VIETNAM'S ECONOMIC CRISIS: Policy Follies and the Role of State-Owned Conglomerates
Viet, Vu Quang, Southeast Asian Affairs
The year 2007 left an an important mark on the economic history of Vietnam. The country became the 150th member of the World Trade Organization (WTO) on 11 January 2007 after its accession package was approved by the General Council of the WTO on 7 November 2006. For Vietnamese political leaders and the population as a whole, WTO membership was the last hurdle to cross to make Vietnam fully integrated with the rest of the world, particularly in view of the perceived ability of the United States to block Vietnam's WTO membership and thus its path to economic development in order to extract political acquiescence from Vietnam. The admission to the WTO was therefore treated by the leaders of the Communist Party of Vietnam (CPV) as a major victory, and like any victory in the past, be it over France, or the U.S., they became consumed with the elixir of triumph and embraced grandiose plans in disregard of reality.
This time, Prime Minister Nguyen Tan Dung's government came to believe that a quick catch-up with other countries in the region was within grasp. The plan for 2008 was set in terms of achieving a high rate of growth in GDP, in the range of 8.5-9 per cent, by focusing externally on attracting capital inflows through foreign direct and portfolio investment, and internally on expanding the state-owned conglomerates and their subsidiaries with easy credit, public land and public money. Politically, the economic plan was expected to win the support of the party's rank and file and the provincial governments throughout the country as it would provide benefits to them from the growth of the state -owned conglomerates and general corporations in terms of seed money, land-use rights, and shares in hundreds of semi-private enterprises spun out by the conglomerates and general corporations. This plan demised rather quickly in 2008 as inflation jumped, the stock market crashed and the economy was threatened by an imminent balance of payment crisis. It has cost the Prime Minister his credibility and his probable ambition to centralize the government economic power to himself, though not yet his position. In November 2008, the government reduced its expectation of the GDP annual growth rate to 6.7 per cent.1 The actual GDP growth rate for 2008 turned out to be only 6.2 per cent.
The first part of this article attempts to review some important features of Vietnam's economic performance. This will serve as background for the second part which dwells on the political implications.
PERFORMANCE OF THE ECONOMY
In terms of gross domestic product (GDP) growth rate, Vietnam's economy has performed quite well since 2002. The average annual growth rate between 2002 and 2007 was 8.1 per cent. Though it was not much lower than the 8.8 per cent of China, it was higher than the 6.8 per cent of India in the same period. It was, however, higher than the growth rates of most countries in the Southeast Asia (see Table 1).
Other indicators also showed that the economy was generally in good shape, at least up to the end of 2006, even though some disturbing signs had already appeared since 2004, indicating the need for some adjusment in monetary and related policies. Disturbing signs included inflation and a balance of trade that began to veer off from sustainable levels due to the expansion of money supply and credit. Inflation jumped from below 4 per cent before 2004 to 7-8 per cent in 2005 to 2006 and then accelerated. The balance of trade also turned negative at a rather higher percentage of GDP (almost 5 per cent and above). During the same period, fortunately, foreign debt was at a reasonbly low level of GDP, and debt service was also low, all due to the cancelling of foreign debts by foreign partners. The international reserves increased to US$20.7 billion as of June 2008 2008 A though, at three months of imports,2 they were still low. What seemed to be the most important achievement was the drastic reduction of the poverty rate from 37 per cent of the population in 2000 to 19.5 per cent in 2004.3 A recent study showed that the poverty rate was 14.6 per cent in 2007 and increased to 17 per cent in 2008, when the individual income threshold was adjusted for inflation.4 This of course means that inflation has partly wiped out the improvement in poverty rate since 2004.
With a good record of economic growth and admission to the WTO, Vietnam seemed on the threshold of increased investment from abroad and the press in Vietnam hailed the golden opportunity for the country. FDI (implemented) almost tripled in one year, from US$2.3 billion in 2006 to US$6.6 billion in 2007 (see Table 2). The stock market index jumped over 300 per cent from 300 in early 2006 to 1,150 in early 2007 when Vietnam officially joined the WTO (see Figure 1). However, the golden opportunity seemed to be wasted by an erroneous policy of Prime Minister Nguyen Tan Dung that led to serious inflation and the imminent threat of a balance of payment crisis, which will be analysed below. The stock market crashed, with the index falling back to 345 on 24 October 2008.
