[Vnbiz] The New Vietnam Irrational Exuberance?

[tranhht-vcci at hn.vnn.vn]

November 15, 2006
COMMENTARY
The New Vietnam
Irrational Exuberance?
By MARTIN GAINSBOROUGH
November 15, 2006
When presidents and prime ministers gather in Hanoi later this week for the
annual summit of the Asia-Pacific Economic Cooperation forum, they'll
find a city teeming with optimism.
Vietnam is on track to join the World Trade Organization, following the
global body's recent vote to admit the country as its 150th member. Hopes
are high that Vietnam's new prime minister, Nguyen Tan Dung, who was appointed in June and is widely
heralded as a reformer, will usher in a new generation of reforms. Even the country's stock market, while
tiny in terms of capitalization, has been caught up in the global bull market: The Vietnam-Index has
increased some 66% this year, the highest growth rate among Asian stock markets ahead of even China.
Moreover, with some of Vietnam's most successful private banks beginning to list, growth rates in excess
of 20% annually are being forecast.
But scratch beneath the surface and a more troubling picture emerges. Two Hanoi-based staff of the
Dutch bank ABN-AMRO remain in jail, with another two under house arrest, held hostage to a police
investigation after a state-owned bank lost millions through foreign-exchange transactions. And the
"PMU 18" corruption case earlier this year put the spotlight on the pervasiveness of graft. Named after a
project management unit in the Ministry of Transport -- where millions of dollars were embezzled from
overseas aid, much of it to pay for gambling and prostitutes -- that case gave foreign aid donors pause to
reconsider just how much Vietnam has really changed.
The truth, as always, lies somewhere between the two extremes. Vietnam is no longer the politically
isolated, drab and dirt-poor country it was before the economic reforms in the 1980s. But nor do
skyscrapers and trendy boutiques convey the whole story.
What APEC leaders will find during their summit is a country in the early stages of industrialization, with
production still largely at the low end of the technology scale. Vietnam has posted impressive economic
growth over the past decade by emulating China's export-led model and focusing on low-margin
products. But just as rising costs have forced Beijing to move up the production scale, so Hanoi will in
time face the same challenge. Firms hoping to benefit from low-cost labor are already looking beyond the
provinces clustered around Ho Chi Minh City and Hanoi.
No country wants its economy to be based on the sweat of cheap labor for long. Higher profit margins, a
deeper level of industrialization -- and hence higher levels of prosperity -- are to be found further up the
technology ladder. But making that transition to more high-tech production is notoriously difficult,
demanding higher levels of investment -- which requires capital accumulation -- and a more skilled labor
force -- which takes time to train. This is a tall order for any country. Many stall at the first hurdle, amid
problems of rent-seeking and corruption.
Added to this are the social challenges posed by rapid recent growth. As Vietnam has industrialized --
agriculture now accounts for just 20% of GDP, compared with more than 40% in 1989 -- hundreds of
thousands of people have flooded into the cities to work in factories. Precise figures are not available, as
a restrictive household registration system has forced much of this movement to occur informally. What
is clear, however, is that increased migration has put pressure on urban infrastructure, while poor working
conditions have led to increasingly frequent labor protests.
In January this year foreign business groups were alarmed when a series of wildcat strikes -- some of
them violent -- swept through industrial zones around Ho Chi Minh City, prompting the government to
raise the minimum wage payable by foreign-owned firms. Farmers, too, have become increasingly angry
at the seizure of their land for urban redevelopment, often without proper compensation. The fact that
companies sometimes have ties to local government officials only aggravates the situation.
The problem is that Vietnam lacks a fair legal system to resolve such disputes. As the ABN-AMRO case
has shown, the law can be used as a tool for unscrupulous government and party leaders. And there are
still powerful people who remain above the law in Vietnam. Whenever a major corruption case breaks
there are often rumors of higher-level involvement.
Building a system based on the rule of law will not be easy. Part of the problem is that, in Vietnam,
political and economic power remains intermingled. But it goes deeper than this. Traditional Confucian
culture, which remains a powerful influence in Vietnam, does not embrace the liberal idea that political
power needs to be accountable and subject to checks and balances. The maintenance of order -- however
achieved -- is ranked more highly. That can change, especially now that Vietnamese people are freer than
before to observe how so many other nations are prospering through democracy. But there is still a long
way to go before such values take root in Vietnam.
On the back of impending WTO entry and continued growth, Vietnam is again attracting a new wave of
foreign investor interest. Much of this is reasonable. However, some of it is exuberance, and there is a lot
of ignorance about domestic political and economic conditions.
This is reminiscent of the period from 1992-95, when foreign investors flooded into Vietnam in large
numbers. Only later did they realize how many problems the country faced, and many ended up cutting
their losses and leaving.
Vietnam is a more mature market now. But in some areas, notably in terms of poor transparency, weak
corporate governance and banking sector vulnerability, not much has changed. This carries a risk that
investors will once again enter Vietnam with unrealistic expectations, only to retreat later when their
expectations fail to materialize. In other words: Proceed, but proceed carefully.
Mr. Gainsborough is director of the Bristol-Vietnam Project at the University of Bristol in England.
URL for this article:
http://online.wsj.com/article/SB116354229350523052.html
Copyright 2006 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our
Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones

-------------- next part --------------
An HTML attachment was scrubbed...
URL: http://www.saigon.com/pipermail/vnbiz/attachments/20061116/b68310a1/attachment.html 
-------------- next part --------------
A non-text attachment was scrubbed...
Name: image002.gif
Type: image/gif
Size: 73 bytes
Desc: not available
Url : http://www.saigon.com/pipermail/vnbiz/attachments/20061116/b68310a1/attachment.gif 
-------------- next part --------------
A non-text attachment was scrubbed...
Name: image001.gif
Type: image/gif
Size: 73 bytes
Desc: not available
Url : http://www.saigon.com/pipermail/vnbiz/attachments/20061116/b68310a1/attachment-0001.gif