Business Review in Vietnam

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Economic Development

The economy of each country is impacted by its own characteristics which guide the direction for present and the future. The status of the economy of Vietnam is characterized by:

Baseline at a low level
Alteration to market economy
Limited dependence of local enterprises on the global economy because the local economy is open and has integrated with the global and regional economy only a while ago at a surface level (Thien, n.p).

For many years, Vietnam has remained the fastest-growing economy of the Southeast Asia. It is one of the emerging markets of the world where more multi nationals are now doing their businesses. This is due to different reasons like availability of cheap labor, land and tax benefits. Some of the companies are coming to Vietnam as a result of shifting their business from China, where they have to incur extensive costs and have to face the threat of a constantly fluctuating Chinese Yuan and the political uncertainties of the country (Field, n.p.)

Inflation is a vital issue in Vietnam and the focus has been long on containing inflation but the financial crisis across the globe has resulted in new policy confrontations for the government, as a result of which legislators have been forced to change their focal point from controlling inflation to sustaining economic growth. But the social and economic stability of the country is threatened by the runaway inflation, consequently, the central bank announced a few months before to lower the dongs reference rate by 2 percentage points, though this can have assorted results (EIU, n.p.).

Because of this announcement, the dong had the greatest depreciation in single-day since 1998. The lowering o reference point was meant to restrain speculation on the currency, but on the other hand, it increased the apprehension that the SBV is not dedicated to the recent system of exchange-rate and that depreciation will definitely continue. This has resulted in local firms and households dumping of the Dong for US dollars, creating more downward pressure for the local currency. The poses a policy dilemma for the authorities as a weak currency encourages exports and helps the trade deficit from increasing more, the central bank is not willing the further depreciation of the dong swiftly or considerably, due to the right fear of magnifying inflation. Even though the SBV has sufficient reserves of foreign exchange for avoiding any considerable depreciation of the currency against the US dollar, a look at the prices in the future implicate the market expectation of the dong weakening further. The foreign exchange market has turned jittery due to the efforts of firms and households of reducing their exposure to dong, and an interest rate on dong deposits which is quite more than that on US dollar deposits (EIU, n.p.).

The success in economic reforms is beyond the expectations of majority of the observers. As a result of being integrated into global markets, economic growth has stirred and the standard of living has improved for millions of Vietnamese population. Vietnam has undergone an abrupt economic fall which has resulted in apprehensions about financial systems stability, especially if situation continues to deteriorate. A positive aspect in the economy is that macroeconomic rudiments are still good since Vietnam is not under heavy debt, there is a strong export growth and the State Bank of Vietnam has substantially increased its reserves of foreign-exchange in the last few years (Pincus & Anh, 28).

The problems faced by the economy are manageable but the policy-making institutions are literally paralyzed. The SBV is responsible for monetary policy but inflation control has been handed over to the Ministry of Finance. The Ministry of Finance is responsible for setting tax policy and recurrent spending, it the Ministry of Planning and Investment that controls investment spending. The institutions are described by vague lines of authority and decision making by consensus, which has armored the propensity of widely distributing rents across the system but the problem is apparent in the public investment allocation where the due share of the poor often doesnt reaches them (Pincus & Anh, 28).

Major industries

Comprehensive data is not easily available about the industries in Vietnam. Through much research, this study found that Vietnam has competed in the international market mostly on basis of its textile industry, mostly the apparel sector where it has turned out to the second-largest supplier of imports for U.S. The imports from the country are having an annual growth rate of 30 percent wherein the apparel imports claim a 6.4 percent share of the total apparel imports. This is below par than China, which takes up 33.9 percent of the imports, but exceeds that of Vietnams closest competitors, that is Bangladesh and Honduras. Evidence in the form of the increasing value of unit value of Vietnamese apparel imports show that they are going up the value chain. Vietnam faces uncertainty in terms of its long term future as in turning out to be the lowest cost supplier of manufactured goods; this is mainly due to the countrys lag in the infrastructure (Field, n.p.)