Infation rates in most countries in the world are generally higher than before, but still at managable levels, in contrast to what has happened in Vietnam. In major advanced economies, CPI increased from 2.2 per cent in 2006 to 3.5 per cent in 2007, while in other emerging Asian countries in the same period inflation rates increased from 2.2 per cent to 4.8 per cent.5 However in Vietnam, overall CPI was 8.3 per cent in 2007 and jumped to 23. 15 per cent in the first 10 months of 2008 as compared to the same period of 2007 (see Figure 2). In May 2008, inflation was at the highest level since 2000 - at 3.9 per cent compared to the previous month and at an annualized rate of 60 per cent. Inflation was obviously due to the substantial rate of growth in money supply and domestic credit during 2007, which was 48 per cent and 50 per cent respectively as compared to the year earlier (see Figure 3).
Inflation subsided in September and October of 2008 due to a dracronian reduction of credit growth - an increase of 18 per cent as compared to 30 per cent in the same period in 2007.6
In fact, inflation has been a threat to Vietnam since 2004, reaching quite a high level: 9.7 per cent in 2004, 8.8 per cent in 2005 and 7.5 per cent in 2006, all well above the rates prevailing in Vietnam's major trading partners, whether in Asia or in other regions, and became severe after Nguy?n Tan D?ng became Prime Minister on 26 June 2006 with his policy of high growth. The recent runaway inflation was due to many factors: the policy to pump credit to the state -owned enterprises, the flood of capital inflows because of the exuberant whipping up of Vietnam's prospects by the world financial press, the grandiose economic plans of the people in power and the people with connections to seize the opportunity to make money without any restraint, and of course the incompetence and/or unwillingness of the Vietnamese authorities to deal with the problems in a timely manner. These issues are outside the scope of this article but it is necessary to draw attention to them as possible subjects for future research; they also serve as a background to discussion on the politics of these issues later in this essay.
Balance of Foreign Trade and Balance of Payments Problems Resulting from Inefficiency and Obsession with Growth
The problems of inflation and balance of payments seem to be the result of an obsession with achieving high rates of growth of GDP by building up state-owned general corporations and conglomerates. In order to achieve such GDP growth rates, capital investment (i.e. gross capital formation) reached an extremely high level. level. A It increased year by year from 29.6 per cent of GDP in 2000 to 41.7 per cent of GDP in 2007, a high rate rarely seen in the history of world economic development (see Table 2). However, unlike China and India which have similar high ratios of investment over GDP, Vietnam achieved lower GDP growth rates. Inefficiency is the natural explanation. The Incremental Capital Output (ICOR) ratio7 of Vietnam was extremley high, on average at 5.2 (see Table 3) but with an average annual GDP growth of 7.7 per cent during the 2000-07 period. The ICOR ratio of China between 2001-06 was 3.9 with an average rate of GDP growth of 9.7 per cent. South Korea, with ICOR of 3.0, achieved an average annual rate of growth of 7.9 per cent during the 1961-80 period, which was a transition period to the status of a high income country. Thailand between 1981-95 achieved an average growth of 8.1 per cent with an ICOR of 4.1. Malaysia had a ICOR of 4.6 and average rate of growth of 7.1 per cent during the 1981-95 period.8
The trade balance reached a crisis point in late 2007 as a result of the high growth policy and inefficiency of state-owned enterprises in Vietnam. The trade deficit in 2007 was US$14 billion, making up 19.8 per cent of GDP (see Figure 4), more than triple the rate three years before. Without changes to government policy made in April by the Political Bureau of the Communist Party of Vietnam (PB CPV), which will be analysed later, the trade deficit could have reached US$30 billion at the end of 2008 and led to a balance of payment crisis, as the international reserves of Vietnam amounted to only US$22.0 billion, and especially when portfolio capital stopped flowing in because of the crash of the stock market. The statistics for the first nine months of 2008 show a sharp reduction of the trade deficit from over US$3 billion a month to below US$1 billion, probably through both a bureacratic imposition of restraints on imports of state-owned enterprises and a cut in credit growth. Even with the change in course, the trade deficit reached US$15 billion in the first nine months of 2008, and probably will reach at least US$18 billion at the end of the year, which is still a very high deficit. Table 4 gives more detailed information. It also shows that for many years, trade deficit has been incurred mainly by Vietnamese domestic producers because of the over-emphasis of growth by the government and over-investment by state -owned A enterprises, not by FDI investors who have had a positive trade balance, even during the first nine months of 2008.
