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Globalization, Employment and Equity: The Vietnam Experience

by Sunil Chandrasiri Senior Lecturer in Economics University of Colombo Sri Lanka and Amala de Silva Senior Lecturer in Economics University of Colombo Sri Lanka Study undertaken as part of the ILO/EASMAT project,

Strengthening the Capacity of the Social Partners

for Effective Employment Strategies in the Context of

Globalization and Liberalization

ILO East Asia Multidisciplinary Advisory Team (ILO/EASMAT)

ILO Regional Office for Asia and the Pacific

Bangkok

June 1996

________________

* Unpublished document issued without formal editing by ILO. The responsibilities for opinions expressed in this document rest solely with the authors and its inclusion here does not constitute an endorsement by the ILO of the opinions expressed therein.

Strengthening the Capacity of the Social Patterns for Effective Employment strategies in the context of Globalization and Liberalization: Country Study - Vietnam

Table of Contents:
Introduction

1. Globalization and Liberalization

2. An Overview of the Vietnam Economy

3. Globalization and Liberalization Trends: Post Transition

4. Effects on Employment and Social Welfare

5. Summary and Conclusions

References

Introduction

According to World Bank classification of economies Vietnam falls into the low-income, severely indebted exporter of non-fuel primary product category. With a GDP per capita income of less than $250 it is one of the poorest economies in Asia. In contrast its relative position in terms of HDI (0.514) is significantly higher than many of the countries in the world table. It has a population of about 74.1 million with an annual growth rate of 2.1 per cent. Its economy performed poorly throughout the 1980s despite large amounts of Soviet assistance. In response to this worsening crisis, Vietnam launched an ambitious programme of "renovation" (doi moi) in 1986 and accelerated its implementation in 1989. Under this programme the highly controlled economy was thrown wide open and market led-policies were introduced. More specifically, this included unifying and devaluing the exchange rate, trade liberalization, increasing interest rates above the rate of inflation, decontrolling the prices of food and most other commodities, decollectivization of agriculture, abolition of trade restrictions on inter-provincial trade, diversification of ownership and the abolition of employment limits on private enterprises.

The immediate response of these reforms were very positive. Real GDP growth was over 8 per cent in the early 1990s and it is expected to be around 10 per cent in 1996. The rate of inflation reduced from three digit level in 1989 to 8.5 per cent in 1993 and the overall budget deficit was reduced significantly from 10.4 per cent in 1989 to 3.7 per cent of GDP in 1992. Total exports nearly doubled in 1989 and the availability of foreign exchange dramatically improved.

It is important to notice that these positive results achieved from the reforms would have had both direct and linkage effects on employment, wage levels, equity and social welfare. A shift from a centrally planned to a market economy involves structural changes resulting in job losses and wage cuts for many. Moreover, in spite of the new opportunities that open up, for every winner there can be plenty of losers. For example, special preference towards industry at the expense of agriculture, private sector at the expense of state sector and the abolition of subsidy programmes that may result in negative effects on employment, income distribution and social security.

The primary purpose of this paper is to study and analyze these changes in the context of Vietnam with special reference to its recent policy shift towards globalization and liberalization. The more specific objectives of the present study are as follows:

a. to study the dynamic character of the Vietnam economy in response to macro and micro policy reforms introduced in the late 1980s and

b. to examine the implications for employment, equity and social welfare of a fast growing and increasingly internationalized labour surplus economy.

The study is organized into five main sections: (1) globalization and liberalization (2) an overview of Vietnam economy, (3) globalization trends: post transition (4) employment and social welfare effects and (5) summary and conclusions. The data has been collected mainly from two sources: (a) in-depth interviews with senior officials of various policy making and administrative institutions in Hanoi and Ho Chi Minh City (see annexure 1) and (b) secondary data published by both government and non-government sources.

1. Globalization and Liberalization

The most decisive force at present in the world economy is globalization or internationalization of economic activities. It is a process of economic and social unification of the world through voluntary or involuntary adoption of interlinked economic and social systems by all countries. With the globalization of economic activities competitive practices go beyond national boundaries. As a result firms operate on global strategies and form alliances with firms from other nations in order to be competitive in international markets.

The essence of globalization in economic terms is integration with the world economy through the opening of the country to the world market and the adoption of a strategy of export led-growth under a market oriented framework as advised and guided by multilateral institutions. In this context, a significant change in direct foreign investment and export-led growth can be observed with regard to many economies over the last one and a half decades. Export-led growth was based on agricultural and mineral exports to the industrialized countries. As argued in the literature during this time foreign investment and export-led growth in the context of LDCs was mainly determined by the economic objectives of developed countries (home countries) rather than the requirements of host nations.

With the globalization of economic activities this pattern has changed completely and now export-led growth is heavily biased towards industrial products and is based on competitive advantages. Foreign investment is very much encouraged through market competitiveness and transnational corporations are viewed as possible sources of foreign capital, modern technology and assured foreign markets. The failure of socialism after 70 years of experimentation, caused by its economic inefficiency and failure to respond to the new challenges of a consumerist society, the relatively slow economic growth of developing countries with regulated economies, the rise of monetary economics and pressure by international and trade institutions for liberalization, appear to be the major factors underlying this change.

Liberalization refers to a shift towards open market operations from a regulated market environment. In the case of centrally planned mixed economies it is a switch towards more private sector participation in economic activities. It is also a shift from market imperfections to perfectly competitive market conditions. As argued by Kruger (1986) and Balassa (1986) these changes will facilitate the efficient and effective pursuit of virtually any economic or social goal. Liberalization of domestic economies is an essential pre-requisite in becoming internationally competitive and surviving international competition, since globalization itself is a direct function of the growth of competition in an international free trade system (Jones, 1995).

An early theoretical case for liberalization is based on the well known neoclassical results of the Pareto optimality of free trade. Subsequent developments in this tradition justify government intervention in order to correct market failures resulting in asymmetric market power, incomplete markets and other externality costs. In the case of some of the success stories of Asian economies the argument used by neoclassical economists in favor of liberalization is that trade-restricting, import substituting policies had failed, and therefore should be replaced with trade-oriented export-promoting policies.

In the real world however, matters are highly diverse and complex. Empirical evidence in support of liberalization is weak and inconclusive. The success stories from East Asia deviate significantly from the neo-classical ideal of laissez-faire and some of their markets especially capital markets had been heavily regulated. The connection between free markets, government policies and economic performance is yet to be confirmed by many other countries. The neoclassical argument for liberalization appear to rest upon a willingness to believe in the efficacy and optimality of free markets. Most recent trends in the Soviet economy are a clear sign of partially returning to a centrally planned market economies.

Globalization and liberalization have become major driving forces behind high growth sectors of the world economy. These two policies are inextricably bound together and therefore both can be considered as complementary in promoting economic growth and development. They advocate a high degree of dynamism with regard to investment and trade. As Jones (1995) concludes "patterns of interdependence within the contemporary international system are highly varied, frequently asymmetrical and commonly imbalanced". It is in such a context that it becomes crucial to strengthen the capacity of countries to identify and implement effective employment strategies, not only to gain from the productive employment opportunities that arise in the context of globalization, but also to safeguard groups adversely affected by changes in trade and production structures. To gain from international interactions an economy must be sufficiently flexible to respond to changes in environment both at national and international level, and economically and politically stable.

Globalization is currently seen among third world countries as a mechanism that could harmonize the international division of production of goods and services, with the existing distribution of resources, including human resources, to achieve increased welfare globally. Vietnam too has subscribed to such a policy perspective since the Doi Moi reforms of 1989, and this study focuses on the means pursued by Vietnam in its attempt to gain greater integration with the world community, and the impacts of such measures, in particular on employment and social welfare

2. An Overview of the Vietnam Economy

Vietnam has had a turbulent history which has left it with a low per capita income level, great economic, social and administrative disparities regionally and struggling to stabilize itself in a period of transition from controlled planned Socialism to a Capitalist market economy while maintaining a social welfare net. Private property was enshrined as a citizen*s right in the 1992 constitution, and is a salient change along the path to Capitalism. Globalization has become a key objective on the Vietnamese government agenda, and direct foreign investment is being widely sought to support the bid for export led growth.