Since 1990, the growth in exports has averaged over 20% per annum, and the labor intensive products are the top industries like garments and seafood. From these industries, millions of rural Vietnamese have procured steady jobs where as in the past they faced only economic insecurity and extreme poverty. The growth in exports is fuelled by farmers, which is not an industry but an embryonic private sector based mostly on very small firms and foreign enterprises. Majority of the borrowing from state-owned banks are done by capital-hungry state firms and they have now started borrowing overseas, it is evident that the rate of return on state capital is much below what is given by both sectors which are private and foreign invested (Pincus & Anh, 28).

The major industries which contribute in the export sector are those of manufactured products, electrical and electrical goods. People and government earn most of their incomes from the agricultural sector and the countrys agricultural goods also contribute largely in the exports and products like rice, pepper, tea and other natural commodities are exported in large amounts. Rubber industry is also a major industry whose products are exported to other countries. Vietnam has been having continued growth of coffee, as a result of which it has become the second largest exporter of coffee in the world (oxford, 1-5).

Infrastructure

Vietnam has a weak infrastructure. Due to its feeble transportation infrastructure, the country has increased overall costs of logistics which makes competition tough and the wages have to be kept low all the time. Merely one-fifth of the roads in the country are paved and those roads which lead to the seaports need to be upgraded to facilitate trade (Field, n.p.)

Many years of war has resulted in weakening the infrastructure of Vietnam but this scenario is now gradually changing. The first rail system was developed during the French colonial period in Vietnam; this was later improved in the late 1950s with the assistance of China when road links were constructed. The railway length is 2,652 kilometers but majority of these tracks require renovation. There are highways which in total are 93,300 kilometers (57,977 miles) long but merely 25 percent of these roads are paved and of these, many are in a poor state. Improvements have indeed been done like highways connecting airports and roads connecting sea ports. A significant portion of international economic assistance is being employed for upgrading the weak road infrastructure. The energy demand in the country is on the rise because of the brisk economic development and often the electricity shortage gets acute. The telecommunications system is inadequate and is going through steady improvements. There are around hundred radio stations, seven television stations, and five Internet service providers but these mediums enjoy limited freedom (Advameg, 2008).

Political situation

After unification, the Communist Party of Viet Nam has been in power. The Executive and the Legislature follow the national policy which is constituted by the decisions of the Partys leadership. The Peoples Committees enjoy significant authority at the provincial and the city level since their consent is a requirement for all projects for development and expenses within their jurisdiction. The revised Constitution of 1992 modified the authority of the Communist Party requiring it to function legally and giving more power to both the Prime Minister and the National Assembly. Everyday policy advices are given by the Party Secretariat whereas the Central Committee pays attention to key policy issues various times annually. The Vietnamese government now has a few comparatively young ministers and this is supposed to be an initial move for establishing a fresh generation of leaders (FAT, n.p.).

Political tensions are being created due to various reasons like increased awareness among public about poverty. Even though exports are strong, but there is decreased productivity due to increasing wages. The policies, wages and regulations have been outpaced due to growth and inflation resulting in labor unrest. This increases the chances of political instability in the region as the government is threatened by potentially stronger unions (Field, n.p.)

Legal system

Vietnam practices the socialist legal system where there are various things common to the laws practiced in the former socialist countries. For a long time, there was colonial system in the country brought by the French which stayed intact for almost two centuries, consequently, some influence from the French still remains. The legal system in Vietnam went through vital changes in its legal system from the late 1980s after the economic reform of the country. A few years later, various laws and codes were passed by the National Assembly which replaced decrees, which were the only form of laws for a long time.

A vital declaration of the legislation of the country is coping with international standards for promoting international transactions. The division of the Peoples Courts has been done into Criminal, Civil, Labor, Economic and Administrative. There are normal and military courts, but when the need arises, extraordinary courts may also be established by the National Assembly. There are three levels of The Peoples Courts. The lower level is charged for disputes related to civil, family, labor and minor criminal issues. The upper level is responsible for appeals, revisions and cassations the former levels decisions; these courts also act as the first instance courts in cases of economic, complex civil issues and grim criminal cases. The highest level makes sure that the laws are uniformly applied (Tran, n.p.).

According to a recent report by Global Integrity, a nonprofit organization that traces the trends of governance and corruption across the world, Vietnams anti-corruption law meets up with the highest global principles but , most of the time the country fails in translating the principles into action. The same report rates the countrys anti-corruption agency, its principles for rule of law and law enforcement as weak. Like in majority of the countries, the practices of extortion and bribery are even though illegal but still widespread (Field, n.p.).