Foreign Direct investment (FDI)
FDI has in fact cushioned the impact of the recent crisis, and at one point it was used as a reason by the government to argue that there was no need to fear a balance of payment crisis as FDI would continue to pour in.
The government's Bureau of FDI reported that FDI capital approved in the first ten months of 2008 reached US$59.3 billion, six times higher than the figure reached in 2007. This seems to be unprecedented anywhere in the world, but a closer look shows that most projects are in real estate, high-class resorts, steel making and petroleum refining which add up to US$45 billion (see Table 5).10 Many of these projects will certainly be postponed or cancelled due to the current international demand crisis and credit crunch.
The value of FDI implemented in the first ten months of 2008 was estimated to be US$7.1 billion.11 It will probably reach at most US$10 billion for the year 2008.
For the year 2008 as a whole, assuming a trade deficit of US$18 billion, deficit for trade in services at US$3.0 billion and net payment of debt of US$2 billion, billion, A the total outflow will be US$23 billion. The inflow may include US$10 billion of FDI, US$6 billion of current transfers by overseas Vietnamese (estimated to remain the same as in 2007) and some uncertain but small amount of portfolio investment (since the stock market had crashed in early 2008), making a possible total inflow of US$16 billion. Thus the net capital outflow might be US$7 billion, which will cut down the international reserves of Vietnam by the end of 2008. It is clear that 2009 would require more cut back in capital investment to avoid a balance of payment problem.
Political Economy in Action
A Debate on Inflation
Vietnam suffered an extremely high rate of inflation in 2008, which is expected to reach 25 per cent. However, inflation had already been creeping up since the beginning of 2007 and became very serious from November of 2007 onward. It accelerated quickly and in December of 2007 and early 2008 reached monthly annualized rates of over 50 per cent. This was the time when Nguy?n T?n D?ng, who became Prime Minister on 27 June 2006, could have demonstrated his economic expertise, instead of pushing on with his high growth strategy. At the November 2007 meeting of the National Assembly when some representatives expressed their concern about inflation while discussing the economic plan for 2008, the government insisted that the National Assembly approve the plan to attain 8.5-9 per cent rate of GDP growth in 2008 and not to set a ceiling for inflation at 7 per cent. Vo Hong Ph?c, Minister for Planning and Investment, argued on behalf of the Prime Minister that "high rate of growth always necessitates high inflation in any country" and that "if inflation was kept lower than 7 per cent the government would not be able to achieve high rate of GDP growth and would have to increase subsidies".12 It is clear that the government was obssessed with high rate of GDP growth and was planning to allow state-ow7ned enterprises to jack up prices to make profit or at least to reduce subsidies. No one in the government expressed any concern about the impact of inflation on the life of the working men and women during the National Assembly meeting. This was strange in the face of a growing number of labour strikes which increased from 71 in 2000 to 193 in the first 3 months of 2006, demanding higher wages to compensate for inflation.13
The inflation problem was flagged by this author in a 2004 paper,14 analysing the reason why inflation was low during 2000-01 even with high growth in money supply and why that would not continue thereafter. The reason for low7 inflation inflation was the reduction in money velocity due to a sharp jump in public confidence in money after the reform that put a stop to runaway inflation and led to wider use of money (monetarization). That effect would die down and lead to high inflation if high growth of money supply continued, and this was observed to begin in 2004. The IMF in a study in 200615 also concluded that "the main results [of the study] suggest that monetary developments have exerted an increasing influence on inflation in Vietnam over the last few years and that inflationary inertia plays a larger role in Vietnam than in other countries in the region". The influence of international food prices, especially rice, of which Vietnam is the world's second largest exporter, was undoubtedly a major factor in the double digit staple price index and food price index in 2004, but the fiscal policy also played up the demand side of the equation. Minimum wage was successively raised by 38 per cent in January 2003 and 20.7 per cent in October 2005, and another 28.6 per cent in October 2006, but it would affect only employees who have wages lower than the minimum wage. However, an increase in average civil service wages by an additional 30 per cent in October 2004 might have had stronger effect on inflation. Petroleum price was raised only in 2006, but the effect on Consumer Price Index (CPI) is small as it makes up only round 3 per cent of the CPI consumer basket. According to the same IMF paper referred to above, the correlation between inflation and monetary expansion seemed to be more prominent after the economic reform at the end of 1989, that liberated the economy from the rigid planned economy, took full effect. The major problem that needs further analysis and that distorted the relationship between prices and money happened between 1999 and 2000: a substantial increase of M2 as a percentage of GDP from 28.4 per cent in 1998 to 35.7 per cent in 1999 to 50 per cent in 2000, and as a result a significant increase in money supply of 35.7 per cent in 1999 and 50.5 per cent in 2000 did not increase CPI significantly. Leaving out these two years, the data from 2002 on shows that the correlation between M2 and CPI and particularly between credit growth and CPI was significantly higher, demonstrating the effect of monetary policy on inflation.16
Even with an acceleration of inflation to a very high level at the end of 2007 and through early 2008, policy-makers, continued to dismiss it - at first, as though it was a methodological error commited by the General Statistical Office of Vietnam, and later arguing that high inflation was induced by the increasingly higher prices of imported petroleum and major agricultural products such as rice.