Vietnam is one of the most densely populated Asian economies with a high level of poverty and great interregional disparities. Its total land area is about 329600 Sq.Km and administratively it consists of 7 regions (Northern uplands, Red River Delta, North Central, Central Coast, Central Highlands, South East and Mekong Delta) and 53 provinces. Among these regions the poorest is the North Central region (south of the Red River delta down to Hue) and the next poorest is the Northern Uplands (the mountainous area north-west of Hanoi). Four other regions (the Central Highlands, Red River Delta, Central Coast, and Mekong Delta) also stand relatively below the national poverty line with the Southeast region having the lowest poverty incidence of 33% (WB, 1995).

Vietnam has a strong resource base: fertile soil, a long coastline, major inland waterways, irrigation, forests, mineral deposits, coal, oil, natural gas, iron ore, bauxite, copper, chrome, gold and rare earths. Commercial oil exploitation began in 1988. Despite a very low per capita income, Vietnam has a high level of literacy (88 per cent) and its workforce is noted for its dexterity. These factors should encourage foreign investors and support the export-led growth drive.

Table 1. GDP by kind of economic activity @ constant prices of 1989 (billion Dong)

Sector %

1991

1994

Agriculture, forestry, fishing 35.4 Industry 21.9 Construction 4.7 Transport, postal, 2.4 tele-communication Trade, material supply 11.2 Finance, banking, insurance 1.8 State management, science, 9.4 education, health, sport Housing, tourism, hotel, repairs 13.2 of personal consumer goods Total 100.0

12264 6042 1186 792

39.2 19.3 3.8 2.5

14169 8771 1860 960

3654 448 2841

11.7 1.4 9.1

4478 710 3760

4059

13.0

5274

31286

100.0

39982

Source: Statistical Year Book, SPH (1994).

Table 2. The structure of GDP by type of ownership (@ current market prices%)

Sector

1990 State Non-state 97.1

1994 State 2.9

Non-state Agriculture, forestry, 97.1 fishery Industry 34.8 Services 51.9 Total 59.8 2.9

62.8 44.2 32.5

37.2 55.8 67.5

65.2 48.1 40.2

Source: Statistical Year Book, SPH (1994)

As analyzed in Table 1 Vietnam is predominantly an agricultural economy. The agricultural sector which contributed 35.4 per cent of the GDP in 1995 remains more significant than industry (21.9) though the share of the former has declined by 9.69 per cent while the latter has increased by 13.47 per cent. The dominant sector continues to be the service sector at 38 per cent of GDP in 1994.

The structure of GDP by type of ownership is analyzed in Table 2 and it clearly indicates the dominance of the state sector in industry (65.2 per cent) and relative significance of non-state sector in agriculture (97.1 per cent) and service sectors (51.9 per cent). The industrial sector comprises of large scale, centrally managed state owned enterprises and non-state owned enterprises. The former is mainly engaged in the production of crude oil, coal, fertilizer and building materials with the latter group concentrating on food processing, textile and apparel, leather tanning, wood processing and handicrafts. The service sector which has expanded its relative share in the early 1990s is projected to grow at 11.9 per cent in the mid 1990s.

Table 3. Distribution of economically active and inactive population % (1994)

Economically Active Urban Rural Male Female Total 63.8 77.6 74.9 69.2 71.9

Not-Economically Active 36.2 22.4 25.1 30.8 28.1

Total 100 100 100 100 100

Source: Statistical Year Book of Labour-Invalids and Social Affairs, NPPH (1994).

The distribution of labour force in terms of the economically active and inactive is presented in Table 3. It reveals a relatively low percentage of economically active persons in the urban sector (63.8 per cent) as against the rural sector (77.6 per cent). With respect to gender the active to inactive ratios stand at 74.9 and 69.2 per cent for males and females respectively.

Table 4. Employment (in millions)

Region 1988 Trade Northern Upland 0.76 Red River Delta 0.85 North Central 0.58 Central Coast 0.45 Central Highlands 0.18 Agri 3.38 4.43 2.74 2.11 0.84 Indus 0.64 0.84 0.52 0.40 0.16 Trade 0.61 0.80 0.50 0.38 0.15 1993 Agri 4.0 4.54 3.11 2.39 0.96 Indus 0.74 0.83 0.57 0.44 0.17

South East 0.53 Mekong Delta 1.10 Total 4.45

2.53 5.07 21.10

0.48 0.97 4.01

0.46 0.91 3.81

2.87 6.97 23.90

0.52 1.10 4.37

Source: Statistical Year Book, SPH (1994).

Table 5. Employment by sectors and ownership (in millions)

Sector State state Agriculture Industry Trade Total 0.52 1.51 2.02 4.05

1988 Non-state 20.58 2.50 1.79 24.87 State 0.33 1.00 1.64 2.97

1993 Non23.57 3.37 2.81 29.75

Source: Statistical Year Book, SPH (1994).

Tables 4 and 5 deal with the structure of employment by region in 1988 and 1993. They further confirm the dominant role played by the agricultural sector in Vietnam. When the structure of employment is analyzed by ownership the non-state sector appears to be the most vital sector of the economy. It's contribution to employment was 86 and 91 per cent in 1988 and 1993 respectively.

The unemployment situation in Vietnam is explained in Table 6. It points to a high level of unemployment in the rural sector. When under-employment is taken into account the problem of unemployment in the rural sector is much worse. Of 24.5 million people working in rural areas, only around 22.7 million people have work for six months or more every year. According to a survey carried out in the Mekong Delta in the North, on average a farmer had nothing to do 133 days every year. His earning capacity per working day is about 10 to 12 kgs of rice and after covering all expenses only 3 kgs remained (Lich and Khoa, 1995). The regional distribution of employment and unemployment in Vietnam is presented in Appendix 2. The high level of unemployment and underemployment in rural areas has resulted in out-migration from rural sectors to urban centers and fragmented information estimate this number to be around 1 million per annum.

Table 6. Rural and urban unemployment (in millions)

Urban 1988 1991 1993 0.37 0.33 0.32

Rural 1.40 1.23 1.06

Total 1.77 1.56 1.38

Source: Statistical Year Book, SPH (1994).

Government revenue is projected to be around 22 per cent of GDP in 1995 and most of it is expected to come from the earnings of large state-owned enterprises. The rate of increase in government expenditure (29.8 per cent of GDP in 1993) however, will continue to be higher than revenue. The overall budget deficit has been reduced from 8.3 per cent of GDP in 1988 to 5.1 per cent in 1993 and is expected to decline to 4.6 per cent. The budget deficit has been met primarily by foreign grants and loans. The level of domestic borrowing is expected to be reduced to 2 per cent and as a result the crowding-out effect is likely to be less. Growth in money supply, especially in M2, is expected to increase by 19 per cent in 1995 in line with the expected high growth rates of the economy. Vietnam's performance on external trade and payments reveals an increasing trend of negative balances from 1990 and the same trend is expected to continue throughout the mid 1990's. The progress on exports and imports in response to economic reforms is remarkable especially in the early 1990s.

3. Globalization and Liberalization Trends: Post Transition

The reform process as stated earlier started in 1986 and accelerated its implementation in 1989. Its primary objective was to develop a mixed economy in which the private and state sectors could compete on a level playing field. The policy reforms introduced in the post 1986 period, both at macro and micro level, are summarized in Appendix 3. Now Vietnam has established a pattern of fast and stable growth that seems likely to last until the end of the decade.