Property rights

Each country has certain property rights law for protecting the private property rights. For measuring the extent to which a country protects the property rights of its people through introduction of such laws and the degree of implementation of these laws, the property rights index is used. The higher the scores on the index, the more protected are the property rights and the score lies somewhere between 0 and 100. The property right index also analyzes the possibility of expropriating the private property, the judiciary independence, the presence of corruption in the legal system and the capability of both businesses and individuals in enforcing contracts. Protection of property rights is vital in influencing the desirability of investments in real estate. Vietnam scores 10 on the property rights index which shows that the country lacks in providing even average protection to the private property, signaling this as the weak dimension of the legal system (GPG, n.d.)

Investment climate

Vietnam has made significant effort to attract foreign capital, but lacked in preparation when it came in large quantity. The SBV has adopted a strategy of targeting the exchange rate and allowing the adjustment of money supply, this is appropriate in an economy where people favor to do business in foreign currencies and retain foreign-currency assets. The monetary policy instruments are not perfectly functional in Vietnam as the government bonds have a thin market and an infant secondary market. This is due to the reason that the yields on government bonds are below the inflation rate and its purchasers bet that the pegged exchange-rate situation will stay in place. This makes the bonds which are dong-denominated less attractive for investors. A sparking credit growth and a rise in the capital inflows has resulted in an increased trade- and current-account deficits which arise due the foreign capital inflow since the country is a net capital importer. Vietnam is in the initial stages of industrialization and therefore it requires capital for purchasing equipment and inputs; this has to be financed by a combination of inflows from both exports and foreign-capital (Pincus & Anh, 28).

Previously, emerging markets were used as a mere production bases which had low cost but these days, they are being considered as the potential consumer markets. Investment is being drawn towards Vietnam as a result of being not only a low-cost production base but also possessing a workforce which is well-educated and has political stability. Evidence is available which shows that manufacturers are shifting their premises for production from other countries in Asia to Vietnam because it is cheaper and more productive than some of its regional competitors. In order to fuel investment, government has streamlined regulations, made efforts for reducing corruption, improving the infrastructure a little and providing legal protection for investors. Besides, the domestic market is also attracting foreign investors to Vietnam and the business environment is being improved as an evolving market and a young population rushes things (Pilling, n.p.).

The increased investment has come with its own cost as manufacturers are beginning to face problems particularly in searching for qualified management and technical staff due to capacity constraints. It is therefore important to assess cost versus capacity before making a decision for investment. There are also other issues like labor relations which can create problem arising from lack of communication between the employees and the management. Besides, corruption remains a major consideration though it is restricted to petty officers only most of the time (Pilling, n.p.).

With respect to the investments in the financial market, the global crisis that has been created as a result of fallout of U.S. mortgage defaults is likely to affect Vietnam at a much lesser extent due to its lesser degree of integration in the global capital markets. The stability can be restored relatively quickly by gaining control over public spending and state-owned enterprises borrowing but the political restrictions make this relatively easy job almost impossible for the policy makers (Pincus & Anh, 28).

The investment in Vietnam saw a slump when the biggest investors ran into great challenges that were created from the regional financial crisis; consequently, the confidence of the international investors has been undermined. Once the crisis broke out, the overall environment for investors grew less friendly as compared to other countries and the relative costs became even more unfavorable. As a result of this shortcoming, the impact is seen when the crisis-ridden economies begin to adjust their structure in order to recover, thus, the business environments progress in Vietnam came around slowly, negatively affecting the feelings of the investors. The challenges are magnified by more issues like weak financial and banking sector, below par efficient state-owned enterprises, discriminated private sector, complex processes for foreign invested enterprises and limited access to information. All these problems affect the confidence of the foreign investors on the outlook of continued growth of the economy (Thien, n.p.).

