MARCH 9, 1998 VOL. 151 NO. 9
Hard Road Ahead
As investment drops and rural unrest intensifies,
Hanoi discovers it isn't isolated from the region's
economic ills. But radical reform seems unlikely
By TIM LARIMER /HANOI
The dramatic choice facing Vietnam's new leaders, who took office
only last year, presented itself last week with a mixture of sobriety
and absurdity. Prime Minister Phan Van Khai was busily trying to
soothe disgruntled foreign investors and promising to enact a slew of
economic reforms. "It is natural for people to become wealthy," one of
his
deputies explained. That farmers in the country's rice bowl, the Mekong
Delta, are going into debt and selling off their paddy fields to rich
landowners, was a logical, even desirable, development, another official
chimed in. At about the same time, leading Hanoi cadres were filing past
the
hammer-and-sickle flag and one of the world's few remaining statues of
Lenin to celebrate the 150th anniversary of Karl Marx and Friedrich Engels'
Communist Manifesto. "Socialism is still the future of the human race,"
said
a political commissar. "The target of Marxist-Leninist theory...is to eliminate
private ownership and the free rights of capitalism."
If the country's Communist Party leaders seem to be talking out of both
sides of their mouths, it's understandable. Vietnam faces a stagnant
economy, rebellious farmers, soured foreign investors, a rapidly expanding
labor pool and even the ravages of El Nino. Predictions of drought in some
parts of the country and flooding in others have farmers scurrying to
pagodas to pray for spiritual intervention. "This is our most serious crisis
in
a decade," says reform-minded economist Le Dang Doanh. "We change,"
says a 40-something party member who is also a business entrepreneur, "or
we die." A sense of urgency has even inspired some of Vietnam's normally
quiet political dissidents to speak out. Says Phan Dinh Dieu, a
mathematician: "In this new difficult period, democracy is essential to
our
development."
In a few short months, Vietnam's confidence has devolved into near-panic.
When the Asian contagion began moving through the region, Vietnam
thought itself immune. It has no stock market; its currency isn't convertible.
Wealthy urbanites in Ho Chi Minh City were flocking to Thailand to take
advantage of the cheap baht and turn a profit by bringing back cigarettes,
whiskey and electronics to sell at home. A news magazine headlined a story
EXPLOITING THE CRISIS, and an official of the Ministry of Planning and
Investment boasted that Vietnam could capitalize on its struggling
neighbors' misfortunes.
That all now seems short-sighted. Vietnam is at least as vulnerable to
economic tremors as any other Asian country. Nearly three-fourths of its
foreign investment comes from Asia; South Korea alone accounts for about
15%, almost $700 million, and plans for new projects are being shelved
as
foreign companies send employees home. Last year, foreign investment
dropped nearly 50%. At the same time, Asia buys more than 60% of
Vietnam's exports, which totaled $8.9 billion in 1997. With the region's
economies weak, those numbers are sure to drop. Lacking a trade pact with
the U.S. (negotiations have sputtered to a halt), Vietnam doesn't have
many
other markets. That might not matter, anyway, because the State Bank of
Vietnam has devalued the currency, the dong, a modest 15% since the Asian
meltdown, making Vietnamese textiles and shoes less competitive compared
with products from Thailand and Indonesia, which have devalued more.
Fujitsu Computer, Vietnam's largest exporter with $255 million in sales
of
hard-disk-drive components last year--mostly to Thailand, Japan and the
Philippines--is scaling down its projections for 1998 and halting expansion
of
its Bien Hoa factory, where it had planned to go from 1,500 workers to
4,000
in two years. "Our market is Asian countries," says Shujo Kawashima,
Fujitsu's general director in Bien Hoa. "We cannot sell anything to them,
so
we cannot expand."