Vietnam's aggregate output has registered remarkable growth after its initial phase of policy transformation. These changes could also be noticed with regard to other indicators such as growth of per capita income, merchandise exports and imports. In terms of sectoral performance all three sectors have performed well and there has been a significant drop in consumer prices from 310.9 in 1988 to 8.5 in 1993. With the liberalization of economic activities and normalization of international relations it has become an attractive investment center in Asia.

As shown in Appendix 4, Vietnam's macro economic record has clearly been impressive. Gross domestic investment (GDI) as a per cent of GDP has increased from 14.4 per cent in 1989 to 19.8 per cent in 1993. This ratio was expected to grow upto 25 per cent in 1995. The domestic savings rate however, was estimated to be around 8 per cent in 1993 and hence a large savings-investment gap exists. This gap is expected to reduce with the increase in domestic savings in line with better performance by households and business enterprises. The facilities for saving and investment of savings have been expanding rapidly. The level of public domestic investment has increased notably due to heavy public investment on power transmission, roads and other infrastructure facilities. The level of private domestic investment has also expanded significantly in response to incentives offered to private investors.

Vietnam has accelerated its overall growth in terms of value added after liberalization of trade and industrial policy. At sectoral level however, the agriculture sector has recorded a slightly lower growth rate as compared with the industrial and service sectors during the post-reform period. In addition the sectoral contribution of agriculture to GDP reduced from 42.7 per cent in 1980 to 35.4 per cent in 1994. In contrast, both the industry and service sectors have increased their relative share over the same period. Within the agricultural sector rice is the main crop and it has been identified as one of the high potential growth sectors in Vietnam. At the end of the collectivization era (in 1989) Vietnam was a net importer of rice and today it is the world's third largest rice exporter. Other agricultural sub-sectors (food crops, livestock, marine products and non-food crops) are also expected to perform well in response to changes in land tenure, provision of extension services, better technology and input and output prices determined by market forces.

The introduction of liberalized economic policies have stimulated the development of agricultural production in Vietnam. For example, reforms in the goods market have offered greater opportunities for producers to participate in market operations and earn a better income for their produce. It has recorded an outstanding success in food production which largely ensures food supply for the whole country and has helped in inflation control. It has also established an important position within the export sector by accounting for 33 per cent of export turnover in 1994. As shown in Table 7, if aquatic products, agriculture forestry and fisheries are included, agriculture accounts for about 50 per cent of total exports (Lam, 1995). The most important commodities include rice, coffee, rubber, tea and aquatic products. The structural changes within agriculture however are still rudimentary, but from the existing evidence one can safely conclude that the effects of liberalization on agriculture have been positive in the case of Vietnam. The reform policies have created diversified and expanding commodity markets and provided job opportunities for surplus labour in the rural economy of Vietnam.

Table 7. Role of agriculture in exports

Unit 1994 Total exports 3600 Agricultural products 1320 US$ Mn. US$ Mn.

1990 2404 910

1992 2580 968

Fishery 480 Share of agriculture & forestry 33.0 Share of agriculture, forestry & 50.0 fishery

US$ Mn. % %

239 37.8 44.6

307 37.5 49.5

Source: Lam (1995)

Industrial development is the focal point of Vietnam's programme of economic growth and modernization. Over the last 40 years the manufacturing sector was owned and controlled by the government employing essentially a Soviet model of industrial development. With the introduction of reform policies the industrial sector in Vietnam is changing rapidly with an active participation of private domestic and foreign investment. It's contribution to GDP increased from 18.8 per cent in 1990 to 20 per cent in 1994 and share of export earnings increased from 30 per cent in 1985 to 45 per cent in 1993.

The economic reforms have also strengthened the role of the non-state sector (private sector). The state enterprise reform, the 1993 Land Law and tax reforms have transferred assets from the public to the private sector. Trade reforms have exposed them to international competition. As a result there has been a high degree of privatization and internationalization of the economy. As shown in Table 8, the non-state sector began to develop in 1991, especially the small scale household businesses. In 1994, the non-state sector produced 65 per cent of GDP, accounted for 40 per cent of budget income and employed 56 per cent of labour force (Hai, 1995). In terms of growth in employment it has maintained an impressive growth rate of over 23.9 per cent per annum between 1988 and 1993. In contrast, the state sector recorded a reduction in employment in early 1990s and this trend is expected continue for the rest of the decade. As reported by the Vietnam General Confederation of Labour, state employment has fallen every year, since 1988. Between 1989 and 1992, reduction in the number of persons employed by the state sector is 1092800 and among them 54.4 per cent are women. The relative status of the state enterprise sector in the economy however, is still significant especially in terms of total funds (90 per cent) and fixed assets in industry (85 per cent). It also accounts for 100 per cent ownership of large mines and employs 90% of skilled workers.

However, in the process of industrialization the non-state sector in Vietnam is faced with four major problems: (a) use of outdated technology, (b) small scale production, (c) lack of trained manpower and (d) heavy concentration in certain economic sectors and geographic regions. For example in 1994 most of the non-state sector enterprises had obsolete equipment which were at least 20 years old. Only 75 per cent of businesses and 25 per cent of companies have modern equipment and technology. The rest use traditional or semimodern technology (Hai, 1995). The poor quality of labour and managerial skills in many of the non-state sector enterprises is due to lack of training. Most of the workers had no training and many managers and directors in these organizations had little knowledge about the market economy and business management. In terms of scale, the average capital of a non-state sector organization is VND 144 million (US$13000) and a large number of them (around 42 per cent) employ no more than 20 workers. With respect to sectoral distribution, a large percentage of non-state sector enterprises can be found only in two sectors: construction (64.4 per cent) and manufacturing (13.3 per cent). In the South, these organizations are clustered in cities especially in HCMC. In the North, the scale and size of these businesses are much smaller. The non-state sector hardly ever invest in rural and mountainous areas (Hai, 1995). From this evidence it is explicit that the non-state sector will find it difficult to sustain its competitiveness in the presence of foreign competition unless immediate attention is paid to these issues.

Table 8. Number of industrial enterprises

Year

State enterprise Central Local

Non-state establishment Co-operative Private Private Househol -

d 1985 1986 711 687 2339 2454 35629 37649 920 567

1987 1988 1989 1990 1991 1992 1993

682 681 666 589 546 537 522

2475 2430 2354 2173 2053 1731 1508

33962 32034 21901 13086 8829 5723 5287

490 318 1248 770 959 1114 3322

318557 333337 376902 446771 368000 452866

Source: Statistical Year Book, SPH (1994)

The post-reform changes in Vietnam, can particularly be noticed with regard to the foreign trade sector of the economy. The coincidence of the universal bias towards globalization and Vietnam*s shift towards an open economy market oriented system have resulted in strong impacts on export and import trade within the country. The growth in exports since 1989 has been striking. From US$698.5 mn in 1985, to US$2404 mn in 1990, and US$2581 mn in 1991, since when the growth rate has risen even more sharply to $3600 mn in 1994. This is a significant improvement in exports over a period of nine years from 1989 both in terms of volume and value, despite the parallel decline in demand for exports from the Socialist block engendered by their own economic transition and turmoil. Within the export sector rice and crude oil have maintained their relative position during both the pre and post reform periods.

