Vietnam - International University of Japan...Vietnam 3 ' The Economist Intelligence Unit Limited 2006 Country Profile 2006 Vietnam Basic data 330,363 sq km 82m (2004) Population (of

Country Profile 2006

Vietnam This Country Profile is a reference work, analysing the countrys history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Units Country Reports analyse current trends and provide a two-year forecast.

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ISSN 1356-4145

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Vietnam 1

© The Economist Intelligence Unit Limited 2006 www.eiu.com Country Profile 2006

Contents

Vietnam

3 Basic data

4 Politics 4 Political background 6 Recent political developments 9 Constitution, institutions and administration 10 Political forces 11 International relations and defence

14 Resources and infrastructure 14 Population 15 Education 16 Health 16 Natural resources and the environment 18 Transport, communications and the Internet 20 Energy provision

21 The economy 21 Economic structure 22 Economic policy 26 Economic performance 27 Regional trends

28 Economic sectors 28 Agriculture 30 Mining and semi-processing 32 Manufacturing 34 Construction 35 Financial services 37 Other services

38 The external sector 38 Trade in goods 39 Invisibles and the current account 39 Capital flows and foreign debt 40 Foreign reserves and the exchange rate

42 Regional overview 42 Membership of organisations

45 Appendices 45 Sources of information 46 Reference tables 46 Population 46 Employed labour force 46 Transport statistics 47 National energy statistics

2 Vietnam


47 Government finances 48 Money supply 48 Interest rates 48 Gross domestic product 49 Nominal gross domestic product by expenditure 49 Real gross domestic product by expenditure 50 Gross domestic product by sector 50 Prices and earnings 50 Industrial crops 51 Perennial industrial crops 51 Food crops 51 Fisheries output 52 Main manufactures 52 Retail trade 52 Tourism statistics 53 Main exports 53 Main composition of trade 53 Main trading partners 54 Balance of payments, IMF series 54 Foreign direct investment 54 External debt, World Bank series 55 Foreign reserves 55 Exchange rates

Vietnam 3


Vietnam

Basic data

330,363 sq km

82m (2004)

Population (of province) in 000 (2004)

Ho Chi Minh City 5,731 Hanoi (capital) 3,083 Haiphong 1,771

Tropical monsoon; north cool and damp in winter (November-April), hot and rainy in summer; south more equable; centre most subject to typhoons. The rains are highly unpredictable

Hottest month, June, 26-33°C; coldest month, January, 13-20°C; wettest month, August, 343 mm average rainfall; driest month, January, 18 mm average rainfall

Hottest month, April, 24-35°C; coldest month, January, 21-32°C; wettest month, September, 335 mm average rainfall; driest month, February, 3 mm average rainfall

Vietnamese (spoken by about 90% of the population); English (increasingly favoured as a second language); some French; a little Russian and German; minority languages such as Hmong, Thai, Khmer in remoter rural areas

Metric system. Local land measurement 1 mau=3,600 sq metres (north); 1 mau=5,000 sq metres (centre)

Dong (D). Average exchange rate in 2005: D15,859:US$1; exchange rate on September 11th 2006: D16,003:US$1

7 hours ahead of GMT

January 1st (New Years Day); January 28th-31st (Tet, Lunar New Year); April 30th (Liberation of Saigon); May 1st (Labour Day); May 19th (Birthday of Ho Chi Minh); September 2nd (National Day)

Land area

Climate

Weights and measures

Currency

Time

Public holidays, 2006

Population

Main towns

Weather in Hanoi (altitude 216 metres)

Weather in Ho Chi Minh City (altitude 9 metres)

Language

4 Vietnam


Politics

The Socialist Republic of Vietnam is a one-party state, run by a collective leadership comprising the Communist Party general secretary, Nong Duc Manh, the prime minister, Nguyen Tan Dung, and the president, Nguyen Minh Triet.

Political background

Vietnams identity was forged out of resistance to its giant northern neighbour, China, and the expansion southwards from its original heartland in the Red River Delta and the north-eastern coastal plain. For over 1,000 years until AD 939, it was governed as a Chinese province. Thereafter Vietnam remained closely linked with China, both politically and militarily, as a tributary state that frequently had to resist Chinese invasions. It also absorbed Chinese cultural in-fluences, including the Confucian model of government, a hierarchical bureau-cracy that stressed the subordination of its subjects to the political leader at its centre. The expansion southwards, driven by population pressure, eventually brought Vietnam into conflict with the Khmer empire in what are now Cambodia and Thailand. It was not until the late 18th century, under the Nguyen dynasty, that Vietnam reached its present southern limit on the Gulf of Thailand.

The Nguyen were, however, unable to resist the growing challenge of French colonialism, and by 1885 all of Vietnam was under French rule. The colonial regime permitted only limited expression to constitutionalist Vietnamese opposition and harshly suppressed more radical resistance. The colonially imposed administration damaged the traditional equilibrium of village life, undermined the authority of the scholar-gentry class and blocked the growth of an indigenous bourgeoisie. In these circumstances the only effective challenge to French colonial rule was communist-led. A number of communist groups were formed during the 1920s, which coalesced in the Communist Party of Indochina, founded by Ho Chi Minh in 1930.

The second world war transformed the Communist Partys prospects. After a period of collaboration the French were swept aside in March 1945 by the Japanese, who installed Emperor Bao Dai as leader of a nominally independent Vietnam. The communist united front organisation, the Vietminh, quickly filled the vacuum left by the surrender of Japan in August 1945, and on September 2nd, in Hanoi, Ho Chi Minh proclaimed the independence of the Provisional Democratic Republic of Vietnam, although shortly thereafter he turned to France to help repel an invasion by a Chinese army that entered Vietnam from Yunnan province and reached Hanoi.

Frances refusal to give up its colony led to a protracted war, which soon became another engagement in the cold war. In 1954, on the eve of talks held in Geneva, Switzerland, to settle the future of Indochina, the Vietminh inflicted a humiliating military defeat on the French at Dien Bien Phu, in an inaccessible valley near the border with Laos. The conference divided Vietnam at the

Chinese cultural influence is strong

The French control the whole country by 1885

The communists gain strength and the French withdraw

Vietnam 5


17th parallel but failed to achieve agreement on a political solution. Soon after the Geneva agreements a US-backed Catholic northerner, Ngo Dinh Diem, took power in the south. Mr Diems intransigence dampened hopes for a peaceful reunification. In 1959 the Vietminh embarked on a more active strategy in the south, and in the following year the National Front for the Liberation of South Vietnam (NLF) was formed to oppose Mr Diem.

After the assassination of Mr Diem during a military coup in November 1963, the conflict increasingly turned into an American war. By 1968 there were 500,000 US troops in Vietnam. In January 1968 the war reached a turning point when communist forces launched the Tet (New Year) offensive, revealing the fragile hold of the South Vietnamese on their territory. In the wake of the offen-sive the US president, Lyndon Johnson, agreed to hold peace talks in Paris. In January 1973 the parties agreed on terms for the withdrawal of US troops.

Two years later the North Vietnamese launched a massive offensive in the south, and the Souths forces quickly crumpled. On April 30th 1975 the communists entered Saigon (the capital of South Vietnam, now Ho Chi Minh City), marking the end of Vietnams 30-year war of independence. The victorious North rapidly undertook the formal reunification of the country, and the Socialist Republic of Vietnam came into existence on July 2nd 1976. The bloodbath that successive US administrations had predicted would follow the fall of the South did not materialise, but the new authorities subjected tens of thousands of officials and soldiers of the former South Vietnamese government to re-education, and many urban southerners were sent to work in remote so-called new economic zones, where conditions were often harsh.

At the same time, ambitious plans for the socialist transformation of the south were launched, but the high hopes generated by the victory there were short-lived. Instead of being accepted into the international community and receiving aid for the reconstruction of its shattered economy, Vietnam was treated with suspicion as a potentially disruptive force with wider hegemonic designs in South-east Asia. Although it was carried out in response to agg-ression, the Vietnamese invasion of Cambodia, which resulted in the ousting of the Khmer Rouge regime in late 1978, appeared to confirm these suspicions.