Thus on 30 November 2007, Prime Minister Nguy?n T?n D?ng issued Announcement 252/TB-VPCP17 which contained instructions to various agencies agencies to take action to combat inflation. The instructions included calls for more earnest efforts to achieve greater efficiency and higher output and more press relations activity to support government policies and avoid release of inaccurate information to the media that could affect popular psychology. These instructions were quite peculiar from the economic point of view. But worse, the announcement also included an order to the Ministry of Economics and Planning which supervises the General Statistical Office to "speedily revise the method of consumer price index in our country to be in line with international standards, especially with the structure of the basket of goods and services". This order was silently ignored after being questionned by critics.18
Prime Minister Nguy?n Tan D?ng and his staff, however, continued to argue that his economic policy was on the right track. In an interview with the Financial Times correspondent Amy Kazmin before his trip to England on 2 March 2008, when questioned about his perceived overconfidence about the overall state of the economy in the face of a U.S. slowdown and the high inflation rate in Vietnam, he still strongly asserted that the economy would reach a growth of 8 to 9 per cent through his policy of expanding exports and increasing investment.19 On 28 March 2008, the Minister for Finance Vu Van Ninh, in response to questions raised on the floor of the National Ambly on the causes of inflation said that inflation was inevitable in the context of world price increases, that "high inflation was not due to the government's bad management" but "was in fact due to our unrealistc forecast". This was obviously a misleading response. When prodded by a representative on why other countries in the region facing the same condition of commodity price increases did not suffer as high a rate of inflation as Vietnam, the Minister said "the situation is getting better due to our sound management".20 After his testimony, inflation jumped from the annualized rate of 30 per cent in March and April to 60 per cent in May.
Prime Minister Nguy?n Tan Dung's economic policy was soon reversed by the Political Bureau of the CPV which issued on 4 April 2008 its conclusions on inflation (Conclusions 22/KL/TW).21 22 The document cited a number of objective causes of inflation, but concluded that the direct immediate cause was lax monetary and fiscal policy which had been tolerated for too many years, and had been particularly lax in 2007. The demand stimulation policy implemented in the face of deflation in the past had not been appropriately changed when facing inflation. According to the document "the top priority right now is to restrain inflation, restore macro-economic stability, keep econome growth at reasonable rate and in particular pay attention to social security, provide support and assistance to the poor and wage-earners suffering from inflation".23 At least the Politb?ro took took appropriate and timely action and the Prime Minister had no other choice but to go along. It is not clear who in the Politburo was the architect of that economic decision. Nevertheless, it is interesting to observe that even though the Politburo document was approved well in advance, its conclusions were made public only after the announcement on 17 April 2008 of government decision 10/2008/NQ-CP enumerating measures to combat inflation that was signed by the Prime Minister. The timing probably served as a face-saving device for the embattled Prime Minister. Central to the new policy is the restriction of credit and money supply, increase in the base interest rates and reduction of government capital expenses. After its first Conclusions, the Politburo has issued two more decisions to guide the government on economic policy. The second one was issued on 5 August 2008 (Decisions 25-KL/TW), and was followed by the decision of the government on measures to implement it on 29 August 2008 (Decision 20/2008/NQ-CP).24 The third was issued after the meeting of the Central Committee of the CPV that took place from 2 to 4 October 2008. 25 The role of the Politburo of the CPV in economic policy was prominently mentioned in the statement of the October 2008 meeting of the Central Committee that also revealed the links between the dates of its instructions and those of the consequent decisions of the government to implement them.