Table 9. International trade (US $ Mn)

Commodity group Total exports Heavy industrial products & minerals Light industrial & handicraft Agricultural products Forest products Aquatic products Others Total imports Mean of production Complete & petrolic equipment Machinery Instrument & accessories Fuels, raw material

1985 698.5 62.9 235.5 274.2 40.5 82.6 2.7 1857.4 1586.6 422.6 156.8 108.9 898.3

1990 2404.0 616.9 635.8 783.2 126.5 239.1 2.4 2752.4 2342.6 439.0 179.4 134.5 1589.6

1992 2580.7 954.8 349.5 827.6 140.8 307.7 0.3 2540.8 2119.8 175.0 216.2 155.9 1572.7 -

1993 2985.2 1014.0 526.5 919.7 97.5 427.2 0.2 3924.0 3311.2 287.7 634.6

2388.9

Consumer goods Food Food stuffs Med goods

270.8 83.0 24.2 25.2

409.8 46.1 68.2 41.0

420.9 53.9 86.2 61.4

612.8 53.5 152.3 86.0

Source: Statistical Year Book, SPH (1994)

In addition to high growth, the export sector has also demonstrated a high degree of dynamism during the post reform period. For example, primary exports have already diversified into other products such as coal, coffee and marine products. Based on its factor endowments Vietnam's export sector has also expanded into labour intensive manufactured goods where Vietnam has greater potential for gradual build-up of manufactured exports. The dynamic nature of Vietnam's export sector is further analyzed in Table 10. It reveals a significant increase in the share of exports to Asian markets and a drastic drop in the share of exports to European markets over a period of eight years from 1985. The imports sector also indicates a similar pattern of growth and expansion in trade, with its counterparts in Asia.

Foreign investment is the other important area which responded positively to liberalized foreign investment policies. Vietnam's huge potential market, low labour costs, hardworking and relatively well educated workforce and raw materials have been identified as key determinants of its level of foreign direct investment. As reported by Asian Business (1995), Vietnam's Confidence Index stood at 84, 80 and 87 for 1993, 1994 and 1995 respectively. The comparable figures reported for Singapore by the same survey for the same period were 74, 79 and 66 respectively. As can be seen from Table 11, FDI flows into Vietnam have grown at 50 per cent per annum between 1989 and 1994. During the first six months of 1995, Vietnam attracted about US$3.6 bn. in new foreign investment projects with Japanese projects leading the charge. By type of investment, majority of FDI projects are joint ventures (Table 12) and by country of origin, Asian nations dominate the investment tables, with Singapore, Hong Kong, Taiwan, Japan and South Korea taking the lead (Appendix 5). These funds were mainly invested in industry, hotels, office buildings, oil & gas, transportation and communication sectors. In spite of various problems associated with existing laws on foreign investment, policy measures taken so far can be considered a positive steps towards globalizing the economic activities of Vietnam. The dominance of Asian investors in Vietnam further confirms the intra-Asian dimension of trade and investment within the region.

Table 10. Direction of Exports and Imports - % Share

EXPORTS * South East Asia # Other Asian Countries Europe Others IMPORTS * South East Asia # Other Asian Countries Europe Others

1985 6.3 14.4 60.3 19.0

1990 14.3 28.8 50.5 6.2

1992 22.3 51.4 14.5 11.8

1993 21.5 51.0 13.7 13.8

1.5 10.2 78.0 10.3

19.6 17.0 58.3 5.1

37.5 27.90 16.5 18.6

33.6 35.7 17.6 13.1

* Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand.

# India, Korea DR,Taiwan, Hong Kong,Iraq, Mongolia, Korea Rep., Japan, China.

Source: Statistical Year Book, SPH (1994).

As in many other host countries, foreign capital in Vietnam is one of the major sources of advanced technology and managerial skills. Over the last few years many Vietnam industries have been making good progress especially in telecommunications, oil, business, electric and electronic products, and light industries. As noted by Tong (1995), Vietnam has not been able to maximize the benefit of foreign investment due to four main reasons: poor quality of labour, lack of managerial skills, use of obsolete machinery and equipment and lack of information. Out of the total working population of 30 million people, only about 3.4 million or 11 per cent have received vocational education at different levels.

Table 11. Growth of FDI from 1988 to 1995

1988 '95 Number of projects 362 214 Total registered 4071 4166 capital (US$ Mn) Rate of growth of 41.0 capital 37 366

'89 70 539

'90 111 596

'91 155 1388

'92 193 2117

'93 272 288.7

'94

47.3

10.6

132.9

52.5

36.4

Source:Thien (1995).

Table 12. Foreign investment by type

Investment type

(%) Project

Ratio Capital 65.3 17.8 16.9

Joint venture enterprise 100% foreign invested enterprise Business cooperation contract

64.6 27.1 8.3

Source: Tien (1995)

Wage policies and Trade Unions

The salary structure for civil servants and state sector employees before Doi Moi was established in 1960 reflected egalitarian principles and penury imposed by war conditions. The incomes of state workers included cash salaries, the possibility of buying rationed goods at subsidized prices and social welfare benefits. Over the years however, adjustments have been made to state salaries to keep pace with inflation and increases in administered prices. In 1989, the government implemented a comprehensive restructuring of the wages of government workers, involving a consolidation of specific consumer subsidies into the nominal wage structure. Adjustments to these subsidies, which are now part of salaries reflect the market related prices of six basic commodities. In spite of these adjustments, real salaries have declined substantially as a result of inflation despite tough anti inflationary measures in the late 1980s. Even with improvements due to wage reforms in April 1993 the real wages indicate a declining trend. The continued decline in real wages is analyzed in Table 13. The fact that wages are falling in the context of rising unemployment signifies increasing poverty in the urban sector. Given the background of rising prices, it also translates to growing inequality (EASMAT, 1994). It should be noted however, that the non-state sector salaries are two to four times higher than that of civil servants. As spelt out in the Labour Code (Article 55) the payment of salaries in the private sector should be decided jointly by the two parties to the labour contract taking into account labour productivity and the quality and effectiveness of work. It also states that the salary of a labourer must not be lower than the minimum wage prescribed

by the state, (c) Garment & footwear: VND 450000 - 500000.. According to most recent regulations foreign invested establishments should pay a minimum salary of US$35 per month to unskilled workers.

As per Chapter 13 of the Labour Code establishment of a trade union in each business enterprise is compulsory. It further states that `labour must closely operate with and create favorable conditions for the trade union to operate according to the regulations of the Labour Code and the Trade Union Law. It is interesting to note however, in spite of these regulations one could still find business organizations without trade unions.

Table 10. Index of real wage 1993

Month Index of price of real wage the following following month compared compared with with previous month month 1 2 3 4 5 6 7 8 9 10 11 12 1.017 1.019 0.005 0.998 1.015 0.997 0.998 1.005 0.999 0.997 1.000 1.012

Coefficient of price slide compared with September 1985

Coefficient of price slide compared with April 1993

Ratio of of the month previous

4.130 4.208 4.187 4.179 4.242 4.229 4.220 4.247 4.237 4.224 4.224 4.275 1 1.029 1.020 1.025 1.024 1.021 1.021 1.021 1.033 1 0.985 0.991 0.980 0.975 0.976 0.979 0.979 0.968

Source: Statistical Year Book of Labour-Invalids and Social Affairs (1993)

Labour Migration

The policy of the Vietnamese government is to promote export of labour and upto 1990 the government was directly involved in signing foreign employment contracts. At present this function is performed by licensed private firms and their activities are being regulated by the government. As can be seen from Table 14, unskilled labour (74 per cent) and trainees (24 per cent) are the main categories of workers employed on signed contracts. It also shows that this sector is mainly dominated by male workers (85 per cent). This may be partly due to the government policy of restricting female foreign employment only to work in factories and service industries. Most of the migrant workers are employed in Far East countries like South Korea and Japan.

Table 14. Labour migration on signed contracts (1994)

Labourer Experts Skilled Male 110 Female 16 Total 126 12710 1482 14192 46 Unskilled

Trainees

3229 1427 4656

Source: Statistical Year Book, SPH (1993)

4. Effects on Employment and Social Welfare

The most important issues that need to be addressed are to what extent globalization and liberalization programmes have helped and hindered Vietnam in solving the problems of unemployment, inequality and poverty.