Social situation

Since Vietnam is a poor country, it can be easily imagined that the social status of people will be low for majority of the population but instead, Vietnam has been applauded by the international community for poverty reduction, near universal primary education and progress in terms of basic indicators. Vietnam depends greatly on out-of-pocket spending for financing basic education and health and after Indonesia, public spending in the health sector is the second lowest. The poor are often deprived of the public funds that are meant for their help. A recent study by the United Nations Development Program shows that 45% of transfer payments in health is given to the richest fifth of the population where as the poorest quintile gets merely 7%, whereas in case of education, these figures are 35% and 15% respectively. The elite class benefits from accessing the state power and resources but thus has possibly grave political consequences since the ruling party alleges to stand for the interests of all people. Besides, the food prices are on the rise and are stinging the poor (Pincus & Anh, 28).

The human rights issue is eventually turning to a better direction. The various dimensions of the life of citizens are now controlled and monitored by the Government at a lesser degree than before but are still invasive and unpredictable sometimes, for instance the people now have satellite television and the internet available to them but the use of the internet is scrutinized, similarly, the freedom of religion and media is greatly limited and acceptance of political pluralism is still to come (FAT, n.p.).

Health care system

Keeping n view the development level of Vietnam, its health indicators are unexpectedly good as expected from such a country and they maintain the improvement trend as in majority of the neighboring countries. The programs for economic growth and poverty reduction have been implemented in the country and in the lieu of this progress; the countrys health care system is in the middle of a remarkable change. Twenty years before, the health care system was under the strict control of the central government but this is no longer the case because of the private sectors brisk growth, a large out-of-pocket expenses and the continuing course of fiscal decentralization. New policy tools are now being implemented like user fees, health insurance and health-care funds for the lower strata of the society. The use of such practices is meant to finance health, yet the efforts do not succeed at merging into a consistent system for health financing and they exist along with other practices operated under the National Health Programs, which have been planned according to disease category. Minimum synchronization exists between such programs, even though they mostly target the same segment of the population but the fact is that a system is absent for ensuring that the programs are stopped after the achievement of their purpose (Adams, 2-4)

In the current years, the drive of the strategy in Vietnams health sector has focused upon proactive prevention, delivery of public services from the basic level, requirement of mobilizing the whole society for supporting improvements in health care, more coverage of health insurance, the importance of traditional medicine and vigorous contribution of the private sector under the leadership of the government. The health spending in Vietnam is remarkably good keeping in view its limited public resources where the country is spending around 5-6 percent of the total GDP on expenses related to health care. The country has a high annual GDP real growth rate of 7 percent, due to which people can now afford to pay more and more from their pockets resulting in degrading the increasing expenditure that Government is allocating to health. There are important challenges in the health sector such as some of the problems which remained unresolved even in the preceding policies and particularly, the issue of HIV/AIDS is nearly at the bottom line of shifting from the most susceptible groups to the general population (Adams, 2-4).

Education attainment

In Vietnam, 65 percent of the labor force comprises of people between ages 16-30 years. A higher level productivity is being achieved as more of the young workers are obtaining higher educational qualifications, are adapting more to the latest technologies and have higher level of professional skill. The country is a least developed one, and even though efforts are being made for improving the education quality and eliminating illiteracy, a major hindrance to these efforts is the economic backwardness. Out of ten thousand people, merely 20 to 25 are university students. The economic backwardness is multiplied by other issues as well and for overcoming these issues, the education system is going through restructuring. The provinces have been ordered by the State for allocating a minimum of 5 per cent of the budget for constructing schools; this will be supported by contribution from the public. This means that the State and the society are sharing the accountability for providing education to people (Dinh, n.p.).

Despite a low per capita income, Vietnam is showing evidence of great feats in education. Statistics show that in 1997, a high literacy rate of 92% of the total population was recorded. Out of the total 22 million pupils in the country, 58% were in primary schools, the second largest majority was in secondary schools and colleges and university had the least percentage of pupils. Both the communist party and the government places great value on education The evidence of successful education in Vietnam is visible not only in its trained, qualified and skilled workers but also in the form of renowned scientists like Mr. Nguyen Van Hieu and Mr. Ton That Tung. Regardless of the successes, the system of education still has various problems like obsolete teaching materials, under qualified teachers and people who restrict millions of children from going to schools (Vietnam, n.p.).