During the 2008 mid-year meeting of the National Assembly, the target of GDP growth was officially reduced to 7.0 per cent at the request of the government but even that is not expected to be met. Thus, in the November 2008 Meeting, the target for 2009 had to be lowered to 6.5 per cent. The actions by the Politburo as discussed above have brought down inflation for now, as shown in the very low to negative month-to-month inflation in September and October 2008, and pulled back the balance of payments from the brink of crisis. Still more needs to be done to restore stability, particularly in restraining the flow of credit and government revenues to state-owned corporations and conglomerates so that their enormous but wasteful capital expenses can be cut down. This issue is discussed below.
A Debate on State-Owned Enterprises and Conglomerates26
The public sector as defined in Vietnam includes all activities of the government, from the state-owned corporations to all governmental institutions that provide public services such as social, education and health services, as well as police and defence services.
Since 2000 the public sector has generated in total around 4 million jobs, making up 9-10 per cent jobs in the economy. Within the public sector, the the state-owned corporations employed 1.9 million employees in 2006, making up 4 per cent of the total employment in the country and 28.4 per cent of the corporate sector that also includes the domestic private and FDI corporations. The share of employment generated by the state-owned corporations is however declining not only in relative terms but also in absolute terms (see Table 6).
Although generating very little employment, the public sector has been allocated an inordinate share of investment funds by the government. The funds channelled to this sector have made up over 45 per cent of all investment in the economy, except for 2007 when the share was reduced unexpectedly to 40 per cent, due to the high inflow of foreign direct investment (see Figure 7). In 2007, with a GDP of US$71.5 billion, US$32.6 billion was earmarked for investment, out of which US$11.5 billion was for the non-state sector, and US$13 billion or 18 per cent of GDP for the public sector. Investment by state-owned corporations was not published, but given the estimate of government investment on infrastructure to be 7 per cent of GDP, the investment by state -owned corporations can be inferred to be 11 per cent of GDP.28 Thus almost US$8.0 billion in 2007 was invested in the state-owned enterprises. This was an enormous amount compared to the investment amount of US$11.5 billion of the non-state domestic sector that encompasses all economic activities and all forms of organizations from corporations to household activities that are producing over 80 per cent employment for the economy.
As in the past, the state-owned enterprises continued to be a drag on the economy in 2008. Their performance has always been dismal when compared with non-state enterprises. Overall, the value of industrial production of all state enterprises, according to the Ministry of Planning and Investment, increased on a year-to-year basis only 6.4 per cent as compared to 29.5 per cent for the nonstate domestic sector, and 17.9 per cent of the FDI sector during the first nine months of 2008. 29
Most of the 5,970 state-owned enterprises are small or medium-sized. However, around 100 can be classified as general corporations and conglomerates and they have been showered with great favours by the government. Data on state-owned enterprises is still lacking, and when published by the General Statistical Office of Vietnam it is aggregated with government services. Thus any systematic research on state-owned enterprises will have to wait until statistics on them are made public. As a consequence of the lack of data, the analysis above and the analysis of state conglomerates below is based mainly on articles appearing in Vietnamese newspapers. Fortunately, data, though unsystematic, appeared recently in public as part of the criticism by National Assembly members of the failure of government economic policy and the defensive reactions of government officials. officials. A The role of state conglomerates in the current economic crisis in Vietnam is explored below.