It's no surprise that Vietnam was slow to realize that the region's crisis
imperiled its own growth, which has barreled along at 8% to 9% annually
this decade. The country had been on a winning streak since adopting
radical reforms in the early 1990s. In less than a decade, the country
has
gone from rationing food to exporting more than 3.5 million tons of rice,
second only to Thailand. Most people couldn't afford a bicycle; now
two-thirds of urban households own a motorbike. "They were clearly
desperate in the late 1980s," says Erik Offerdal, the International Monetary
Fund's Hanoi representative. "And they've had remarkable success in
turning things around." The $29.5 billion pledged by foreign investors
is "the
envy of every developing country," says Andrew Steer, the World Bank's
Hanoi director. That represents about 20% of Vietnam's GNP--one of the
the
highest proportions in the world, according to Steer.
What would make those figures more impressive, however, is if the money
pledged were actually being spent. Official statistics show that projects
worth
more than $680 million have been suspended, and the real number is
probably higher. Less than half of the project money licensed this decade
has been used, and that includes ventures that have since died, as well
as
local joint-venture partner contributions, which are usually inflated property
values. "The early success makes it look easier than it is," says Virginia
Foote, president of the U.S.-Vietnam Trade Council.
Just three years ago, Vietnam was the darling of emerging economies. Its
population, at 76 million, represented one of the largest untapped consumer
markets in the world. Politically stable with highly literate workers whose
wages are among the lowest in Asia, the country appeared ripe for
investment. Reformers were in the ascendancy, wasteful state-owned
businesses were being dismantled and the country was emerging from years
of isolation by shoring up ties with its Southeast Asian neighbors, China,
Europe and its old wartime adversary, the U.S. Hanoi's grand old hotel,
the
Metropole, was lavishly rehabilitated with the World Bank's financial help,
and its lobby bar was crowded with visiting capitalists. Now, once-buoyant
investors are wondering if Vietnam missed its chance. Red tape, corruption
and an opaque decision-making process turned many off even before the
onset of the region's economic turmoil. "There isn't anything to invest
in,"
Eugene Matthews, an early American business pioneer said shortly before
shutting down his consulting firm last year. Petroleum companies invested
heavily to tap Vietnam's offshore gas reserves, but they haven't been able
to
pump anything onshore for 18 months because they can't agree with Hanoi
on a price. A U.S. utility company, after a year of watching deals fail
to
materialize, found out that even quitting in Vietnam can be difficult.
The
company needed permission from the Ministry of Trade and the Ho Chi
Minh City People's Committee, as well as proof that it had paid its rent,
turned in its official chop and paid all its taxes. Then it needed evidence
that
its landlord had paid all of his taxes on the rent collected. "The landlord
refused so we couldn't get a termination certificate," says the company's
lawyer. "We had to call the mayor to solve the problem, but you can't call
the mayor every time you meet a corrupt official."
Last week, vietnam faced a potentially embarrassing blow as U.S. consumer
products-maker Procter & Gamble threatened to pull out altogether.
At issue
was a problem encountered by many foreign companies who link up with
state-owned firms. P&G, disappointed by low sales of its toothpaste,
laundry
detergent and shampoo, wanted to inject more money into the venture, a
70-30 split with a local partner. But doing so would mean that the
Vietnamese side would have to pony up 30%--in cash it doesn't have. P&G
has proposed buying out its partner, something the Vietnamese don't seem
likely to approve. The dispute has been played out in the pages of the
state-run media, where the American company has been blamed, among
other things, for "extravagant" spending on expatriate salaries and
advertising budgets. Some articles have even insinuated that P&G is
exaggerating its losses as an excuse to dump its local partner. Whether
Vietnamese consumers can buy Tide detergent ultimately isn't important
for
Vietnam, of course. But foreign companies fear that the case will be used
to
drum up public sentiment against them in an environment already heavy on
trade protectionism.
Obviously panicked that the bubble of good fortune is about to burst, Prime
Minister Khai held an unusual meeting in Ho Chi Minh City last month with
hundreds of foreign investors. His government has announced regulations
designed to streamline approvals, remove some onerous tax and customs
regulations and reduce inflated land prices. Officials are starting to
understand that investors don't just pump money into Vietnam out of
goodwill. When asked why an investor should come to Vietnam at all, the
vice minister for planning and investment, Nguyen Nhac, answered without
hesitation: "For profit." Unfortunately, this new attitude follows years
of
other, so-far unfulfilled promises. "Their credibility is understandably
low,"
says the imf's Offerdal. "There has been a lot of paper created, but in
terms
of real juicy reforms, they have sort of dried up." Regulations announced
in
recent weeks, Offerdal says, amount to "tinkering."
