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Vietnam Environmental Export Market Plan
Chapter 1 - Economic Overview

From the late 1980s until 1997 Vietnam enjoyed some of the highest growth rates in Asia after the government launched its doi moi ,or renovation, program in 1986. Faced with a decline in Soviet aid and food shortages caused by failing agricultural cooperatives, Vietnam's leaders were forced to open the country's economy to foreign investors and trade.

Vietnam dismantled its collective farms, giving families the right to use land in the countryside, where 80 percent of Vietnam's population lives. Farmers were allowed to choose which crops to grow and to sell them at market prices to whomever they chose.

The results of these changes were dramatic.Vietnam's GDP growth averaged more than 8 percent from 1991 to 1997, making it the second fastest growing country in Asia, after China. Vietnam went from being an importer of rice to the world's third largest rice exporter. Poverty, as measured by the World Bank, dropped from 70 percent to 30 percent.

At its peak in 1996, Vietnam licensed foreign investment projects valued at more than $8 billion. Foreign companies, mostly from Asia, rushed into a market of 77 million people, eager to profit from what would surely become the next “Asian Tiger.”

In recent years, that optimism has faded. The slowing pace of reforms and lingering effects of the Asian economic crisis have taken their toll. After reaching $8 billion in investment pledges in 1996, that number plunged to $4.5 billion in 1997. In 1998, the amount dropped further, to $1.8 billion. In 1999, Vietnam approved 274 new foreign investment projects worth $1.48 billion. Donors estimate that actual inflows will total $600 million in 1999, the lowest since 1992 (Table 1.1).

Recognizing the trend, the government has taken incremental steps toward improving the investment climate. It has made it easier for foreign companies to establish 100 percent foreign-owned enterprises instead of arranging forced marriages to local joint-venture partners. Foreign companies can now set employee salaries in Vietnamese dong. Previously, salaries were set in dollars, making Vietnam a less competitive labor market, especially after devaluations in Indonesia and Thailand.
Table 1.1 Foreign Direct Investment in Vietnam, 1987-1999
Billions of Dollars
Total Commitments
Disbursements
1987-1995
36.2
11.2
1995
6.6
1.8
1996
8.5
2.3
1997
4.5
2.4
1998
1.8
1.0
1999
1.0
0.6

Note: Figures do not include additional capital committed to existing projects.
Source: World Bank, Ministry of Planning and Investment, January 2000.

These steps have not been enough, however, and the economy has slowed over the past three years. For 1999, GDP growth was between 4 and 5 percent depending on the source. Generally, the World Bank's forecast is a bit lower than the Vietnamese government's. The industrial sector grew about 10.5 percent in 1999, despite falling demand. As has been the trend over the past five years, foreign-invested companies are growing fastest, recording a 19.4 percent growth rate, with state enterprises growing an estimated 4.9 percent, and local private businesses 8.5 percent.

Inflation dropped precipitously in 1999, with Hanoi recording an inflation rate for the year at 0.1 percent year-on-year (Table 1.2). The figure for year-on-year inflation in 1998 was 9.2 percent. Falling rice prices, which account for 60 percent of Vietnam's consumer price index, are believed to be the cause of the lower than expected inflation rate.
Table 1.2 Year-on-Year Inflation in Vietnam, 1994 –1999 (Percent)
1994
1995
1996
1997
1998
1999
14.4
12.7
4.5
3.8
9.2
0.1

Source: World Bank, General Statistics Office, January 2000.
Chart 1 Foreign Direct Investment in Vietnam (as Percent of GDP), 1989-1999



Vietnam enjoyed a strong export performance in 1999, marking one of the economic highlights of the year. Exports rose to $11.5 billion, up 23.1 percent compared with 1998 (Table 1.4). The trade gap for 1999 slimmed to an estimated $113.0 million, from $2.0 billion in 1998. Imports rose 0.9 percent to $11.6 billion for the year.
Table 1.3 Changes in Vietnam Consumer Prices, 1998-1999
December 1999
November 1999
December 1998
Month-on-month change
0.5
0.4
0.8
Year-on-year change
0.1
0.4
9.2
Index*
100.1
99.6
109.2

* Base 100 =previous December.
Source: World Bank, General Statistics Office, January 2000.

Higher oil prices and Vietnam's continuing ability to capitalize on its strength in agricultural commodities, such as rice and coffee, helped boost the country's export performance in 1999. Meanwhile, imports have dropped as domestic economic growth has slowed, reducing demand for capital equipment.
Table 1.4 Vietnamese Balance of Trade 1995-1999
(Billions)
1999
1998
1997
1996
1995
Merchandise exports
$11.5
$9.4
$8.9
$7.1
$5.1
Merchandise imports
$11.6
$11.4
$11.2
$11.1
$7.5
Trade deficit
$0.1
$2.0
$2.3
$4.0
$2.3

Note: Smuggled goods estimated to add $1.5 billion to annual import totals.
Source: World Bank, Ministry of Trade, 2000.

The long-awaited bilateral trade agreement with the United States is expected to boost these figures tremendously. Indeed, the trade agreement is now the key factor that will determine Vietnam's economic health over the next three to four years.

With the final agreement in July 2000, Vietnam would win Normal Trading Relations (NTR; formerly Most Favored Nation status) with the United States. The lower taxes on Vietnamese goods, combined with Vietnam's low labor costs, would result in a new influx of investment to produce items such as garments, textiles, shoes, and furniture. In the first year of NTR alone, it is expected that Vietnam would earn an additional $800 million in export sales. In the long term, the agreement would lead Vietnam to adopt market-opening measures that would benefit foreign investors and Vietnam's private sector.

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