The cadres backtrack on key US trade pact.
For most of the decade, Vietnam's ruling Communist Party has pursued integration into the world economy. Its success hinged on the conclusion of a bilateral trade agreement with the United States. And after nine rounds of negotiations undertaken since 1996, local newspaper reports indicated that the two sides were close to wrapping up a deal. So consistent was the message that many Vietnamese companies started buying new equipment and hiring more workers, to gear up for access to the world's largest single market. When Trade Minister Truong Dinh Tuyen initialled the pact in July, the actual signing seemed little more than a formality.
So it wasn't just the Americans who were stunned when the Vietnamese delegation attending an Asia-Pacific Economic Cooperation (Apec) meeting in Auckland in September informed their counterparts that they would not sign. Prime Minister Pham Van Khai and President Bill Clinton were to have witnessed the signing, offering Hanoi an opportunity to put itself back on the foreign-investment map. Now, Vietnam risks slipping into investment oblivion as Vietnam's leaders mull over what the trade agreement would mean for the country and the government.
The disappointment on the Vietnamese side is palpable. "We all agree: The sooner the signing, the better the economy will be. But the leadership has other considerations which they think are more important," says Hoang Van Dung, deputy general secretary of the Vietnam Chamber of Commerce and Industry. Even such veiled criticism of the party line is unusual and reflects the deep frustration reform-minded Vietnamese now feel.
"Until recently, people were optimistic about the signing," says Hoang Ve Dung, the export director of the Garment and Textile General Corp. Now, it looks less likely that the two sides will ink the deal, he says. "This means that the new recruits have to be laid off indefinitely, while bills for debt servicing continue to mount." No wonder some enterprises have closed down or declared bankruptcy, he adds. That story won't appear in the Vietnamese press, though. The subject has been dropped.
President Clinton's desire for the accord helped the US side to reach a quick conclusion in favour of it - and that seems to have caught many in Hanoi by surprise. Now accusations are flying that the Vietnamese negotiators exceeded their mandate even though the Central Committee and Politburo were briefed all along. When the time came to put pen to paper, the senior leadership - concentrated in the 18-member Politburo - found itself in a stalemate, according to Vietnamese and foreign sources. Without a consensus, or near-consensus, they cannot move forward.
"I think when it came time to bite the bullet, the leadership started having second guesses about the impact on the communist system," says a US official. Adds an executive at a multilateral organisation in Hanoi: "I think they realised they did not really understand it. The question is what will they do when they do understand it."
That might take some time. Government translators have been working overtime to bring top officials up to speed on international trade issues. But even in the vernacular, much of the material may be beyond their comprehension. "Can you imagine a 78-year-old revolutionary, who has no legitimate background in economics, trying to understand the agreement? It's like giving me a book on brain surgery," says another US official. In the Politburo, Prime Minister Pham Van Khai has the best background in economics, which he studied in Moscow in the early 1960s.
Probably most recalcitrant on the issue is former Communist Party chief Do Muoi and retired general Le Duc Anh, a former president. They serve as influential advisers to the Politburo and have the support of most war veterans and the military, the country's most powerful institution after the party itself. Although fast on its way to becoming the country's largest diversified corporation, the military does not sound especially confident about going to battle in the global economy.
"We haven't finished reorganising our enterprise to make it compatible to the terms of the trade pact," explains a vice-director of the General Administration of Economics and Technology that oversees Ministry of Defence-owned businesses. "Signing now is too soon for us."
The Ministry of Public Security, another politically conservative institution and the next most powerful after the military, is actually in favour of the deal, according to Vietnamese sources. It has fewer businesses at stake and one of its key income sources is immigration control. The pact would bring in more foreigners - and more revenues.
The trade agreement is probably the most significant step for Vietnam since it started its doi moi - or renovation - reforms in 1986. Rearguard action to slow down and limit the reforms won out at the National Party Congress in 1996 and the epic struggle between reformers and conservatives has continued unabated since. Vietnam has joined Apec and the Association of Southeast Asian Nations' Free Trade Area, and applied to join the World Trade Organisation. But a US official involved in the negotiations says: "Sometimes I get the impression the Vietnamese government looks at these as if they were plaques on the wall, which make Vietnam look good. The first ones came easily and I think they underestimated the work and the substance that goes into a bilateral agreement like this one."
Signing the trade pact would signal that Vietnam is serious about reforms and about trying to become globally competitive, says Wolfgang Bertelsmeier, the Vietnam representative for the International Finance Corp. Reform efforts have floundered in recent years and without a balance-of-payments problem, the World Bank and the International Monetary Fund have little real leverage to prod Hanoi to push forward.
Increasing dollops of development assistance from international aid donors have offset a drop in foreign investment. This leaves Hanoi's leadership in the driver's seat. Under these circumstances, Hanoi, which has an abiding fear of real economic interdependence, feels little pressure to abandon its zero-sum approach to economic relations. In a recent meeting with state-enterprise managers, Trade Minister Tuyen explained that the leadership had misgivings about becoming dependent on expanded exports to the US since Washington could later threaten a cut-off as leverage against Hanoi.
The trade pact's terms call for the eventual elimination of discrimination against foreign investors. That could lead foreigners to become major investors in certain economic sectors - raising Hanoi's concerns about its sovereignty. "We say, 'look at China'," says one US official. "Is China any less sovereign for having developed itself - with the help of massive foreign investment - into a proud strong country trading with the whole world?"