It is easy to distinguish conglomerates and general corporations by the titles of "conglomerate" (tap do?n) or "general corporations" (t?ng c?ng ty) added before the company names; but in reality they all act in a similar manner. By the end of 2007, according to a report of the Ministry of Finance, eight state-owned conglomerates (tap do?n) and 70 state-owned general corporations (t?ng c?ng ty) together had an asset value of US$56 billion (almost 80 per cent of GDP), not including the value of land they are entitled to. Out of this asset value, the value of equity was US$25 billion (or VND 403 trillion); and the value of loans provided by state banks amounted to US$31 billion (or VND 500 trillion); the value of loans provided by international markets and the value of domestic bonds, however, is unknown. The conglomerates and the general corporations taken together have an average loans/equity ratio at two times which suggests that their business operations are risky. However, many companies among them are extremely risky, for example the loans/equity ratio is 42 for the General Corporation for Transport Construction No. 5 (T?ng C?ng ty X?y dung C?ng tr?nh Giao th?ng 5) and 22 for Vinashin.30 31
So far there is no law to regulate the state-owned conglomerates nor is there a clear definition provided of a conglomerate, except that it is assumed to be a company that owns other legally independent companies. Although only eight companies are designated as conglomerates, the general corporations have been behaving as though they are conglomerates. They are establishing their own subsidiaries or associated companies. It was reported that these companies have already invested a total of US$7.3 billion (VND 117 trillion), 10 per cent of GDP, in fields that are not of their specialty, and in recent two quarters (the fourth quarter of 2007 and the first quarter of 2008), US$1.4 billion (VND23,000 billion) was invested in the stock market, real estate, financial services as well as for opening new associated commercial banks.32
The number of subsidiary enterprises proliferated immediately after the CPV agreed to allow their establishment on an experimental basis. Though the rates of return on these state -owned companies are not yet public information, a representative of the National Assembly in its recent meeting made a terse comment that "that money would have made a higher yield if deposited at a bank".33
It is easy to see that the main advantage of establishing such a conglomerate is to turn it into a pot of gold for all participants. A conglomerate can simply spin out numerous, in some cases a few hundred, subsidiar}7 companies throughout the the country, each of which gets the privilege, among others, of easy access to loans from state-owned banks and their own subsidiary banks, and more importantly, of obtaining the right to use public land at extremely low prices, most of the time at the expense of farmers whose lands under the right to use law are in the process taken back by the state. More importantly, the subsidiary company can then be "corporatized" (privatized but with a certain minimum share of the parent state enterprise), i.e. securitized and floated on the stock market. It is not rare that important share holders of the enterprises associated with the conglomerates are relatives of the managers of the conglomerates, loan providers and the local officials who may provide privileges. Conglomeration seems to be a legally recognized process to turn public property over to private hands.
A few examples reported in the Vietnamese press show how this has been done. The well-known high-tech zone in Ho Chi Minh City (Khu Cong Ngh? Cao TPHCM) was set up in 2002, claiming 915 hectares between 2002 and 2004 from the farmers. Even before the project was approved by the Prime Minister in 2007, the then Chairman of the Board of Directors of the zone in 2006 leased 6,000 sq metres to a private company, Chip Sang, which turned out, when investigated by the National Deputy Chief Inspector on the basis of a report in the press, to be owned by the relatives (including wife, husband and sister) of the members of the Board of Directors of the zone, which is against the anti-corruption law.34 (In general, the enterprise is set up in order to get a lease on an important piece of land from the state.) No legal action was taken against the Chairman as he was a former Deputy Mayor of Ho Chi Minh City. Other well known cases include an offspring of Petro Vietnam (a conglomerate) which signed a US$17 million contract with an Ukrainian company which turned out to be fabricated without the knowledge of the Ukrainian company in order to pocket the money. The scheme was initiated by the Deputy Director General of Petro Vietnam, with the involvement of the Chairman of the Board, who was later exempted from legal actions due to old age and other reasons.35 A similar scheme was carried out by the Director of Ho Chi Minh City Power Company, a part of EVN (Vietnam Conglomerate of Electricity), who set up a private company that was supposed to provide high quality household electricity usage metres imported from Singapore, but were later found to be low grade locally-produced devices.36
Vinashin provides a rather typical example of conglomeration on which luckily more information is available than on other conglomerates due to the scrutiny of many national assemblymen during the November 2008 meeting of the National Assembly. Vinashin is a ship-building conglomerate, and known for the first successful issuance of sovereign bonds of US$750 million by the the government in 2005. However, instead of focusing on what it might do best, and help build up the supporting industries for ship-building, Vinashin quickly spun out almost 100 associated companies all over the country, including a commercial bank and many financial, construction, trading and real estate companies.37 When answering reporters' questions, Vinashin stated that its 2007 financial report audited by KPMG (which has not been made public), showed assets of VND 80,000 billion, roughly US$5.0 billion (not counting land rights), and an equity of VND 25,000 billion. The ratio of loans over equity was given as about two, which is much lower than the ratio of 22 reported by the Ministry of Finance.38 This highlights the fact that no one seems to be on top of the financial situation of the conglomerates which have been put under the direct control of the Prime Minister (more on this point later). Also, according to Vinashin, it was a profitmaking conglomerate, generating a profit of VND 700 billion in 2007. However, the rate of return was a mere 2.8 per cent. This rate of return was 50 per cent higher than that of 2006,39 but would be much lower if the value of land provided by the state was also included.