The invasion led to a break with China, with which relations had already soured owing to Vietnams close relations with the Soviet Union after the Sino-Soviet split and the Vietnamese authorities harsh treatment of its ethnic-Chinese community. The latter had borne the brunt of the government campaign against the bourgeoisie, and many Chinese joined the exodus of boat people. In early 1979 China launched an incursion over Vietnams northern border in response to Vietnams invasion of Cambodia, only to be repulsed by the more experienced Vietnamese troops.

During the 1980s the members of the Association of South-East Asian Nations (ASEAN), together with Japan and western Europe, backed a tightening of the economic embargo that had been imposed on North Vietnam during the war, by supporting the US veto of multilateral assistance to Vietnam. These moves forced Vietnam to rely on the Soviet Union and its allies in the Council for Mutual Economic Assistance (Comecon) for economic and military assistance.

The communists take over

6 Vietnam


The economic crisis created by the adoption of a central planning model poorly adapted to Vietnams circumstances had intensified by the mid-1980s.

Recent political developments

The direction of economic policy dominated party debate well into the 1980s, although consensus was generally maintained throughout this period. Even the landmark sixth party congress in 1986, at which the party made its historic commitment to economic renovation (doi moi), did not undermine the cohesion of the leadership. By the late 1980s economic reforms had become part of the new consensus, but, with communist regimes in the Soviet Union and eastern Europe under threat, there was no prospect of matching political liberalisation. Reflecting this dichotomy, the politburo (the partys executive body) that emerged from the eighth party congress in June 1996 not only contained several economic reformers but also gave strong representation to the security apparatus.

Since the final withdrawal of its troops from Cambodia in 1989, Vietnam has emerged from the international isolation that followed its invasion of Cambodia at end-1978. Within months of the Paris Agreement on Cambodia of October 1991, Vietnam established diplomatic and economic relations with most of the countries of western Europe and East Asia, including China. Vietnams multi-directional diplomacy has been explicitly based on its perception of growing global economic interdependence. Its integration into the regional and global economy has been formalised through membership of international organisations. The most important of these is ASEAN, which Vietnam joined in July 1995, and the Asia-Pacific Economic Co-operation (APEC) forum, which Vietnam joined in November 1998.

There has been some evidence of divisions within the party in recent years. The more conservative party bloc is concerned about the perceived negative effects of economic growth, such as corruption and drug-trafficking, whereas the more reformist government bloc argues for government to be separate from the party and for a greater role for the private sector. However, formal factions have not emerged, and both sides share a suspicion of political pluralism. With the replacement as party general secretary of the conservative Le Kha Phieu by the more moderate Nong Duc Manh during the ninth party congress, the reformist group gained the upper hand. This has been reflected in the quickened pace of economic reform since 2002 compared with the glacial pace of political change.

During his first term in office, Mr Manh fostered a less polarised political en-vironment, and his resolve to clamp down on corruption had some effect. During 2000-04, 12,300 government employees were disciplined for corruption, and since 2001 the Communist Party has disciplined over 10,000 members, including seven members of the Central Committee and the agriculture and rural development minister, Le Huy Ngo, who was sacked in May 2004 for allowing a swindle in a firm supervised by his ministry. Mr Manhs message was clear: senior officials had been put on notice that they were not beyond the reach of the law.

The party leadership focuses on reform

Reformists gain the upper hand under Nong Duc Manh

Vietnam 7


At the tenth party congress, in April 2006, Mr Manh retained his post after receiving a resounding vote of confidence from the partys new enlarged Central Committee. This was widely seen as a reward for his success in main-taining party unity, but it also reflected members unwillingness to upset the balance of the party at a time of relative crisiscorruption scandals attracted much of the publics attention in the months leading up to the congress, a trend that was damaging the partys leadership authority. During the congress, Mr Manh stated that intensifying the fight and control of corruption and wastefulness was a pressing requirement, with corruption being a major threat to the partys survival.

A key scandal that erupted in early 2006 centred on the embezzlement of funds from PMU18 (a state project management unit that oversees around US$2bn in funds for transport infrastructure projects). The head of the unit, Bui Tien Dung, was arrested in January accused of pilfering around US$7m, much of it spent on gambling on football matches. In April the minister of transport, Dao Dinh Binh, resigned for his failure to prevent the corruption scandal, and his deputy, Nguyen Viet Tien, was arrested for his suspected involvement in the case. The PMU18 case has wider significance. It channelled large amounts of foreign aid into infrastructure projects, and both Japan and the World Bank are now looking more carefully at how the money was spent.

At the tenth party congress there was no change in the partys top post, but there were major changes in the other positions. The prime minister, Phan Van Khai, and the president, Tran Duc Luong, both resigned from the partys Politburo, effectively bringing to an end their terms in office. The decisions by Mr Khai and Mr Luong, aged 72 and 68 respectively, were widely anticipated, as both had already served two terms in office, but the changes were not made official until the ninth session of the eleventh National Assembly (the legislature) in June. Mr Khai was succeeded by his first deputy, Nguyen Tan Dung, 56, a southerner and a committed economic reformer. The partys secretary in Ho Chi Minh City, Nguyen Minh Triet, 64, was chosen to succeed Mr Luong. Mr Triet is widely regarded to have economic reformist credentials and managerial competence, and he was instrumental in leading the campaign in 2003 to bring to justice the powerful Ho Chi Minh City gangster, Truong Van Cam (Nam Cam), and root out corrupt officials associated with him.

Important recent events

2001

April. The ninth party congress chooses the moderate Nong Duc Manh as general secretary of the Communist Party. December. A bilateral trade agreement with the US comes into effect, more than two years after it was first agreed in principle. It represents an important victory of the economic reformers over the conservatives.

2002

April. Elections for the National Assembly (the legislature) produce a larger, younger, better-educated legislature, but one with fewer non-party members.

There are changes at the senior level of government

Mr Manh retains his post, as focus on corruption intensifies

8 Vietnam


2003

March. An outbreak of Severe Acute Respiratory Syndrome (SARS) is confirmed in the capital, Hanoi, but the government moves swiftly to contain the problem. June. A well-connected gang leader, Truong Van Cam (Nam Cam), is sentenced to death along with five associates, after a highly publicised three-month trial that involved 155 defendants, including several prominent government officials. The move represents a toughening of the governments anti-corruption drive.

2004

January. An outbreak of avian influenza (bird flu) emerges. The government arranges for 35m fowl to be slaughtered, but, after disappearing a couple of months later, the disease reappears in July and re-emerges sporadically in 2005. The governments rapid-reaction procedures contain, but do not eliminate, the threat. April. At least two people die when demonstrations by ethnic minorities in the Central Highlands, protesting against land confiscation and religious persecution, turn violent. This marks the short-term failure of the governments response to the serious riots in the same region in January 2001. Local elections are held for commune, district and provincial officials. Two-fifths of the 500,000 candidates are not members of the Communist Party. May. The minister for agriculture and rural development, Le Huy Ngo, is sacked for allowing a swindle by a ministry-supervised firm. More than 40 executives in PetroVietnam are disciplined (the firms general director was fired in 2003 for alleged corruption).

2005

January. Rioters in Ha Tay province, near Hanoi, burn down a government building in a protest about inadequate compensation for land appropriation. Such protests start to become increasingly common. June. The then prime minister, Phan Van Khai, makes a historic trip to the USthe first by a Vietnamese leader since the end of the US-Vietnam war three decades ago. The trip enhances Vietnams prospects of joining the World Trade Organisation, and also underlines the USs growing interests in developing trade and investment ties with its former foe. November. The National Assembly passes the countrys first anti-corruption law. The law, which came into effect in June 2006, holds the heads of agencies responsible for corruption within their organisations. In essence, the law is aimed at increasing transparency in the state apparatus while making state officials fully accountable for any wrongdoing.

2006

April. The Communist Party holds its tenth congress amid an escalating corruption scandal. Nong Duc Manh is called upon to serve a second five-year term as the partys general secretary. The prime minister, Phan Van Khai and the president, Tran Duc Luong, signal their intention to step down from their posts. June. Nguyen Tan Dung succeeds Mr Khai as prime minister and Nguyen Minh Triet becomes the new president. Both men are considered to be reformists.

