beyond the commercial effects of the agreement, however, the impact on Vietnam will be even more dramatic. First is the enormity of what Vietnam must do to comply. Almost every area which the agreement touches - transparency, IP protection, services and streamlining procedures - will change the way Vietnam regulates business. Achieving these results one by one would have been impossible. Each could have been achieved only as part of a comprehensive agreement. The cosy protection of State-owned enterprises [SOEs] will be thoroughly challenged. Few service sectors including banking, insurance, engineering and distribution will be untouched. In reality, few companies are prepared.

The winners are not only the Americans. The elimination of many conditions to qualify for an investment license can be expected to result in a broader access for all foreign investors.

The greatest gainer is likely to be the tiny but dynamic Vietnamese private sector At US$ 2.5 billion in 2001, new foreign investment in Vietnam was up 35% on the year before. So too is private Vietnamese investment. During the same period, nearly 18,000 new Vietnamese companies were formed. Many are small, but at $US 1.5 billion the capital they have invested is significant. The pace has quickened in 2002. Competitive pressures exerted by an agile private sector will be a more effective vehicle for SOE reform than all of the governments blueprints, decrees and imprecations.

There is anxiety among Vietnamese at large. To be sure there will be displacements. But not everyone sees this as bad. Its the acknowledged price of an open economy, which most Vietnamese want. As one Vietnamese lawyer put it: Up to now we have had to look only to the state to solve our problems. Now the private sector will be able to help.

The Vietnamese leaders who took office over one year ago have accelerated change. Although laws may still not be totally adequate, they are less likely to be misdirected. There is a healthy realization that changes are occurring so fast that the government can no longer manage each step. There is also a generational change occurring among bureaucrats who are seen to be resisting less. One battle-scarred foreign investor observed: I was in a meeting at the Ministry of Finance, and they were actually all looking for reasons to say yes. In many ways, the government has become more realistic, more familiar with the international environment, more confident, and so less timid. Equally important, there is a general recognition that market principles also apply to countries and that Vietnam is competing with its neighbours.

Watchpoint: Foreigners who have urged patience may yet have reason to smile, but how soon will it be until substantive benefits flow also to non-US investors?

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