Employment

Currently the rate of growth of employment in Vietnam is 2.5 per cent per annum while the rate of growth of the labour force is 3.3 per cent per annum. The difference can be defined as new additions to the unemployed reserve, and it has been estimated to be around one million per annum. In addition continuous retrenchment programmes, demobilization of soldiers and returning migrants and refugees have further added to the number of unemployed in the labour market. Hence, creation of job opportunities is a challenge that has to be addressed by the on going globalization and liberalization programmes in Vietnam.

The officially approved foreign direct investment sector had led to employment being provided for around 10,000 in 1991 (Fforde, 1992). This number has been growing with the expansion in foreign direct investment, that engenders both direct and indirect employment opportunities. Enterprises funded by foreign direct investment will need to grow rapidly in order to absorb not only the rapidly growing labour force in Vietnam, but also those who are being made redundant as the public sector shrinks in line with liberalization measures.

The non-state sector too will have to expand to take up the slack in employment created by retrenchment and military demobilization. In 1993 2.97 million persons worked for the state sector as compared to 29.75 million in the non-state sector (Table 5). This includes the dominant household sector, as well as those involved in self-employment, micro enterprises, medium scale enterprises and large scale enterprises. This trend of greater non-state sector employment will continue fuelled both by the strengthening of market forces that encourage private sector activity and the shrinking of the state sector in response to domestic liberalization pressures and encouragement from international financial institutions. The effects of reform policies on employment and social welfare are presented in Table 15.

Social Welfare

The effects of globalization and liberalization on social welfare can be discussed under four main criteria: Low per capita income, rural poverty, inequality and unequal access to health and education.

Low Per Capita Income/Consumption

Despite high growth rates and an optimistic outlook regarding future growth and development, current GDP per capita remains at a very low level, at $249.6 in 1995 (Le Khoa, 1996), constraining individual's consumption, saving and investment as well as public expenditure due to low tax revenues. Parallel to the low per capita income level, is the low per capita consumption expenditure figure of US $140 (Appendix 7). Food share is high at 59 per cent while per capita calorie consumption per day is low at 2075.

High economic growth, around 8 per cent, fueled in part by the boom in agricultural production, attributed to reforms in land ownership and decollectivization, have benefited most Vietnamese households, through a decline in the price level of food. Striking success in controlling inflation that had been three digit (400 per cent in 1988) at a single digit level (5.3 per cent in 1993) improved welfare by significantly increasing real income and consumption levels. Population growth rates declining can have a significant impact on household welfare in the future. Currently the population growth rate in Vietnam is around 2 per cent which means that an 8 per cent GDP growth rate translates into a 6 per cent per capita growth in income. If high growth rates of around 8 per cent, as have existed in the past three years, could be maintained using export led economic measures as the engine of growth, per capita income could be increased significantly, and in particular the percentage below the poverty line could be halved.

Table 15. Impacts of reform policies on employment and social welfare

Reform Decollectivization a 60 Changes in Land ownership laws aftermath argues up. Returns to family farming practices Price liberalization of agricultural output of Devaluation Fiscal reforms and tight Budget controls Cuts in Public Expenditure Retrenchment from

Impact on Social Welfare These measures have resulted in growth in agricultural output in country where 80 per cent of the population are rural based, and per cent of the poor are farmers. Many land use conflicts arose, mainly in the South in the of de-collectivization, which for Arbitration Units to be set Improved output. Reduced price of agricultural commodities that reduced the cost living. Growth in demand for agricultural exports benefited the farmers. Affected public expenditure on health, education, child-care and assistance to vulnerable groups. Unemployment 500,000 soldiers were released the military and are now seeking employment. Subsidies to state enterprises eliminated resulted in nearly 800,000 layoffs over a three year period. The quick absorption of these workers into the private sector could reduce the adverse impacts.

Elimination of subsidies to state being enterprises

Reforming the state owned enterprises through the elimination programmes. of operating subsidies and the reduction of implicit subsidies on out interest payments; and moving from soft budget constraints to binding budget constraints.

State capital expenditure can be re-directed to pro-poor Public sector unemployment. Prevents state sector crowding of private investment. Encourages private sector investment, multiplier effect and employment creation. Enforces financial and fiscal discipline Encourages saving and investment Acts to control inflation

Interest rate reform in line with market interest rates

Rural Poverty

In Vietnam 81 per cent of the population is rural, and poverty is concentrated mainly in rural areas. The presence of a dominant rural sector is one of the most important structural features of Vietnam. In contrast to transition economies in Eastern Europe and the former Soviet Union most of the Asian countries are blessed with strong rural sectors. Based on relatively labour intensive technologies, rural economies generally exhibit a significant degree of self-sufficiency and are more resilient to changes. With decollectivization of agriculture the household has emerged as the basic production unit in Vietnam's agricultural production system. Technology is geared to family farming and therefore it is easier to enhance productive efficiency through competition. Growth in agricultural activities should also promote small scale trading and craft activities, and strengthen the local market channels of an emerging market system.

The Government Statistical Office (GSO) survey carried out at the end of 1993 that focused only on food requirements concluded that the food poverty incidence is 22 per cent in rural areas as compared to 10 per cent in urban areas. The VLSS (conducted in 1992/93) data similarly has food poverty levels of 28 per cent and 10 per cent for the rural and urban sectors respectively. The fact that over 20 per cent of the rural population are 'food poor' in the sense that they cannot meet their daily calorie requirements even if they were to spend all their income on the basic food basket necessitates serious consideration in proposing social welfare policies in the context of globalization and liberalization.

A self evaluation of the socio-economic impacts of market forces revealed that the majority do perceive an improvement in their welfare though the necessary initial trade off that occur with transition is evident by the fact that 17.5 per cent of Vietnamese reported to being worse off under reform. Public policy should seek to minimize the adverse effects by targeting the vulnerable groups and redressing the problems of those groups that are marginalized by the reforms. This necessitates identifying the affected groups, recognizing their problems and then targeting welfare and development measures.

In absolute terms rural dwellers are worse off than their urban counterparts on average. Market reforms however, are thought to have had a positive impact, by a larger share of rural dwellers. Changes in land holding patterns and in agricultural pricing systems are likely to account for this positive outlook. Measures need to be taken to resolve the many land disputes that are arising post-decollectivization, and to provide alternative forms of employment in areas like the Mekong Delta, where private tenure is dominant, and is threatened by the significant emergence of landless groups (Fforde, 1992).

Average cash receipts in the farming sector were 1021800 Dong (about US$95) per family per year in 1995. The insufficiency of such a household income becomes apparent when it is noted that

education costs 50,000 - 70,000 Dong per child per year, despite the possibility for poor households to gain free education, due to the need to pay for school books and stationary;

and that

a hospital bed, without even medicine and health services costs 50,000 - 100,000 Dong per day.

This suggests the need to review issues such as the feasibility of providing free or subsidized school books, stationary, medicine and health services for targeted groups and the maintenance of free education and medical care for the poorer segments of society, as well as target greater employment opportunities and transfer payments towards the rural poor.

Table 16. Self-evaluation of living standard changes among households During the Market Reform: 1990-1993

Better off (%) Vietnam By Sector Urban Rural By Region North Mountains Red River Delta North Coastline Land Central Coastline Land High Land Southeast Mekong River Delta 51.8 47.3 52.7 57.8 72.3 58.4 37.3 49.5 41.6 36.4

No Change (%) 31.7 32.8 30.3 28.8 20.3 28.1 37.8 32.9 38.5 35.3

Worse off (%) 17.3 19.9 17.0 13.4 07.6 13.5 24.9 17.6 19.9 28.2

Source: Statistical Yearbook, SPH 1994.