Vietnam 9


Constitution, institutions and administration

Vietnam has had five constitutions, adopted in 1946, 1959, 1980, 1992 and 2001 respectively, each regarded as appropriate to its time. The 1992 constitution was geared to the era of renovation and dropped the revolutionary rhetoric of the 1980 constitution. The Communist Party was to operate within the framework of the law and the constitution. No longer responsible for ensuring the building of socialism, the government was charged with specific management functions under a prime minister with defined powers. The 2001 constitution committed the state to protect the legitimate rights of overseas Vietnamese (Viet Kieu).

The 1992 constitution had stipulated that, instead of a centrally run economy, Vietnam would have a multi-sector economy in accordance with the market, based on state management and socialist orientations. Land was to be assigned to individuals on long leases. The autonomy of state enterprises was guaranteed but the private capitalist economy was given an explicit role. Foreign investors were given ownership rights and guarantees against nationalisation. The 2001 constitution went further, specifying that all economic sectors are important components of the socialist-oriented market economy. It states that organisations and individuals of various economic sectors are permitted to engage in any business not prohibited by law and develop in an equal and competitive manner according to law. It stipulates that there should be no restrictions on the size of private-sector operations or the sectors in which they may operate.

The 1992 constitution enhanced the powers of the National Assembly (the legislature) as the highest organ of state power, and the 2001 constitution has given it the power to hold votes of no confidence in leaders that it elects (including government ministers). The election for the 11th National Assembly in May 2002 was as tightly controlled as in the past. No senior figure lost a seat; just over 25% of the deputies were women; 17% of deputies came from ethnic minorities, and 10% were not party members (down from 12% in the outgoing National Assembly). Only two of the 13 self-nominated candidates from the total 762 candidates (all vetted by the Vietnam Fatherland Front) won seats.

Nevertheless, beneath the surface there were a few significant changes. An unusually high proportion of those elected (73%) were new to the National Assembly. The new deputies are well educated, with 93% said to have completed tertiary education upwards. Candidates were required to declare their assets, although this represents more form than substance, as the results of the declarations are not publicly available. Perhaps most importantly, 25% of the new deputies will be paid to serve full-time. This is expected to increase public access to deputies and raise the level of professionalism within the legislature. Over the long term, it will also help to broaden the pool of politicians from which the countrys leadership can draw.

The National Assembly, which acted as little more than a rubber-stamp until the late 1980s, has become increasingly vocal and assertive, calling on ministers to account for their performance and taking the initiative in amending proposed legislation and policy.

The 2001 constitution offers more private-sector freedom

The National Assembly is more assertive

10 Vietnam


The judiciary is relatively weak and is not independent of the Communist Party. There are few lawyers, and trial procedures are rudimentary. There is a growing backlog of unsettled civil lawsuits, and the workload of staff at the Ministry of Justice has reportedly tripled since 1994. The death penalty is still used regularly, especially in major cases of corruption and drug-trafficking. Widespread bureaucratic procedures, coupled with a lack of transparency in government activitiesboth legacies of the period of the planned economypermit significant levels of corruption to occur, both at the petty level (such as the receipt by police of pay-offs from street vendors) and on a larger scale (especially in public works contracts).

Political forces

Vietnam continues to be organised politically along orthodox communist lines. The Communist Party remains the dominant political force, despite the modest downgrade of its role in the 1992 constitution. Other important forcesthe government, the army and the bureaucracyare subordinate to it. The party secretariat issues directives to party members and plays an important role in directing government policy. The party is entrenched in state institutions and mass organisations, such as the Confederation of Trade Unions, the Womens Union and the Youth Union (grouped under the Vietnam Fatherland Front, which exists to mobilise support for the partys goals), to ensure their subordination to the party line.

The party selects future leaders and senior officials and gives them extensive mid-career training, some of it highly ideological. However, the party has been increasingly accepting of its members engaging in private business, and at the tenth party congress in April 2006 it formally allowed members to own businesses, thereby giving its tacit approval to capitalism as an economic ideology. The party leadership of Ho Chi Minh City, the countrys biggest urban centre, is considering allowing properly qualified non-party members to occupy top positions; it appears that the advantages of party membership are not compelling enough to attract all of the countrys talent.

The politburo, which currently has 14 members, is the partys executive, sets government policy and vets all major appointments. It is elected by the 160-member Central Committee at national party congresses, which are held roughly every five years. Almost all of the ministers in the cabinet are members of the Central Committee, and 90% of the deputies in the National Assembly are Communist Party members. Party committees exist at every level of the bureaucracy, in effect representing a parallel administration. Efforts have also been made to establish a party presence in private enterprises, albeit with limited success. Managers or deputy managers often double as party secretaries in state enterprises, which helps to explain the continued resistance to thorough reform of such enterprises.

The Peoples Army of Vietnam ranks in influence only behind the party and the government. Its roots in society are deep. In the past half-century it has

The party and government overlap extensively

The military is influential and deep-rooted

The Communist Party remains dominant

The judiciary remains weak

Vietnam 11


confronted and humiliated armies from three of the worlds major powers: France, the US and China. The army has always had a political dimension, and a defence white paper written in 1998 rejected depoliticisation of the armed forces. Many senior officers (including a previous party general secretary, Le Kha Phieu) have moved on to top leadership positions in the Central Committee and the politburo, although their number is now diminishing.

Main political figures

Nong Duc Manh

Elected to the position of party general secretary in April 2001, and re-elected in April 2006, Mr Manh, a northerner, was born into an ethnic Tay family in September 1940. He is the first Communist Party general secretary to have a university degree, having majored in Russian at the Hanoi Foreign Language College (1966-71) before studying for a year in Russia at the Forestry Institute in Leningrad (now St Petersburg). Starting in the forestry service, he worked his way up through the party hierarchy to become a member of the politburo (the partys executive body) in 1992. He is best known for his role as chairman of the National Assembly (the legislature), a position that he held from June 1996 until May 2001; during this time the Assembly became both livelier and more powerful. Mr Manh is a pragmatist, respected for his skills as a mediator and conciliator.

Nguyen Tan Dung

Elected as prime minister in June 2006 at the age of 56, Mr Dung previously served as first deputy prime minister under his predecessor, Phan Van Khai. Mr Dung first became a deputy prime minister in September 1997 and was responsible for general economic and internal affairs in the cabinet. He was also acting governor of the State Bank of Vietnam (SBV, the central bank) until November 1999. He comes from Ca Mau province at the southern tip of Vietnam, and is regarded as a committed economic reformer but not an intellectual heavyweight.

Nguyen Minh Triet

Although Mr Triet was an initial challenger for the post of party general secretary at the tenth party congress in April 2006, in June he was chosen to serve as president. Prior to this, he was the partys secretary of the southern province of Song Be, during which he presided over a period of spectacular industrial development, and in 2000 he became party secretary in Ho Chi Minh City. His rise to the presidency may reflect his success in leading the campaign against a powerful gangster, Truong Van Cam (Nam Cam), in addition to his economically liberal credentials and managerial competence.

International relations and defence

The US did not lift its economic embargo until February 1994, and full diplomatic normalisation was not achieved until June 1995. Negotiations on a bilateral trade agreement, according normal trade relations (NTR) status to Vietnam (allowing it access to the US market at the low tariff rates applied to most countries) while requiring reciprocal measures by Vietnam, began in 1996. However, conservative resistance in Vietnam to economic liberalisation at the pace and on the scale envisaged in the pact delayed its signature, and it did not

Relations with the US improve, but remain prickly

12 Vietnam


come into effect until December 2001. Bilateral negotiations over Vietnams entry to the World Trade Organisation (WTO) also proved to be difficult and protracted, but an agreement was signed in June 2006. Although it is not specified in the agreement, the US is expected to accord permanent NTR status to Vietnam before end-2006 (currently Vietnam's NTR status is reviewed annually), thereby ensuring that Vietnamese exports to the US enjoy the same tariffs as almost all other countries.

There is some resistance in the US Congress to granting permanent NTR status; some of those who oppose the measure want Vietnam to do more on the human rights front, whereas others would like to see Vietnam pay more attention to labour and environmental issues. Reports issued by the US State Department have routinely criticised Vietnams human rights record, and the US has included Vietnam on its shortlist of countries of particular concern regarding its handling of religious freedoms. However, foundations are be-coming strongera trend that was highlighted by Mr Khais historic trip to the US in June 2005, when he met the US president, George W Bush.