All this talk of a brave new world of competition does not sit well with managers of state-owned enterprises (SOEs) who will do whatever they can to avoid real rivals. They lean on entrenched political doctrine: The Communist Party's power rests largely on the state playing the dominant role in the economy.
The state, though, can't supply enough jobs. About 1.2 million people enter the job market each year; state-owned enterprises now employ about 2 million people, but SOEs have actually been shedding jobs. Internationally-supported safety nets could help cushion future layoffs in the state sector, but the longer-term answer lies in developing a dynamic private sector.
Local officials benefit from the near-monopoly state businesses now have, so they can hardly be expected to help potential competitors. Little wonder private businesses have trouble getting bank credit and access to reasonably priced industrially zoned land. "So long as most industrial activity is centred in state enterprises, it will be all but impossible for a domestic private sector to emerge," says David Dapice, an economist with the Harvard Institute of International Development.
Trade Minister Tuyen, in his briefing to SOE managers, claimed the pact calls for the establishment of a fund to promote private-sector activities. America's aim, the minister said, was to make the private sector larger than the state sector. That would "shake the economy" to its foundations, he warned, according to a businessman in the audience.
But a US official, who has read the 100-page document, says there is no call for such a fund. "The lack of a significant private sector is probably the single biggest flaw in Vietnam's industrial strategy," adds Dapice.
Hanoi has other reasons for putting the deal on hold. US Secretary of State Madeline Albright had visited Hanoi just a week ahead of the Apec summit. There, she tried to engage Communist Party boss Le Kha Phieu in a discussion about when Vietnam might hold multiparty elections. The topic seemed to reinforce suspicions that the US has a long-term agenda to undermine Communist Party rule in Vietnam. According to Nguyen Thanh Ha, a Danish-trained economist, the threat to the leadership of increased US influence in business, politics and human-rights issues probably outweighs the promise of a boost in US exports.
If the agreement is not concluded under Clinton's administration, it could mean a delay of several years. "A historical opportunity is being forfeited," says a senior US official. "They are going to become like Burma or Laos, maybe not as bad, but they are going to be in everyone's wake."
Even in the short-run, the Vietnamese economy could use a boost. After maintaining a steady growth rate of 8-9% during most of the 1990s, the economy faltered in 1998 - growing between 3% and 4%. Export growth has weakened and foreign investment continues to slide. Industrial sectors have racked up huge stockpiles which may cause production to plummet. Idle inventory strains the banking sector which is already groaning under bad loans, estimated to range between 20% and 40% of all loans. More than 50% of lending is still going to the state sector. Vietnam's trade account is roughly in balance, but this has been achieved by tight import controls, which are liable to choke off further growth. Similarly, a relatively stable exchange rate has been achieved through increasingly restrictive capital controls.
The country has also benefited from record agricultural harvests and from a near doubling of world crude-oil prices. Oil accounts for roughly 20% of Vietnam's exports and Vietnam has boosted production nearly 30% over the past year.
The Vietnamese government is now predicting that the country will register growth of 4.7-5% this year as the rest of the region regains its economic health. The World Bank sees 4% growth for Vietnam; Canberra-based research firm Aduki, a long-time observer of Vietnam, however, predicts no growth for the year.
Without a convertible currency or a stockmarket, Vietnam was spared the full brunt of the regional economic crisis. But this has proved a mixed blessing. Not forced to undergo the reforms that its neighbours did, Vietnam is now emerging as a much less attractive place to do business.
With political and administrative pressures distorting market cues, even the aid investment that is being committed is all too often misallocated. Take the case of cement. There is an annual domestic oversupply of about 4 million tonnes. Yet authorities in Nghe An province have recently built another 1.4-tonne capacity plant - at a cost of US$230 million - close to one financed by the Asian Development Bank and the IFC that cost US$332 million. That adds up to more than US$500 million in misinvestment in just one province - and in one product.
"This story is repeated with unfortunate frequency in infrastructure, real estate, sugar, steel and other goods; billions of dollars of debts are incurred, few people are employed, and no cost-effective capacity is produced," says Dapice, who cited the Nghe An case in a recent report. "The result is likely to be slowing investment and growth, a lack of adequate jobs, and increasing strains on the poor rural sector that must finance the debt payments for these mistakes, usually by taxes or low prices."
In short, while other countries see growth steadily picking up, Vietnam is likely to limp along. "I'm afraid Vietnam is going to pay a heavy price for this," says a senior Western economist in Hanoi regarding the delay in signing the US trade pact.
"We aren't looking at a collapse of the economy, but more like a country growing at 2%, 3%, maybe 4%, instead of at a tiger rate of 6-8%." Says a Western European ambassador involved in assisting Vietnam's reform process: "You just don't catch up at 4%; they have to do better."
With Vietnam's population growing by roughly 2% a year, 4% growth won't allow the economy to absorb 1.2 million new job seekers each year - and the World Bank warns that millions of farmers will sink below the poverty level.
Of course virtually all Vietnamese are better off than they were 10 years ago and they have an inordinate capacity for enduring austerity. But with expectations raised, the country's declining fortunes could be a formula for social unrest.
Trouble has already erupted in several rural areas where grinding poverty and blatant official corruption have proved a combustible mix. It's a scenario that has the police and army passing responsibility between them like a lighted fuse.
Both are beefing up their riot-control capabilities. Perhaps soon, the Party will realise that a deal with Uncle Sam can help - this time - to keep the peace and help fulfill the nation's aspirations.