An overhaul is what's needed. The state sector is still loaded down with
thousands of unprofitable companies that are draining the country's
domestic capital. The banking system, which the IMF estimates has as large
a proportion of nonperforming debt as did Thailand's troubled banks, is
saddled with loans to state companies that have no incentive to pay them
back. The banks also lack basic regulatory procedures, which has meant
politicians, bankers and businessmen have been engaged in shoddy, if not
illegal, lending practices that have already brought down two major Ho
Chi
Minh City companies. The IMF is now pursuing a harder line, refusing to
hand over a $180 million loan previously committed to bolster the country's
foreign reserves until it gets guarantees that Hanoi will begin fixing
its
problems. "Pain is inevitable," says Offerdal. "The kind of reforms we
are
talking about are big bullets, not peanuts."
Vietnam's consensus-style leadership doesn't lend itself to quick maneuvers;
leaders weaned on two long and destructive wars have come to value
stability. "Why did the reforms slow down?" asks Robert Glofcheski, senior
economist with the United Nations Development Program in Hanoi. "After
a
period of dramatic reform, they needed a period of consolidation, of
stability." That, Glofcheski argues, has been achieved, the evidence an
inflation rate of just 5%. "Now there is scope for a whole new round of
concrete reform."
It's an absence of radical reforms, especially in the legal system, that
has
created instability in rural areas. Since last May, farmers in dozens of
communes in Thai Binh province have turned the countryside upside down
with demonstrations against local cadres. They were upset about the number
of taxes they have to pay; in some villages, officials levy as many as
30
separate fees every year. One woman in her 50s complained that out of a
120-kg paddy harvest, she has to pay 90 kg in taxes. Another farmer said
officials charged him a fee for crossing a road with ducks. The taxes were
bad enough. But watching local officials getting wealthy was too much.
"We
all have the same land, the same weather and do the same work," says a
farmer in Thai Binh. "So how come they are so much richer than the rest
of
us? We went together to their offices and asked them to teach us their
secrets." In several cases, the protests turned violent. In one village,
for
example, insurgents shut down roads and rivers leading in and out of the
village, closed the markets and took hostage policemen and cadres sent
in to
restore order. Here and elsewhere, rebels essentially took control. The
entire
province was shut off to visitors for weeks at a time. Provincial officials
concede that at least 20 cadres were punished for corrupt behavior.
In February, the government finally allowed foreign journalists to visit
the
province. Phan Nguyen Duyen, 57, a retired Army officer who was asked to
take over the top Communist Party post in one particularly hostile village
late last year, analyzes the unrest this way: "We could lead the people
in the
fight against foreign invaders very well, but we have made some mistakes
in
economic management. Our cadres were not very well qualified and
disciplined, causing waste and misappropriation."
The unrest in Thai Binh was especially alarming to leaders in Hanoi, 100
km
away, because that area, the most productive rice-growing province of the
northern Red River Delta, has been a staging ground for revolution
throughout this century. Some of the first uprisings against French
colonialists were in Thai Binh; and even after the province was hit by
a
devastating famine in 1945, its people rallied to fight Japanese occupiers.
The region sent the largest proportion of soldiers to do battle against
the U.S.
during the Vietnam War. And in the 1980s, demonstrations over food
shortages spurred the government to institute economic reforms in the first
place.
While the unrest in Thai Binh might well be a special case, there is another
cause for worry in Hanoi. People can live with poverty for years without
moving to overthrow a government. It's often when they get a taste of wealth,
when there are expectations that their lives will improve, that they began
demanding political change. Vietnam has had nearly a decade of robust
growth. Stomachs aren't empty anymore. Says one economist, who asks not
to be named: "If motorbikes and TV sets become too expensive, then you
have got the potential for real unrest." The challenge for Vietnam's new
leadership, then, is making sure that prosperity continues--but in the
corruption-free way its communist loyalists and strong-willed peasants
have
come to demand.