Partly because of ideological affinities, diplomatic relations between Vietnam and China continue to improve. High-level officials make frequent visits in both directions; most recently, in October 2005, China's president, Hu Jintao, visited Hanoi, in a move that was widely viewed as being aimed at countering growing US influence in Vietnam. Trade between the two countries has also expanded rapidly in recent years. Relations have not always been so friendly, however, and Vietnam remains wary of Chinas intentions. A major and persistent area of disagreement is the sovereignty of a number of islands in the South China Sea; both countries claim parts of the Spratly and Paracel archipelagos and (more importantly) the surrounding seabed, which is believed to hold substantial oil reserves. However, reflecting both countries keenness to enhance co-operation in order to maintain stability, in April 2006 they conducted joint military patrols off the Gulf of Tonkin, the first time that the Chinese navy has operated in a joint exercise with Vietnam.

Vietnams ties with neighbouring Laos and Cambodia remain strong, although relations with the former are less complicated than those with the latter. Vietnam and Laos have close political and security links. Vietnam has helped Laos contain its low-level insurgency by Hmong rebels. Both sides are also now keen to promote trade and investment links.

Some of the complications in relations with Cambodia centre on the ongoing failure to demarcate the common border. However, in November 2005 both sides ratified a Supplementary Treaty to the Treaty on the Delimitation of the State Border between the two countries. The border has been a constant source of controversy, with accusations that one side or the other has moved border markers or invaded territory. The Supplementary Treaty reaffirms the basic line mapped by the French (the Bonne map) in 1954 and upheld in a 1985 treaty between Vietnam and Cambodia. In practical terms, the Supplementary Treaty adjusts six border areas where there were mapping errors at the time of the 1985 treaty, and adjusts the border to comply with international principles that set river borders at the median of the main current. Most

Ties with China are strong, but disagreements remain

Close ties are maintained with Cambodia and Laos

Vietnam 13


importantly, it sets a deadline of December 2008 for completing full demarcation, including the positioning of border markers. This is likely to be difficult: in some areas Vietnamese live in Cambodian territory, and vice versa. Moreover, in some places floods have changed the terrain, so that it now differs somewhat from the Bonne map.

After Vietnams withdrawal from Cambodia in 1989 about 500,000 troops were demobilised. Since then, there have been sharp cuts in military spending, although a reduction in the influence of the armed forces has been tempered by continued suspicion of China, as well as by their enhanced internal security role. In addition to a mainly conscript army of 412,000 (two years of military services is, in principle, required of all men), there is a navy of 13,000, an air and air defence force of 30,000, a border defence corps of 40,000, and reserves of about 5m in the urban Peoples Self-Defence Force and the rural Peoples Militia.

Security risk in Vietnam

Armed conflict

There is no armed conflict in Vietnam. A few émigrés, with some support among small minority groups in the Central Highlands (which supported the US during the American war and have no love for the central authorities), favour the creation there of a separate state called Dega. This movement has not taken up arms, and would be no match for the Vietnamese army.

Unrest/demonstrations

Demonstrations and overt forms of unrest are rare but not unknown. In early 2001 there were serious demonstrations in the Central Highlands, which were repeated in April 2004 as members of ethnic minorities expressed their frustration at govern-ment attempts to restrict their freedom of religion (evangelical Protestantism is rife in the region) and at the gradual loss of land to ethnic Vietnamese who have moved into the area to cultivate coffee, often with government backing. In 1997 there were protests, mainly directed at corrupt local officials, in the northern province of Thai Binh. Similar outbursts have occurred elsewhere, including in Ha Tay province (near the capital, Hanoi) in January 2005, where protestors burned down a government building. The governments response has typically been to send in police and soldiers, arrest some of the ringleaders, caution those who would undermine national unity, and offer some sopsmore roads and scholarships, promises of grass-roots democracy, the demotion of some local officials and broadcasts in ethnic-minority languages. The number of protests by people who feel that they have been unfairly dis-advantaged by government projects has risen recently, and the threat of ethnic and religious unrest has not diminished. Short strikes have occurred in some foreign-invested enterprises (FIEs), but have been related to simple issues of working con-ditions and have been resolved quickly. FIEs are typically welcomed, not targeted, in large part because they provide good jobs.

Violent crime

There is little hard information on violent crime, but the popular perception is that Vietnam is not a particularly dangerous place. Foreigners in Vietnam do not generally

The armed forces are less formidable

14 Vietnam


live in enclaves and do not have to take any special security precautions. However, pickpockets are common in the busier tourist areas, and drug-related robbery has become more common in Hanoi.

Organised crime

Organised crime, mainly related to drugs, gambling and prostitution, is of some concern. A notorious gangster in Ho Chi Minh City, Truong Van Cam (Nam Cam), was executed in 2004 following a highly publicised trial. The crackdown on his operations became possible only after police from outside the city had been brought in to investigate. Several prominent government figures were also found guilty during the trial, either for turning a blind eye to organised crime or for helping Nam Cam to avoid prison. There is a substantial flow of drugs from the Golden Triangle (an area where the borders of Thailand, Laos and Myanmar converge) to Hanoi, Haiphong and beyond, and sometimes customs and police officials are charged with trafficking.

Kidnapping/extortion

There are no cases of kidnapping for ransom. There is an irritating, if relatively minor, amount of petty extortion (for example, district police chiefs visiting foreigners in their districts before signing their residence papers; or ministry officials seeking bribes to expedite paperwork).

Resources and infrastructure

Population

The annual population growth rate has slowed, falling from an average of 3.1% in 1960-70 to 1.4% in 2000-04. In 2004 the population was estimated at around 82m, according to the General Statistics Office (GSO). The population is 74% rural and is concentrated in the two main rice-growing deltas, the Red River in the north and the Mekong in the south. The urban population is growing rapidly, at an annual rate of around 3.5% in recent years, and now accounts for over 65% of the annual population increase. In January 2003 the governments one child/two children policy, which helped to reduce the fertility rate from 6.7 in 1970-75 to 2.3 in 2000-05, was quietly dropped. In 2002 around 32% of the population was aged below 15 years, with around 5% aged over 65.

The delta populations are almost entirely ethnic Vietnamese (kinh), but one-sixth of the population belongs to one of the 53 ethnic minorities, including the Tay, Thai, Nung, Muong, Hmong and Dao in the Northern Uplands, the Gia-Rai, Ba-na, Xodang and Ede in the Central Highlands, the Khmer in much of the south of the country and the Hoa (ethnic Chinese) in urban areas. Minority groups in the Central Highlands have been marginalised by inflows of migrants attracted by the prospect of profitable coffee cultivation; until recently this flow was aided by government resettlement subsidies to families that moved to the new economic zones. Many ethnic-minority people do not speak Vietnamese, especially in the more remote mountainous areas, and thus remain outside the economic and social mainstream.

Annual population growth slows

Minority groups form one-sixth of the population

Vietnam 15


Population, 2004a 000 % of totalHabitation

Rural 60,441 73.7Urban 21,591 26.3

Gender

Males 40,318 49.1Females 41,714 50.9

Total population 82,032 100.0

a Figures do not include members of the armed forces and Vietnamese working abroad.

Source: General Statistics Office.

The once-sizeable ethnic-Chinese community was depleted after many left Vietnam, often as boat people, when the government closed down private businesses in the south in 1978. The 1989 census counted 962,000 Chinese, but the figure is now estimated to be more than 1.5m. A large proportion of the inflow of remittances, estimated at more than US$2bn a year, originates from the overseas Chinese. The Chinese business community remains vibrant, particularly in and around Ho Chi Minh City. There is a high rate of inter-marriage, with 30% of Chinese marrying a non-Chinese partner.

Education

Although access to higher levels of education has historically been limited, the introduction of near-universal primary education has produced high literacy rates. The Viet Nam Living Standards Survey 2002 found that 92% of the population aged ten years and older were literate89% of females and 95% of males. Literacy in the urban areas (96%) is only slightly higher than in the countryside (91%). Vietnams school enrolment rates suffered a decline in 1987-91, particularly at secondary level, because of a budgetary squeeze that reduced the wages of teachers. This was compounded by the emergence of alternative occupations for teachers. However, enrolment rates have not only recovered but have risen to record levels, with 167 per 10,000 people enrolled in tertiary education. The government aims to raise this figure to 200 by 2010. The share of government current spending allocated to education and training rose from just under 5% in 1989 to over 16% by 1999 and 23% in 2002. State spending is augmented by large amounts of household spending on fees, tutoring and educational supplies, which is thought to account for as much as half of all educational spending.