Inequality

A positive socio-economic characteristic is that the Gini coefficient derived using the VLSS for Vietnam as a whole is .34, which suggests a relatively equitable distribution of income, particularly in a developing country context. The regions and sectors have a very unequal distribution of growth, differ in their social welfare conditions and have varied Gini coefficient ratios (see Table 17). These regional disparities are even more serious because they can fuel even greater divergence in the future. The fact that average fixed investment per employee in the provinces in the North was a small fraction of that in the South (278.5 in 1989 compared to 1311.9, see Truong and Gates, 1992) would have had a significant impact on employment and growth in output in the two regions.

What is most striking however is the disparity between rural and urban poverty levels: while 80 per cent of the population is rural based, 90 per cent of the poor are to be found in rural areas. Likewise the highest poverty rate by occupation, 60 per cent is found among farmers, with more than three quarters of the poor to be found among households in which the head has an agricultural occupation. This highlights the need to rapidly address the issue of rural agricultural poverty. The outcome if not could range from mass urban-ward migration, that in turn would generate its own problems, to social unrest in rural areas.

This conclusion of worsening regional disparities is further supported by the fact that while North Central coast with a Gini coefficient on 25 per cent has a growth rate of only 2.5 per cent, the Southeast with a Gini coefficient of 45 per cent grew at 16.5 per cent (Table 17). Data on the other regions, presented in Table 17 also seem to suggest a negative link between regional growth rates and inequality, though the direction of causality remains uncertain.

Table 17. Rural and urban growth rates, Gini Coefficients and Poverty Index by Region

1993 GDP Growth Rate Rural Northern Uplands 3.1

Gini Coefficient 0.25

Poverty Headcount % 62.8

River Delta North Central Central Coast Central Highlands Southeast Mekong Delta Urban Northern Uplands River Delta North Central Central Coast Southeast Mekong Delta Vietnam

4.6 2.5 6.3 11.3 14.7 7.7 3.1 4.6 2.5 6.3 16.2 7.7 7.5

0.26 0.25 0.31 0.30 0.37 0.30 0.25 0.21 0.31 0.31 0.33 0.41 0.36

55.0 73.6 54.0 50.1 45.2 52.0 34.3 15.4 17.1 36.0 17.1 28.4 50.9

Source: WB (1994).

A significant difference exists in literacy and education levels between quintiles: while the percentage of literates is 79 per cent and 94 per cent in the poorest and the richest quintiles, the years of education vary from only 5 years of education on average to 8 years. The implications of unequal access to education are evident when poverty data is linked to education of the household head: 65 per cent of households with heads with no education, 54 per cent with primary education and 52 per cent with lower secondary education are termed poor; while the percentage keeps decreasing though it remains significantly high, to 41 per cent with upper secondary education, 33 per cent with vocational education and 11 per cent with university education (WB,1995). This suggests that educational policies and access to education need to be targeted in the bid to achieve greater socioeconomic equity in the future.

Genderwise while there may be discrimination, with women and girls being disadvantaged in various ways, female headed households were not found to be significantly more vulnerable to poverty than male headed households (WB, 1995). It should also be noted that while a gender gap does exist with regard to literacy, with 93 per cent and 84 per cent of males and females being literate, this gap is smaller than in most developing countries with even the female literacy rate being excellent.

Safeguarding Access to Health and Education

For a country like Vietnam, with low per capita land and resource values, the base for development lies in its strength, its population. Yet rapid population growth is currently adversely affecting health and education provision, the foundations of human resource development. Government policies are being promulgated to counteract the impacts of population growth and to ensure access to health and education.

Compared to similar low income countries Vietnam's provision of health, education and other social services has been extensive. While the government continues to place great value on the expansion of social services even post Doi Moi, lack of resources has led to the need for imposing user charges in health and education. The resulting consequences could however be costly for Vietnam since deterioration of literacy rates and lowered human welfare levels could adversely affect labour productivity, that is a key determinant in ensuring growth and drawing in foreign investment.

Liberalization of the health sector has taken three main forms; introduction of user fees, private practice by public sector doctors and private sector production and retail sales of pharmaceuticals. On May 1st 1989, a user fee system was introduced at the three higher - district, provincial and national - levels of healthcare. Primary healthcare consultations remained free but scarcity of drugs at commune health centres force patients to buy their needs at local pharmacies. World Bank (1995) states that the cost of fees and drugs for a commune health centre visit are on average 31,000 Dong despite the fact that official fees are zero. Average outlays for a hospital visit are around 71,000 Dong while per capita hospital inpatient stay costs around 210,000 Dong. War invalids, the handicapped and those certified as poor still get free treatment as well as drugs.

Liberalization has also affected the health sector to the extent that now doctors are allowed to practice privately, charging fees, after office hours at the public health facility. There are even a number of full time physicians and traditional healers in full time private practice. Likewise it has led to the liberalization of the pharmaceutical industry that now allows enterprises the right to determine its use of inputs including labour, production level and output price. Since July 1989 private retail pharmacies have been set up to sell drug to individuals, hospitals and health centres directly. Regulations to moderate the impacts of liberalization however have not been implemented effectively so as to safeguard social welfare.

Strong curative bias of health interventions exists whereas coupled with high literacy rates preventive health care interventions could be extremely effective since the leading causes of morbidity and mortality in Vietnam are preventable diseases primarily infections and parasitic complaints. There is also a need to expand capital expenditure in the health sector which is currently meagre in comparison to recurrent expenditure. The VLSS survey (1992/93) reflected that commune health centres provide good coverage even to the rural poor. However immediate access is a problem with some rural respondents having to travel eight kilometres on average to reach a health centre, a journey of around two hours given the poor rural road network. Capital expenditure should therefore be devoted both to increasing the number of commune health centres and for improving health facilities which are in a dilapidated condition particularly in rural areas.

Despite enormous efforts to enrol all children in school, drop-out rates as well as repeater rates were high in Vietnam because of poor teaching, inefficient supplies and a poor teaching environment. The situation has been further exacerbated by the imposition of user charges, even though those certified as poor still maintain the right to free education. Growth in economic activity in the private sector has increased the prevalence of child employment practices, and this too has adversely affected education enrolment rates.

Human resource development depends significantly on childhood education, healthcare and welfare. Children also deserve special attention being a vulnerable group. The state therefore needs to intervene to reduce child malnutrition which is at a very high level in Vietnam (see appendix 8), to ensure satisfactory access to high quality education and to draft and implement laws to protect children.

5. Summary and Conclusions

Vietnam, one of the poorest economies in Asia is in a phase of transition. With the introduction of both macro and micro level policy reforms in the late 1980s, a dynamic multi-faceted economic system has emerged, which together with the fact that the economic indicators are heading in the right direction, as in the over 8 per cent growth rate and inflation controlled around 14 per cent, suggests that Vietnam will emerge a high growth economy on par with its NIC neighbours in the future. The progress made in every sphere has been accompanied however by a new set of problems. Among these, some of the major issues which need immediate attention are poverty, inequality and unemployment. Distribution bottlenecks, bureaucratic inefficiencies, inadequate legal base, poor understanding of the free market system and lack of institutional support have caused serious problems in deriving the full benefits from globalization and liberalization programmes. The emergence of rapid growth opportunities have also fostered double dealing, fabrication of information, appropriation of public property, tax avoidance, smuggling and other socially undesirable practices.

This paper which began by identifying the development measures implemented by the state post 1986, and the favourable and unfavourable impacts engendered in the economy since this period, attempts in this section, in addition to summarising the main findings, to suggest policies to ameliorate the unsatisfactory outcomes while strengthening the growth and equity enhancing trends.