Employment

There has been an in increase in the rate of underemployment since 1997 and statistics show that population growth resulted in the growth of labor at a rate, which exceeded the economys job creation capacity from previous year in Vietnam. In the former years, high economic growth came around as a result of capital-intensive industries. This is visible in the sector of foreign investment where one job is created after an investment of approximately US$40 000-45000, which is a very high rate even for those economies which are more developed than Vietnam but in this country, the conditions are worse because of unemployment. The country requires harnessing the comparative advantage offered by inexpensive and plentiful labor and to create new jobs in large numbers. A reason for unemployment is the decrease in foreign direct investment after 1997, besides; various employees were laid off in foreign invested companies. Reduction also took place in related job opportunities which were due to these investments; the amount of these related jobs was 3-4 times more than what was directly provided by the FDI enterprises (Thien, n.p.).

Under employment is also a major issue in the country and even though official data is absent for unemployment, the high rate of underemployment is evident. A few of the surveys show that in rural areas, underemployment exists around 30%. Majority of the employees who have lost their jobs are those occupied in export and import sectors. The instant result of underemployment is lower income for large number of workers and although official data is absent on income, it is estimated that a decline came in the average income of the majority of the population in the past few years. This is attributed to three major reasons: underemployment, inability of the enterprises to pay full wages to their workers and declining prices. The last reason impacts a large number of farmers who contribute the largest share in the economy, but workers income in almost all sectors endure a decline and results in negatively impacting consumption of goods, resulting in deterioration the disparity of supply and demand for capital even more (Thien, n.p.).

Key trends of the Vietnamese financial market

The following factors echo the development level of the Vietnamese market:

The dong is inconvertible.
Absence of stock market and portfolio investment.
Capital market is yet to be liberalized.
Government regulated exchange rate
Weak and infantile banking system signaling high risks.

The private enterprises don not rely much on the banking system since there is poor opportunity for accessing it. The state owned enterprises are cautiously looked after by the government and have little distress about banking risks (Thien, n.p.).

Import and export trends

Export is a vital thrust behind the new and revolutionized economy of Vietnam and is now improving, in the past it was adversely affected due to the variations in the global market and crisis-induced decline of the regions market. Export has been impacted strongly by the following factors:

There has been a decline in the demand from both regional and international markets particularly for those goods which make the major exports of the country like rice and coffee. Besides, the international prices for products that are used domestically like paper, clothes and cement dropped significantly as well.
As a result of the declining price trend, the country was severely affected because the dong appreciated in comparison to other currencies in Asia which depreciated instead. Despite the devaluation of the exchange rate by the State Bank of Vietnam during late 1990s, the rate still remained low.

As a result of decline in the prices across the globe and the appreciation of products from Vietnam, the following results have come to surface:

The products of the country weakened in competition.
Tension was created in the local market since an excess supply of Vietnamese goods made their sale hard.
The CPI also declined continuously for a few months in the late 1990s in the past due to reduced domestic demand and world prices for the major products of export.

As a result of these factors, there was a build-up of inventories and various organizations failed in recovering their capital and paying their due debt to the banks, employees suffered in terms of their jobs and income and the effect was seen on the state budget. The banking sector is already weak but as a result of crisis, it became even more susceptible, reducing the opportunities of taking credit from businesses and lending to them (Thien, n.p.).

The trade deficit has narrowed due to reduced imports. For an economy like Vietnam which is in the initial stages of industrialization, this is a negative trend if viewed in the long run since this will have impact on the growth rate in later years. Besides, reduced imports also implicate that Vietnam failed to take benefit from reduced world prices, and the exports continued to grow even then due to efforts made for its encouragement (Thien, n.p.).

Impact of world economic crisis on the economy

It is seen that the Vietnamese economy is facing difficulties as a result of the effect of the global financial crisis, whether directly or indirectly. The recent crisis differs from that which occurred in 1998, since this one has victimized even the most strong and healthy economies like that of Japan, USA and Europe, which have been wasting billions of dollars in their struggle for stimulating the economy. This crisis started from the financial sector and then moved on sectors of production and consumption; this makes it difficult for people like economists and policymakers to lay down a certain direction for future action. Vietnam is a part of the global economy, even if a small one, and therefore it is bound to absorb the effects of any crisis that hits the world. Since this latest crisis has strike the production sector, its effect is seen in the exports and foreign investment of the country (VBF, n.p.).