Enrolment rates in education (% of relevant age group; school years)

1990/91 2002/03Net primary enrolment rate 90 94Net secondary enrolment rate n/a 65

Source: UN Development Programme, Human Development Report 2005.

Despite rising enrolment rates, only 18.5% of those aged 15 or above have completed (upper) secondary school or higher, and four-fifths of the labour force is considered to be unskilled. Skilled workers are disproportionately

The Chinese community remains important

Enrolment rates reach record levels

Skills levels remain low

16 Vietnam


concentrated in and around the capital, Hanoi (the Red River Delta region), and Ho Chi Minh City (in the south-east). In the south-east, 32% of workers are skilled, including 6% who have a college education; the comparable figures for the Red River Delta are 25% skilled and 6.5% with college education.

Health

Healthcare provision is relatively good, as measured by such indicators as life expectancy, infant mortality and the number of doctors per head of population. After 1954 the government set up a public health system that reached down to hamlet level and was extended to the south after reunification in 1976. However, in the late 1980s a number of factors began to have an adverse effect on the quality of healthcare. These included reform-linked factors, budgetary constraints, the shift of responsibility to the provinces and the introduction of charges. According to data from the UN Development Programme (UNDP), government spending on healthcare amounted to just 1.5% of GDP in 2002, compared with private healthcare spending equivalent to 3.7% of GDP. However, the healthcare system is plagued by the high incidence of unofficial payments to health workers to speed up access to treatments at public healthcare centres.

A shortage of funds has meant that improvements in water supply and sewerage systems have been slow in coming. These inadequacies are largely responsible for the most common infectious diseases, such as malaria, dengue fever, typhoid and cholera. Although the number of doctors rose by over 50% between 1995 and 2003, the numbers of nurses and midwives stagnated during the 1990s, rising again only in recent years. There is particular concern about the health of people living in the poorer provinces, where malnutrition, although falling, is still common. However, Vietnams health indicators have improved in recent decades. According to the UNDP, the infant mortality rate slowed to 19 (per 1,000 live births) in 2003 from 55 in 1970, and life expectancy has risen to around 70 years from around 50 in 1970-75.

Health indicators, 2003 One-year-olds fully immunised against tuberculosis (% of total) 98

Infant mortality (per 1,000 live births) 19Fertility rate (per woman)a 2.3

Life expectancy at birth (years)a 70.4

a 2000-05.

Source: UN Development Programme, Human Development Report 2005.

Natural resources and the environment

Vietnam has a humid tropical climate heavily influenced by the monsoon. In the north (roughly north of the 18th parallel), there is wide variation in temperature between the cold, relatively dry season (November-April) and the hot, wet season (April-October). In the south, the two seasons are not distinguished by marked differences in temperature. The north-central coastal area is susceptible to typhoons, which regularly destroy houses, livestock and

Healthcare is under threat from budget cuts

Some regions are susceptible to flooding and typhoons

Vietnam 17


infrastructure. This frequent destruction of the capital stock helps to explain the persistent poverty of the region. Floods often hit parts of the Mekong Delta, destroying crops but also replenishing the soil.

About 36% of the land area is categorised as unused or barren. Most of this is land that was once forested and now lies fallow, and much of it is badly degraded. Cultivated area per head, at 0.1 ha, is among the lowest in the world. The government has a policy to increase the amount of land that is under cultivation and effectively irrigated, and to plant trees on barren areas. Strict rules preventing the conversion of paddy land to other uses have been relaxed, particularly in areas with high potential for shrimp farming. An environmental protection law is in place, as are numerous local environmental ordinances, but implementation is weak and the rules are sometimes confusing.

Vietnams natural forest is officially estimated at 9.9m ha (equivalent to 33% of the land area), but only around 192,000 ha is counted as concentrated planted forest. The government has an ambitious target of replanting 200,000 ha of new forest per year to cope with what a government report has described as the most serious challenge since reunification. In the 1980s afforestation took place at an annual average rate of 36,000 ha, according to the World Resources Institute, a US-based environmental think-tank, with the pace accelerating to 68,000 ha annually in 1994-99.

Official statistics indicate that 1,394 ha of forest was destroyed in 2004 and a further 4,133 ha was lost to fire. These figures, which are probably under-estimates, are smaller than in recent years. The main causes of deforestation have been logging, demand for fuel wood and the clearing of forests for agricultural purposes (prompted by population pressures and the profitability of tree crops, notably coffee), including clearing by slash-and-burn farmers. The production of wood peaked in 1996; firewood output has been falling since around 1995.

Forested area, 2004 (000 ha; year-end)

Natural forest 9,904

Afforested area 2,269Total 12,173

Source: General Statistics Office.

Until recently the government subsidised a migration programme from the densely populated lowlands to the new economic zones in the Central Highlands, in part to ease pressure on agricultural land. It also favoured the settlement (sedentarisation) of peripatetic slash-and-burn cultivators in the hills and mountains. However, these programmes have been criticised for causing further deforestation and soil erosion, and have met resistance from local, mainly ethnic-minority, residents, who staged large demonstrations against such programmes in February 2001 and April 2004.

Rapid urbanisation is putting stress on the antiquated infrastructure of the cities, where increased vehicle ownership has raised the level of pollution, congestion and accidents. Human exposure to airborne pollutants exceeds

Overcrowded areas are a strain on the environment

Cultivated area per head is low

Deforestation is being tackled

18 Vietnam


permissible levels in most cities, and water quality is also a concern. Over 90% of factories lack treatment facilities, and nearly 50% of the population has no access to safe water.

Economic activity, especially prawn cultivation, also poses a threat to the mangrove wetlands. Vietnams underpowered fishing fleet tends to operate close to the coast rather than venturing into deeper seas. The result is that coastal waters are overfished.

Transport, communications and the Internet

Vietnam had around 126,000 km of roads in 2003, according to official statistics. However, the road network is generally considered to be in poor condition, with only around 35% of roads being covered with asphalt. Over 10% of villages are inaccessible by road for at least one month of the year. Road use has been rising by about 8% a year for a decade, and in 2005 the roads racked up 34.4bn passenger-km and 11.3bn tonnes-km. Since 1993, 90% of aid and counterpart funding for roads has gone towards the major highways, which constitute less than 10% of the total network. Insufficient attention has been paid to secondary roads, leaving many parts of Vietnam, particularly those in mountainous areas, isolated. In an effort to rectify this problem, in 2005 the Ministry of Finance proposed increasing spending on roads to US$900m annually through to 2010. Over 600 communes (out of a total of 8,850) are inaccessible by car.

The favoured means of transport in Hanoi and Ho Chi Minh City is a motorcycle. There are an estimated 12m motorcycles on the road in Vietnam, equivalent to one for every 1.4 households, and local production reached 1.6m units in 2004. The demand for cars is still modest, but is rising. In an effort to alleviate congestion in urban areas and reduce the number of road deaths, which have risen in line with the increasing number of vehicles on the roads, the authorities in Hanoi and Ho Chi Minh City have long-term plans for rapid mass-transit systems. In Hanoi, there are plans for the construction of a 25-km elevated railway, and the authorities in Ho Chi Minh City have been given approval to build two 21-km underground rail lines by 2007 with help from Germany, at an estimated cost of US$800m. A subsequent project would build four additional lines.

The railway system comprises six single-track routes totalling 3,260 km; this is equivalent to 0.04 km per head, or about one-third of the average density of other low-income countries. The Reunification Express takes 32 hours to travel the 1,730 km between Hanoi and Ho Chi Minh City. One-quarter of the rolling stock is not operational, and one-quarter of the functioning rolling stock is over 30 years old. However, rail use in terms of passenger-km rose by nearly 5% to 4.6bn in 2005, while the volume of freight carried (measured in tonne-km) has also risen, expanding by 5.6% year on year in 2005 to 2.9bn.