Globalization is seen to lie in the standardization of production technologies, and capabilities world-wide and in the increasing exposure of all states to a common set of practical problems and competitive economic pressures. Countries in South East Asia have actively participated in global trade and finances to exploit their dynamic comparative advantage and this has been pivotal in their development policies over a long period of time. The fact that Vietnam is geographically close to these economies has given rise to many opportunities, particularly in the form of joint ventures, as the NICs are now facing rising labour costs that are compelling them to shift to new locations. The advantages of membership in ASEAN can further be strengthened by bi-lateral trade, tax and training treaties with member countries. Linking up in this manner with its counterparts in the Asian region can be viewed as an important step in the process of globalization and liberalization, as the Asian region has already been identified as the 'super growth sector' of the world economy. Likewise the lifting of the economic embargo by the USA now opens up both a new funding source and a vast new market. The direct, indirect and multiplier effects of growth in exports and foreign investment, will prove to be an essential catalyst in a country where private savings though growing is yet extremely limited.

External support programmes could assist by contributing to the creation of an environment that encourages foreign joint ventures, particularly in the industrial export and service sectors. The private sector in Vietnam, being an economy in transition from state ownership to private ownership and a controlled labour force to a labour market operating on price and wage signals, currently suffers from the lack of a comprehensive and systematic commercial and industrial law system. Technical assistance in the improvement of the legal system, as well as in the setting up of a more efficient arbitration system is therefore of crucial importance. Providing regular and reliable information regarding the investment potential and incentives for foreign direct investment in Vietnam is another role envisaged for the international trade and aid organisations. Indirectly too the presence of multilateral and bilateral donors signals confidence in an economic regime and could act as a catalyst for private investment.

Vietnam currently has the comparative advantage of low labour costs (even as compared to countries like Sri Lanka and Malaysia), but the long term ability to draw in foreign direct investment depends on improved productivity that makes the labour force attractive even when wages begin to rise, as they are likely to do as the country develops. Penetration into foreign markets requires technical skills and currently though Vietnam has a highly literate population, the degree of technical know-how and skills available is limited. The managers and technical staff are not active, dynamic or flexible as in market economies owning to their long period of employment in a centrally controlled subsidy based economic system. Hence the most important factor needed to obtain full benefits from market reform policies is the development of management and technical skills of policy makers, administrators, entrepreneurs, managers, technical staff and workers. This fact needs to be recognized by the existing universities and vocational training institutions in order to meet the challenges of globalization and liberalization. The government must use fiscal incentives to actively promote human resource development programmes within private enterprise, as well as train its own decision makers. Foreign donor agencies should also

play an important role in supporting vocational training schemes since the cost of such training is currently often beyond the individual, the production unit, and even the state.

The rural-urban disparity and the regional disparity, reflected in per capita income, consumption, growth rates and equity measures, result from unequal growth rates, incentives and economic treatment in the pre-1979 period, the communist era post unification, and in the current era of focused on globalization and liberalization strategies. Market reforms have made rural communities better off in general and have reduced rural poverty in particular. Price liberalization and market reforms have created new opportunities for growth and development. At the same time they have introduced new challenges to rural communities, due to the growth of competitiveness for resources. Landlessness is fast becoming a problem, particularly in regions like the Mekong Delta, and argue for the need for the state to rapidly provide alternative employment measures, if they wish to avoid major urbanward migration and social disruptions. Measures to diversify investment geographically, using fiscal incentives as well as taking steps to identify new production opportunities, and the strengthening of intra and inter-regional trade linkages becomes imperative. A barrier to implementing both these measures lies in the poor standard of physical infrastructure. While low government revenue, and escalating expenditure on social welfare limit the feasibility of comprehensive and rapid infrastructural developments, this does remain a priority as a pre-requisite for strengthening the capacity for employment creation and social welfare improvements.

The expansion of labour intensive industries is important in Vietnam with its large population, scarcity of agricultural land and high unemployment rate. This calls for creating a more investor friendly environment, using in addition to the measures already highlighted: developing the legal base, expanding human resource development including entrepreneurship training and improving physical infrastructure; the creation of an efficient market and instruments for the mobilization of financial resources. The stock market that began on an extremely small scale involving enterprises in HCMC must be expanded since the stock market is an efficient way of bringing together savers and investors. Likewise the banking system that has been expanding rapidly must be encouraged to diversify its services to cater both to grassroot level savers and investors as well as to the rapidly expanding small and medium scale industries.

Micro enterprises engaged in processing and simple manufacture processes are able to absorb more labour more quickly. They are also important in the context of developing countries since they need less start up capital and technological inputs. Currently such small scale production units and household production are the predominant sector in Vietnam. Development and sustainability of this sector however needs more attention. Credibility of government socio-economic policies, low cost easy access credit and a good marketing network are the major conditions needed to establish a dynamic micro enterprise sector in Vietnam.

In a transition economy such as Vietnam, economic agents are subject to much pressure due to changing economic and social conditions, power groups and interaction dynamics, so there is a greater need to strengthen the provision of basic social services as well as to adopt a mechanism to provide safety nets for the most vulnerable households. Safeguarding welfare in times of transition involves restructuring the allocation of public sector expenditure towards sectors and programmes that benefit the poor in particular. This however should not be limited merely to current consumption measures but should encompass intertemporal welfare maximisation and equity creation strategies.

Social services - education, health and family planning - are an essential investment in human capital formation to raise labour productivity and to cause an improvement in current and future welfare. The appropriateness of the imposition of user fees in the health and education sectors in a time of transition is therefore questionable, particularly since evidence seems to exist that in the case of Vietnam they have resulted in lower enrolment and utilization rates. The ideology of privatizing markets for efficient allocation of resources and production is widely accepted but the very fact that health and education are not pure market goods, seems to detract from the suitability of allocating these goods through market forces. While targeting is attempted as a means to safeguard the provision of essential services and the poorest groups, administrative and trained manpower limitations and limited reliable information currently make Vietnam a poor candidate for such stringent measures.

To conclude, Vietnam is a highly dynamic economy, whose choice of an export led foreign investment based growth strategy is complementary to its resource base of a large and rapidly growing literate population. Its geographical location amongst the NICs seems to ensure that the country will continue to grow rapidly if necessary measures are taken to avoid the social disruptions that could result from unequal regional growth rates and unequal distribution of welfare across social groups.

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15. Nether, Clark D. 1994. South East Asia in the new international era. Oxford, Westviwe Press.

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Appendix 1 List of officials and organizations covered during the field survey

1. Mr. Nguyen Huu Dung - Director for International Relations, MOLISA

2. Dr. Do Trong Hung - Director, Legal Department, MOLISA

3. Mr. Vu Khang - Chief of Documentation Dept. (Trade Information Center) Ministry of Trade

4. Mr. Tran Manh Thu - Deputy General Director, Department of Planning and Investment, Ministry of Industry.

5. Mr. Dao Hay Giam - Assistant Director General, Ministry of Trade

6. Mr. Nguyen Nyoc Qnynh - Head of the Labour Market Division, dept. for Administration of Foreign Employed Labour, MOLISA.