If we consider the direct effect of international financial crisis on Vietnam, it is minimal but the main damage is due to globally inadequate demand. The banking sector is not a victim of harmful international policies nor is it largely owned by foreign banks. Some problems at domestic level which arose due to irresponsible lending for real estate during the last half of 2007 and first half of early 2008 are now declining and since government banks were restricted to lend, profits were made as they bought bonds from foreigners. Those banks which were small and those which had a weaker joint stock successfully increased their capital to the required legal minimum (VBF, n.p.).

The economic growth target was reduced by the government in the recent year to 5 percent, which is the lowest since 1999, as a result of weak first-quarter expansion in many years. There is reduced demand in the international markets which is translating into reduced demand for the domestic markets impacting the economy in various forms like closing of production plants and reduction in job opportunities. Exports growth is decreasing since the prices declines sharply in mid-2008 yielding in lower number of orders for products like garments and footwear in the late 2008; this suggests that the slump trend will remain for more time (VBF, n.p.)

In order to deal with the falling demand, bank credit can be made cheap and provision of loan guarantees may be helpful for the reduced trade finance. The shortfall is that cheap credits credit will not be helpful in motivating the production by firms if the demand for their products is absent or low. To offset this, it is suggested by World Bank that demand be directly supported via transfer of funds to households and public investment projects as it is the observation of the Bank that the most potential for offsetting the drop in manufacturing lies in the construction sector. With respect to exports, the country is mostly likely to undergo less suffering than other countries in the region due to its ability to retain competition, as evidenced by the growth of its market share (VBF, n.p.).

Recommendations

The focus of the government is on restoring stability and achieving growth. In this regard, it is recommended that the provision of jobs to people be ensured for supporting the efforts to preserve social order. For stimulating the economy and achieving growth, the monetary policy should be loosened and policies and systems for investment should be reformed on the basis of rules of the market.

It is also recommended to fortify both the banking and the financial system, allowing the government owned banks to function freely by making more decision of their own and be accountable for them as they are the hub of the existing banking system.

Policies should be created in a more equivalent environment which is important for a fair and dynamic business environment. This helps in encouraging the growth of the private sector, as well as that of small and medium enterprises. Such an environment is also conducive for foreign investors.

The policies and other steps should pay attention towards liberalizing trade. It is important that the vision of the businesses as well as the government is long term but complete efforts are made to overcome problems of the short-term as this is important for succeeding the economy in both medium and long-term panorama. Finally, it is suggested that the public enterprises should be equitized and investment funds of the state be directed for developing the weak infrastructure.

Works Cited

Advameg, Vietnam: Infrastructure, power, and communications, 2008, Encyclopedia of the nations, Web.

ALAN M. FIELD, Vietnam rising Journal of Commerce [New York]. 2008, ABI/INFORM Global. ProQuest, Web.

David Pilling, From boom to gloom. FT.com. 2009, ABI/INFORM Global. ProQuest, Web.

Do Duc Dinh, The social impact of economic reconstruction in Vietnam: A selected review, 1995, IILS, Web.

Dr. Tran Dinh Thien, Impact of the regional crisis on the Vietnamese economy, 1999, Web.

EIU, Vietnam economy: Inflation headache EIU Views Wire, 2008, ABI/INFORM Global. ProQuest, Web.

FAT, Vietnam political situation, 2008, Web.

GPG, Property Rights Index Vietnam Compared to Continent, Global Property Guide, 2007. Web.

Jonathan Pincus, Vu Thanh Tu Anh, Vietnam Feels the Heat Far Eastern Economic Review, 2008: 28-34. ABI/INFORM Global. ProQuest, Web.

Oxford, Vietnam Oxford Economic Country Briefings: Vietnam . 2009: 1-5. ABI/INFORM Global. ProQuest, Web.

Susan J. Adams, Vietnams health care system: a macroeconomic perspective, 2005, paper for international symposium for health care in Asia,Web.

Tran, Legal system in Vietnam, Tran_H_N & Associates, 2009, Web.

VBF, Vietnam faces low risk from financial crisis World Bank, 2009, Vietnam Business Finance,Web.

Vietnam, Vietnam education, 2009, Web.

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