The tonnage-km of freight carried on the inland waterway systems, chiefly on the Mekong River, its tributaries and canals (which total 4,500 km) and the Red River and its tributaries (totalling 2,500 km), is nearly double that transported

The road network is in poor condition

Motorcycles are the favoured means of local transport

Rail usage has increased by 10% in recent years

Vietnam 19


by rail. In 2005, 4.8bn tonnes-km of cargo was transported on the waterways, down by 14.4% on the previous year. The World Bank estimates that poor maintenance and navigation aids reduce the productivity of water transport-ation to 40% below its potential.

There are seven international seaports and five special ports through which only oil and coal are shipped. The main ones are Haiphong in the north, Quang Ninh, Danang and Qui Nhon in the centre, Ho Chi Minh City in the south-east and Can Tho in the Mekong Delta. A significant amount of investment has gone into upgrading the ports, which can now handle more and larger ships. The ports handled 34m tonnes of freight in 2005, although improvements in ship-handling and land access have provided the capacity to handle three times the present volume. The port system is competitive, but the cost of shipping garments from Ho Chi Minh City to Los Angeles is 10% of the landed cost, compared with 4% for garments shipped from Shanghai, China.

The state-owned national airline, Vietnam Airlines (VA), has been modernising and expanding rapidly. The airline owned or leased a total of 38 planes in 2005, a fleet that included ten Boeing 777s (six of which are leased), six Boeing B767-300s and 15 Airbus A320/321s. The fleet has expanded over the past few years in line with the delivery of four Boeing 777s and five Airbus A321s. The boom in international arrivals has also enabled VA to record strong growth. In 2005 the airline flew over 6m passengers, a year-on-year increase of around 25%, and up from around 4m a year in both 2003 and 2002.

The Vietnamese government has been slow to open its air routes to full competition in order to protect VA. As a result, air fares to Vietnam are considered to be high and to form an impediment to the development of tourism. However, change is occurring; a Singapore-based low-cost carrier, Tiger Air, now serves Hanoi and Ho Chi Minh City, and time slots at domestic airports will no longer be allocated by Vietnam Airlines. International airlines carry almost two-thirds of foreign visitors to Vietnam.

Vietnams telecommunications industry has been growing rapidly. The rate of growth in the number of mobile-phone subscribers is outpacing that of fixed-line subscribers, and, as a result, competition is intensifying in the mobile-phone sector. Between 2000 and 2005 the penetration rate of mobile-phone subscribers rose tenfold to ten subscribers per 100 population. Despite the rapid pace of expansion, the number of mobile-phone subscribers remains low compared with other countries in the region, such as Thailand (at around 46 subscribers per 100 in 2005). In 2005 there were 5.7m fixed lines, equivalent to a density of 6.8 lines per 100 population, up from 3.2 lines in 2000, but still low compared with around 12 in Thailand and 28 in China. Although the monopoly previously enjoyed by the state-owned Vietnam Post and Telecommunications Corporation (VNPT) has ended, with five new telecoms service providers in, or about to enter, the market, VNPT remains dominant. There are two dominant providers of mobile-phone services: Vinaphone, operated by Vietnam Telecoms Services Company (GPC), which is a subsidiary of VNPT; and MobiFone,

Ports have been upgraded and can handle larger ships

Vietnam Airlines has modernised rapidly

The telecoms industry is growing fast

20 Vietnam


operated by Vietnam Mobile Service (VMS), a subsidiary of VNPT (in co-operation with Comvik Group of Sweden until May 2005).

Internet services, which became available in mid-1998 in both Hanoi and Ho Chi Minh City, are expensive, but there were around 4.3m Internet users in 2005. Internet access is generally slow, largely because of government firewalls that limit access to certain websites from outside the country. Most people wishing to access the Internet do so through Internet cafes, which are now common in most urban areas. The dominant Internet service provider (ISP) in Vietnam is the Vietnam Datacommunications Company (VDC, a subsidiary of VNPT), which controls around 65% of the market. There are 12 other licensed ISPs. A number of ISPs have entered the broadband market, using asymmetric digital subscriber line (ADSL) technology. Although ADSL typically provides Internet access at speeds of up to 40 times faster than regular dial-up connections, service quality in Vietnam has been fairly poor, with capacity failing to cope with the sharp rise in demand since late 2004.

A government firewall blocks access to some pornographic and politically sensitive sites abroad, but also limits bandwidth and makes confidential business transactions difficult. In an effort to boost investment in the information technology (IT) sector, the government is allowing a few firms to avoid the firewall.

Energy provision

Power generation reached 53.3bn kwh in 2005, up from 30.7bn kwh in 2001. This expansion has been driven by increased power generation from gas-turbine power plants at the Phu My power-generation complex. Vietnam's power-generation sector had installed capacity of 11,340 mw at end-2004, up from 9,895 mw at end-2003 and 8,860 mw at end-2002, according to the state-owned electricity generator and distributor, Electricity of Vietnam (EVN).

Despite the expansion in energy provision, the system remains vulnerable to shortages because of its heavy reliance on hydropower, which is dependent on the amount of rainfall. As a result, the government is shifting to natural-gas and coal-fired power plants. At end-2004 installed capacity of hydropower plants totalled 4,155 mw, unchanged compared with the level at end-2003, but the capacity of gas-turbine power plants rose to 2,939 mw at end-2004, up from 2,489 mw at end-2003. The capacity of independent power plants (IPPs) has also increased sharply, rising to 2,518 mw at end-2004, up from only 6,120 mw in 2002. Coal-fired thermal power accounted for 11% of total installed capacity at end-2004, with diesel- and oil-fired thermal power accounting for the remainder.

Internet usage grows slowly and is restricted

Electricity production is adequate, but vulnerable

Vietnam 21


The economy

Economic structure Main economic indicators, 2005 (Actual unless otherwise indicated)

Real GDP growth (%) 8.5

Consumer price inflation (av; %) 8.3

Current-account balance (US$ m) -279.0a

Exchange rate (av; D:US$) 15,859

Population (m) 83.8a

External debt (year-end; US$ m) 20,338a

a Economist Intelligence Unit estimate.

Source: Economist Intelligence Unit, CountryData.

Measured by employment, Vietnam is an agrarian society, with around 60% of the labour force working in agriculture, forestry and fisheries. Despite growth in value added of 4% annually over the past decade, the agricultural sector (including forestry and fisheries) accounted for only around 21% of nominal GDP in 2005, down from 40% in 1991. However, Vietnam is a leading exporter of a number of agricultural commodities, such as coffee, rice, pepper and cashew nuts.

Industrial GDP has grown by more than 10% annually over the past decade, and industry (including construction) contributed around 41% of GDP in 2005, compared with only around 23% in the early 1990s. By this measure, Vietnam is a highly industrialised country. Industry is relatively diversified, and all subsectors have expanded over the past decade, with particularly rapid growth in steel products, garments, footwear, cement, and car and motorcycle assembly. Mining (mainly oil and gas) accounted for around 10% of industrial GDP in 2005. The services sector has grown steadily over the past decade, but its share of GDP has fallen, dropping to around 38% in 2005 from 44% in the mid-1990s.

State-owned enterprises (SOEs) continue to lose their share of industrial output, accounting for about 34% of all industrial output in 2005, down from 44% in 1999. Although output from SOEs has continued to expand, the pace of growth has been slower than that recorded by domestic private firms and foreign- invested enterprises (FIEs). In 2005 industrial output by SOEs grew by only 8.7%, down from an annual average of 12.7% in 1999-2004. The fastest-growing part of the industrial economy has until recently been FIEs, which include both joint ventures and 100%-foreign-owned subsidiaries. Output in this sector rose by about 21% year on year in 2005, up from annual average growth of 16.5% in 1999-2004, and this sector accounted for 37% of industrial output in 2005. This underscores Vietnams reliance on a continued inflow of foreign investment to sustain rapid economic growth. However, foreign investment comes at a price, as it makes growth in Vietnam more vulnerable to external shocks.

The remainder of industrial output, constituting almost 30% of the total, originates in the domestic, non-state sector. After a comparatively slow start, the private industrial sector has gathered momentum; the output of privately

Agriculture remains important

The states share of industrial output is falling

22 Vietnam


owned and mixed non-state enterprises rose by 24% in 2005, up from 20% annually in 1999-2004. Following new rules that came into effect in January 2000, which made it easier to register private firms and swept away many sectoral licensing requirements, the number of private firms registering has grown sharply. An estimated 80-85% of these newly registered businesses are operating profitably, a high rate of survival by global standards.