7. Dr. Bui Cong Tho - Vice Director, International Relations Dept. Ministry of Education and Training

8. Mr. Nguyen Quang Thep - Director, State Bank of Vietnam

9. Prof. Dao Cong Tien - Rector, University of Economics, HCMC

10. Mr. Nguyen Dinh Tho - Research Vice President, CESAIS

11. Mr. Pham Manh Tien - MOLISA Branch, HCMC.

Appendix 2 Labour force (in millions)

Region 1988 Unemp Northern Upland 0.23 Red River Delta 0.26 North Central 0.18 Central Coast 0.14 Emp 4.36 6.07 3.76 2.89 Unemp 0.16 0.37 0.23 0.18 Emp 5.11 6.19 4.03 3.10

1991 Unemp 0.26 0.31 0.20 0.16 Emp 5.56 6.22 4.25 3.27

1993

Central Highlands 0.06 South East 0.22 Mekong Delta 0.29 Total 1.38

1.16 3.47 7.21 28.92

0.07 0.21 0.55 1.77

1.24 3.72 7.58 30.97

0.06 0.19 0.38 1.56

1.31 5.24 6.87 32.72

Source: Statistical Year Book, SPH (1994)

Appendix 3 Status of economic reforms in Vietnam

Type Macroeconomic Reforms Monetary policy under interest Autonomy to commercial separated banks and banks Interest rate liberalization fully Capital market development Autonomy to commercial banks Exchange rate deviation about 5%. at the past

Status

The money supply and inflation were brought control by a halt in credit to the budget, restrained overall growth of credit and rate reforms. Four state-owned commercial banks were from the state bank. With entry of private

foreign banks, there are now 60 commercial operating. Positive interest rates since 1989 and inter sectoral differentials eliminated but not liberalized No formal institutions Greater autonomy since 1990 Official exchange rates in 1989; the between official and black-market rate is Exchange rate has remained relatively stable around 10,500 Dong per US$ 1.00 for around

dollars transactions. Trade reforms tariffs. been Tax administration but not Modern tax system still far Expenditure reform enterprise Microeconomic Reforms Private ownership private sector transport to

two years.

Ease of convertibility between

and Dong is evident even in consumer Introduction of export-processing zones. Quantitative restrictions replaced by Access to foreign trade permits has gradually liberalized. Internal revenue system instituted in 1989 effective Direct and indirect taxes since 1990 but from modern tax reforms/systems Subsidies reduced considerably. Reduction of Military budget; constraints on state activity.

After years of discrimination against the sector, the government now encourages private participation. Freeing of trade and

private sector in 1987 and constitutional amendments guaranteeing individual rights and private property. Introduced in 1989. The end of budgetary

Reduction of state-owned subsidies enterprises budget Restructuring of going to 70%, with Openness to FDI and a Price reforms 1989

and increases in interest rates hardened the constraint on state enterprises; enterprises. The proportion of bank credit

public enterprises was reduced from 90% to further reductions expected in the future. Since 1987; A liberal foreign investment law subsequent revisions succeeded in attracting growing volume of FDI. Two track system was totally deregularised in

removed. Agricultural reforms back to was to gave Non-agricultural enterprise reforms Corporate governance 1987 & Property law Bankruptcy law Anti-monopoly law

and virtually all price controls were Since 1986; towards the late 1980s reverted household agriculture. The collective system

largely dismantled and agriculture returned family farming. The 1993 Land Law formally

land use rights to peasant households. Little action Since early 1980s but more intensively after 1989 Since 1989 Little action Little action

Appendix 4 Key economic indicators

1988 1995* GDI as a % of GDP 25.0 Changes in consumer prices 6.0 Changes in Money Supply (M2) % p.a. 19.0 Growth rate of merchandise exports % 20.0 p.a. Growth rate of merchandise imports % 22.0 p.a. Balance of trade ($ mn) -1120 14.4 310.9

1990 11.5 36.4

1993 19.8 8.5

445.4 21.6

49.2 31.1

17.2 15.2

12.3

6.1

38.3

-1580

-41

-655

BOP on current A/C ($ mn) -1220 BOP on current A/C as a % of GDP -8.4 External debt outstanding ($ mn) 21400 Debt-service ratio % 12.0

-747 -16.9 15288 70.0

-259 -3.4 17348 29.9

-758 -6.4 17768 28.5

Source: ADB (1994)

Appendix 5 Foreign investment by country of origin

To the end of 1993 capital No. of licensed projects Singapore Hong Kong Malaysia Taiwan Japan Korea Rep. of Thailand U.S.A Switzerland France Other Total 828 84552.6 52 162 26 119 50 57 43 8 9 51 Total capital US $ Mn. 4747.9 13720.0 4659.6 15810.6 3784.2 6650.5 1549.4 50.0 104.2 6092.1

1994 No of licensed projects 29 48 11 66 26 43 18 20 6 18 Total US $ Mn. 5976.7 5468.7 1263.2 4037.6 3005.6 2684.2 1618.3 2199.2 4525.0 1499.0

342

37651.7

Source: Statistical Year Book (1994).

Appendix 6 Registered FDI capital by industries from 1988 to June 1995

sector %

No of

Capital

projects Production Industry 40.1 Oil & gas 8.5 Agriculture, forestry & Fisheries 2.4 Construction 0.5 Transport and Communication 7.0 Export Processing Enterprises 1.1 EPZ's Infrastructure construction 3.2 Technical Services 0.8 Services 36.4 Hotels 23.8 Offices, Apartment for rent & Trade 10.1 centers Banking 1.2 Education & Health 1.3 Total 100.0 246 136 76 943 694 25 51 23 42 46 7 55

(US$ Mn) 9549 6019 1283 355 83 1047 160 474 128 5463 3571 1518 64.6

13 21 1189

175 199 15012

Source: Thien (1995)

Appendix 7 Summary Indicators of Per Capita Consumption, 1992-1993

Calorie Consumption

Per Capita Consumption

Per Capita Consumption

Food Share

(Capita/day)

Expenditure in Dong (Nominal)

Expenditure in Dong (Real)

(%)

Quintile Poorest II III IV Richest Region Northern Uplands Red River Delta North Central Central Coast Central Highland Southeast Mekong Delta Urban/Rural Urban Rural Vietnam

541,000 802,000 1,063,000 1,408,000 3,134,000 994,000 1,257,000 951,000 1,439,000 1,228,000 2,290,000 1,605,000 2,406,000 1,157,000 1,407,000 (140)

562,000 821,000 1,075,000 1,467,000 2,939,000 1,007,000 1,349,000 974,000 1,457,000 1,159,000 2,008,000 1,506,000 2,199,000 1,167,000 1,373,000

70 65 60 54 47 68 62 64 55 59 53 54 51 61 59

1591 1855 2020 2160 2751 2054 2062 1991 1867 1982 2154 2226

2124 2062 2075

Notes:

1. Real per capita consumption expenditure has been calculated by deflating nominal consumption data using region-specific price deflators.

2. Conversion into dollars has been done at the rate of US $ 1 = 10,640 dong (1993).

Source: Based on VLSS; extracted from Vietnam Poverty Assessment and Strategy, WB study (1995) Report No. 13442-VN.

Appendix 8 Distribution of Social Indicators by Expenditure Quintile 1992-1993

Viet nam Household size 5.04 (persons) Children per family 1.9 (age 0-12) Elderly per family 0.4 (age 60+)

Poorest 5.3

II 5.1

III 5.1

IV 4.9

Richest 4.5

2.5

2.2

1.9

1.6

1.3

0.4

0.4

0.4

0.5

0.5

Age of Household 45 Head (Years) Literacy 88.1 (% of adults aged 15+) Years of Schooling 6.4 (average per/adult 15+) Low Birth weight 5.6 (% of birth<2.5 kg) Total Fertility 3.3 Rate (Children per woman) Stunting (% of 54 Children 24-35 months) Piped Water 10.6 (% access) Flushed Toilets 11.0 (% access) Electricity 47.9 (% access) Bicycles 64.9 (% access) Motorbikes 10.7 (% access)

42

42

45

48

48

79.2

86.8

88.8

89.7

94.2

5.1

5.7

601

6.5

8.0

6.9

7.5

5.3

3.8

3.8

4.9

3.8

3.5

2.4

1.8

69

62.6

48.8

43.7

29.2

0.7

0.9

4.0

10.5

36.8

1.2

1.0

3.3

10.5

39.1

28.7

39.0

44.2

54.7

73.0

48.9

62.4

98.0

70.0

73.0

0.6

2.0

3.5

8.3

35.3

Source: Based on VLSS; extracted from Viet Nam Poverty Assessment and Strategy, WB study (1995) Report No. 13442-VN

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Updated by BB. Approved by BW. Last update: 11 May 2000.

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