The share of investment in nominal GDP rose rapidly from 11% in 1990 to 36% in 2004, before dipping slightly to 33% in 2005. The general upward trend in investment over the past decade has been financed by increased government savings (8% of GDP in 2004), continued foreign direct investment (FDI) and a compression of domestic consumption relative to GDP that has permitted dom-estic non-government savings to rise. The relative stability of aid-financed in-vestment projects helps to explain the apparent stability of the investment rate.

Comparative economic indicators, 2005 Vietnama Indonesiaa Thailand b Singaporea Malaysiaa

GDP (US$ bn) 52.8b 281.3b 176.6 116.8b 130.6b

GDP per head (US$) 636 1,162 2,697 a 26,870b 4,997

GDP per head (US$ at PPP) 3,017 3,490 8,414 a 34,044 10,729

Consumer price inflation (av; %) 8.3b 10.5b 4.5 0.4b 3.0b

Current-account balance (US$ bn) 0.2 2.7 -3.7 33.0 19.4

Current-account balance (% of GDP) 0.5 1.0 -2.1 28.3 14.9

Exports of goods fob (US$ bn) 32.4 83.2 109.2 232.0 141.0

Imports of goods fob (US$ bn) -33.3 -61.8 -106.1 -195.5 -108.2

External debt (US$ bn) 20.2 138.7 51.9 a 23.8 52.2

Debt-service ratio, paid (%) 2.6 15.7 8.5 a 1.4 5.0

a Economist Intelligence Unit estimates. b Actual.

Source: Economist Intelligence Unit, CountryData.

Economic policy

Economic reform has been gradual, with actual changes failing to keep pace with the governments impressive rhetoric. The foundations of a market-driven economy were in place by 1992. The governments socioeconomic strategy for the first decade of the new millennium relies heavily on encouraging the private sector. Despite efforts to encourage the private sector, such as reducing the time and cost of registering businesses, private firms continue to face relatively limited access to land and capital compared with SOEs.

Despite the governments efforts to promote private enterprise, it remains keen for the state to play a leading role in the economy. However, it has acknow-ledged that many of the large SOEs need to be reformed. Modest progress has been made. Between 2001 and 2005, 3,346 of the country's 5,655 SOEs were restructuredeither equitised (2,188), dissolved (252), merged (416), allowed to go bankrupt (184), transferred to individuals (124), or otherwise dealt with (182). Of the 34 companies listed on the stockmarket by the end of 2005, 29 were equitised SOEs. The first large firm to be equitised is expected to be the state-owned commercial bank, Vietcombank, (now set for early 2007), but the government intends to maintain controlling stakes in cigarette production, the

Investments share of GDP has increased

Private firms are encouraged, but state firms resist reform

Vietnam 23


national communications network, power transmission, oil and gas, insurance, petroleum and coal.

Opposition to privatisation is strong, primarily because SOEs have a number of advantages over private firms: they enjoy easier access to credit and to land-use rights (the latter being highly valued contributions to a joint venture), they are favoured for government contracts and in the award of trade and other licences, and some have access to subsidised loans. Workers and managers, accustomed to the security of working for SOEs, also fear that they could lose their jobs. In addition, several ministries oppose privatisation, as they do not want to give up the enterprisessources of patronage and influenceunder their control.

Key changes in economic policy

2001

December. The normal trade relations (NTR) status accorded by the US comes into effect. It was initialled in July 1999 and signed in July 2000, but was not ratified until late 2001 following considerable debate within the government of Vietnam.

2002

April. Formal negotiations begin with the World Trade Organisation (WTO) over membership. May. The National Assembly (the legislature) approves a new Labour Law, which gives foreign-invested enterprises flexibility in hiring labour (effective from January 1st 2003). Previously, firms were supposed to recruit via local labour offices. July. The State Bank of Vietnam (SBV, the central bank) widens the trading band for foreign exchange to ±0.25% per day (up from ±0.1% per day). It allows forward and swap foreign-exchange transactions.

2003

April. In view of the fact that foreign-exchange reserves have been increasing rapidly, the SBV drops its requirement that exporters surrender 30% of their foreign-exchange earnings to local banks.

2004

May. The National Assembly agrees to unify the corporation income tax rate at 28%. Previously it was 32% for domestic firms and 25% for most foreign firms. December. The National Assembly passes a law on competition, which comes into effect in July 2005. The law prohibits companies with market shares above 50% from undertaking mergers and joint ventures, and outlaws cartels and pyramid schemes.

2005

May. The SBV introduces a new risk-rating system for bank loans, which brings local practice more closely into line with international norms. The system gives a more accurate picture of loan performance and forces banks to make adequate provisions to cover their weak loans. October. Vietnam successfully launches its inaugural international sovereign bond issue, which was heavily oversubscribed. The government raises US$750m in ten-year bonds.

24 Vietnam


November. The National Assembly passes the new Law on Investment, which does not discriminate between local and foreign investors, and a new Enterprise Law, under which foreign investors are permitted to decide the legal form of their enterprise, rather than being limited to operating a limited-liability company. Both laws come into effect in July 2006.

2006

May. Speaking to the National Assembly (before he was elected prime minister), the then deputy prime minister, Nguyen Tan Dung, sets out the country's five-year plan for 2006-10. Real GDP growth is targeted at 7.5-8% annually, which will ensure that nominal GDP in 2010 is more than twice its level in 2000. June. An agreement is reached with the US in the bilateral negotiations with World Trade Organisation (WTO) members. These had been the most difficult and protracted bilateral negotiations and were the last of the talks with the other 28 members to be completed.

A modern tax system was not introduced until the early 1990s, with new measures including excise taxes, turnover tax and business profits tax (October 1990), personal income tax (April 1991), a natural resources tax (March 1992), a revised agricultural tax, and a land and housing tax (1993). Value-added tax (VAT) was introduced in January 1999, along with a simplified corporate income tax. The personal income tax rates and brackets for Vietnamese citizens were relaxed in 2001 and again in 2004. In May 2004 the rate of tax on corporate profits was unified at 28%; previously it stood at 32% for domestic companies and 25% for foreign firms.

In early 2006 a proposal by the Ministry of Finance to change the personal income tax regime ran into heavy public criticism, and its introduction has now been delayed. The changes would have significantly expanded the number of households subject to personal income tax by introducing a rate of 5% on the first D60m (US$3,762) earned annually.

According to the latest available official data, total fiscal revenue (including grants) stood at 23.4% of GDP in 2004, up from 20.5% in 2000. Tax revenue increased from 14.8% in 2000 to 16.7% in 2003, largely reflecting growth in VAT receipts from 3.9% of GDP in 2000 to 5.3% in 2003. Personal income tax remains at around 0.5% of GDP, and corporate income tax around 5%. Domestic tax collection is estimated to have continued to rise in line with nominal GDP, but revenue from taxes on trade (other than crude oil) is fairly weak as Vietnam begins to implement tariff reductions under the requirements of the Association of South-East Asian Nations (ASEAN) Free-Trade Area (AFTA) obligations. Revenue from import and export taxes had already started to contract in the early 2000s, falling from 4.1% of GDP in 2002 to 3.5% in 2003, and it was estimated by the IMF to have dropped to 2.9% in 2004. The govern-ments financial management system is considered opaque and inefficient, and allows corruption to thrive.

The government has run annual budget deficits in recent years, with total spending (including net lending) rising from the equivalent of 25.5% of GDP in 2000 to 28% in 2003, before falling back to 26.7% in 2004. Excluding net lending

Tax reform continues

Total tax revenue rises, but taxes on trade weaken

Net lending and off-budget investment spending increase

Vietnam 25


and off-budget investment expenditure, the government recorded a total fiscal deficit of 3.3% of GDP in 2004 compared with 5% in 2000, but the deficit was about 6% if off-budget expenditure is included. There are growing concerns about the governments increasing reliance on off-budget investment expenditure and quasi-fiscal operations via the states Development Assistance Fund (DAF). Net lending reached the equivalent of 2.9% of GDP in 2003, up from 2.2% in 2000, and off-budget investment expenditure totalled 2.3% of GDP in 2003. Around one-third of government spending is devoted to the capital budget, which was equivalent to 8.3% of GDP in 2003, up from 7.4% in 2000. The military is believed to absorb about 25% of the budget, although this may be an overstatement. (All budget figures should be treated with caution, as published numbers are incomplete and appear only with a long lag.)

Vietnam launches its inaugural international bond issue

Vietnams first international bond issue, which was launched in the US in October 2005, was a resounding success. The US$750m issue of ten-year sovereign bonds carrying a coupon of 7.25% was heavily oversubscribed, with the order book closing at US$4.5bn. Demand was geographically widespread, with interest from Asia (38% of total demand), the EU (32%) and the US (32%), and mainly came from banks and insurance companies. The government plans to use the proceeds of the bond issue to finance a large expansion by the state-owned Vietnam Ship Building Industry Corporation (Vinashin). Part of the reason for the bond issue was to set a benchmark for state-owned enterprises to launch their own international bond issues. Indeed, Vinashin soon after announced plans to issue US$200m in international bonds in 2006, and Electricity of Vietnam (EVN) and the Vietnam Oil and Gas Corporation (PetroVietnam) have made similar plans.

After rising by only around 6% a year during most of the 1990s, the average annual rate of expansion of narrow money (M1) rose to around 22% a year in 2001-05. There were equally rapid increases in dong and foreign-currency (mainly US dollar) deposits, raising liquidity (M2, or broad money) from 24% of GDP in 1998 to 77% of GDP in 2005. This burst of expansionary monetary policy was designed to maintain economic growth. However, this policy has raised concerns over sustainability, with outstanding domestic credit standing at around 70% of GDP in 2005 compared with only 35% of GDP in 2000. The IMF deems the pace of growth in domestic credit in recent years to be excessive. In the recent past the State Bank of Vietnam (SBV, the central bank) has moved to tighten monetary policy, but not aggressively. This primarily reflects the fact that the SBV operates with little independence, and thus faces the conflicting policy objectives of maintaining economic stability while supporting the governments efforts to achieve its high economic growth targets. Over the past few years the SBV has, however, increasingly used open-market operations to influence the money supply. In December 2005 the SBV raised its base annual interest rate for savings in dong from 7.8% to 8.25%. The SBV's refinancing rate for banks rose from 6% to 6.5%, and the discount rate from 4% to 4.5%.

Although the government failed in its attempt to become a member of the World Trade Organisation (WTO) by its targeted deadline of end-2005, it has made good progress in its efforts to join the global trade group. Vietnam applied

Monetary policy has been expansionary

Vietnam makes good progress towards WTO membership

26 Vietnam


for membership in 1995 and has now completed bilateral negotiations with all 28 WTO members that requested such talksthe most difficult and protracted negotiations were with the US, but an agreement was finally signed in June 2006. The potentially last round of multilateral negotiations took place in July 2006, and the chairperson of the multilateral working party meeting, Eirik Glenne, stated that he was aiming to wrap up multilateral negotiations by October 2006. Vietnam has already begun a process of trade liberalisation, re-ducing its tariffs under its AFTA obligations. In addition, under its bilateral free-trade agreement with the US, which came into effect in late 2001, tariffs are being reduced, intellectual property rights are being increasingly protected, quantitative restrictions are to be gradually ended, and WTO-inconsistent measures (such as local-content requirements) are being phased out.

Economic performance Gross domestic product (% real change)

Annual average 2005 2001-05GDP 8.4 7.5 Agriculture 4.0 3.8 Industry 10.6 10.2 Services 8.5 7.0Source: General Statistics Office.

Vietnams economic performance has more closely mirrored that of China than the other former centrally planned economies. Throughout the 1990s up until the regional financial crisis in 1997-98, GDP growth did not fall below 8% a year, and Vietnam appeared to be on the trail of the Asian tigers. However, growth slowed in 1998-99 mainly as a result of the knock-on effects of the regional economic crisis. But there was also a domestic component, with economic reform incomplete and initial, somewhat excessive, investor enthusiasm being undermined by widespread corruption, pervasive red tape and uncertainty about dong convertibility.

Since 2000, however, GDP growth has remained strong, fuelled by a rapid rise in exports and buoyant industrial growth. In 2005 GDP growth surged to 8.4%, (General Statistics Office data) up from an annual average of 7.2% in 2000-04. The industrial sector has been particularly strong, with annual growth surpassing 10%, and services growth has been impressive at around 7%. Agricultural growth, however, has been relatively slow at 3-4% a year.

The government has succeeded in implementing policies that have ensured that the hyperinflation experienced in the mid-1980s has not been repeated. In 2000 and 2001 average consumer prices actually fell, largely owing to a sharp decline in global food prices. When food prices rebounded, so did the rate of inflation, which jumped to an average of 3.1% in 2003. Annual average inflation continued to accelerate in 2004 and 2005, rising to 7.8% and 8.3% respectively. Year-on-year inflation eased slightly in the first half of 2006, but remained high, dropping from 8.8% in January to 7.5% in June.

GDP growth has generally been rapid

Inflation accelerates as food and fuel prices rise

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The main cause of high inflation in recent years has been the rapid increase in world food prices. These feed through to domestic prices of food and food-stuffs, which in turn constitute almost one-half of the basket of goods and services used to measure consumer prices. In addition, the booming world economy has raised the prices of a number of commodities, including petrol-eum and steel, and these price rises have begun to feed into domestic prices. The rapid rise in domestic credit over the last two years has also played a role.

Inflation Annual average 2005 2001-05Consumer prices (av; %) 8.3 4.5

Source: IMF, International Financial Statistics.

Rapid economic growth since 1990 has raised living standards. The percentage of people living in poverty (as defined by a budget adequate to buy 2,100 calories of food per person per day and a modest amount of non-food purchases) fell from 58% in 1993 to 37% by 1998 and 29% by 2002, with a further fall to about 24% by 2004. Child malnutrition has also decreased: in 1993, 53% of children under five experienced stunted growth, but by 1998 this proportion had fallen to 34%. The reduction in poverty has been accompanied by a modest rise in inequality, and in particular a widening income gap between the urban and rural areas. The average income of a person in the top 10% of the income distribution was 10.6 times that of a person in the bottom 10% in 1996 but 12.5 times higher than in 2001-02. Concern about rising inequality has prompted the government to pay more attention to rural development, and efforts to combat poverty are now at the centre of the World Banks extensive activities in Vietnam. Poverty rates are about three times higher in rural areas than in urban areas.

Regional trends

Vietnams peculiar geography (see Resources and infrastructure: Natural resources and the environment), particularly the 1,700-km distance between the two main population centres, Hanoi and Ho Chi Minh City, has tended to encourage regionalism. Since doi moi (economic renovation) began in 1986, Ho Chi Minh City and the nearby provinces (especially Dong Nai and Binh Duong) have consolidated their position as Vietnams industrial heartland, although the Hanoi-Haiphong area has grown almost as quickly over the past few years and the central city of Danang is now expanding rapidly. Left behind are the mountainous areas of the north, the north-central coast and parts of the Central Highlands, which are the three regions where poverty rates are highest. In 2004 the countrys highest poverty rate was in the north-west, at 54.4%, followed by the north-central coast (41.4%) and the Central Highlands (32.7%). These rates compare with relatively low poverty rates in the south-east (6.7%) and the south-central coast (7.3%).

Around 26% of the population lives in urban areas. Only Hanoi, Ho Chi Minh City and Haiphong have populations of more than 1m. Although these cities

Living standards rise, as does inequality

Regional inequality is increasing

Some smaller towns have specialised economically

28 Vietnam


are also the main industrial centres, a number of smaller towns have specialised in particular industries, such as silk, porcelain or furniture. This may be because of tradition, proximity to the required natural resources, external economies of scale (such as a good supply of specialised local skilled labour), or the wartime policy of dispersing industry. Most other small towns have grown up as market and agro-processing centres.

Economic sectors

Agriculture

Although Vietnam is still a predominantly an agricultural society, cultivated land is scarce, at just 0.12 ha per head, one of the lowest rates in the world. Only about 20% of the

Documents

Vietnam - International University of Japan...Vietnam 3 ' The Economist Intelligence Unit Limited 2006 Country Profile 2006 Vietnam Basic data 330,363 sq km 82m (2004) Population (of