Vinashin expected to reach sales of US$1.4 billion in 2008 of which US$400 million were already achieved with foreign customers during the first nine months of 2008. 40 The capital output ratio in this conglomerate based on this information seems to be very high and all the risks have been taken on by the Vietnamese government. Ship-building may be a good line of business for Vietnam to pursue, but its future prospects seem rather cloudy at best, judging from the information on management problems discussed above and the lack of technical skills discussed in a recent article in the Peoples 'Army Daily. ?? According to this article, the shipbuilding industry produced under contract ships with tonnage capacity of 6,500 to 55,000 for a number of countries like Britain, South Korea and Japan, but unfortunately 90 per cent of inputs were provided by foreign suppliers. The same article noted that due to lack of engineers and skilled labour, ship repair services are almost non-existent; hence most of ships with 20,000 tonnes capacity or more have to be sent for repair abroad. From the information known to this author, in order to fulfill international contracts, Vinashin has to rely on foreign workers. To deliver on contracts already signed with foreign customers, the total capital of Vinashin will need to increase to at least US$6 billion which would require an additional loan of US$1.2 billion in 2008 during adverse market conditions because of the credit crunch.
Instead of focusing on improving its efficiency and profit rate Vinashin is planning to build a power plant and to enter into a US$10 billion joint venture with Lion Diversified Holding Behard of Malaysia to build a steel-making plant plant producing 10 million tonnes of steel a year, with most of the material inputs like low grade iron and coke imported. The steel-making plant should also be seen against the background that the demand for steel in Vietnam is now 6 million tonnes and is expected to reach 15 million tonnes in 2015, which can be easily satisfied by the four steel-making companies whose investment has already been approved.42
In response to the additional financial needs of Vinashin to fulfill the contracts with foreign customers, the Prime Minister's Office, on 22 September 2008, signed a public notice, No. 264/TB-VPCP, announcing the decision of Nguyen Sinh H?ng, the Deputy Prime Minister, agreeing to a financial package of US$1.2 billion to Vinashin (which includes VND 3,000 billion in domestic bonds, VND 10,000 billion in domestic loans and US$400 million in foreign loans) and instructing the State Bank of Vietnam "to instruct the Bank for Construction and other commercial banks while implementing anti-inflation measures, must be flexible in providing credit to the ship-building industry". The public notice also announced that the Prime Minister will consider further the request of Vinashin to treat government foreign borrowing on behalf of Vinashin as state equity instead of government loans. This certainly would improve the dismal profit rate of Vinashin as interest and principal payment for loans would no longer be recorded as costs of doing business.43
The Vinashin example shows that Vietnam is eager to copy from South Korea the strategy to use conglomerates as the means to quicken economic development. However, there is an important difference between the Vietnamese copy and the South Korean original. The Korean one is fully private, while in the case of the Vietnamese one, the parent is public but the spun-out offspring are mostly joint stock corporations which, as analysed above, can easily be taken advantage of and in fact have already been manipulated by the people with political connections to enrich themselves. Not a few people have become extremely rich in the stock market and the real estate market using ill gotten money through their official connections, while the flare up of inflation due to the easy monetary policy of the government to the conglomerates has greatly impoverished the working people and thus outraged the public. It is an interesting topic for further study. But until now the blueprint for conglomerate development as well as the person or government agency accountable for it does not seem to be fully clear, which explains the anger of the representatives in the November 2008 meeting of the National Assembly44 who demanded transparency in financial reporting of the conglomerates and general corporations, independent auditing and regular government reports on their activities. activities.
What is known however is that the supervision is put directly under the Prime Minister himself. The demarcation of responsibilities between the Prime Minister and the Deputy Prime Ministers clearly points to this. Besides other responsibilities, the Prime Minister specifically assigned himself to be fully responsible for economic strategy and planning, government budget, monetary and credit policy which are normally expected, but also for strategic planning and development of the conglomerates and general corporations as shown in the Prime Minister's decision 1009/QB-TTg in 2006 and decision 1120/QD-TTg in 2007.45 The allocation of responsibilities between the Prime Minister and the Deputy Prime Ministers was quite significant in the Vietnamese political context in the sense that not only no collective responsibility was mentioned but also the Deputy Prime Ministers "can in their assigned rights and responsibilities take initiative to decide; and inform promptly the Prime Minister with regards to significant, important and sensitive issues".
Interestingly, after the Political Bureau took over the economic decisionmaking, as discussed above, the role of supervising economic affairs was given to the Nguy?n Sinh Hung, the Deputy Prime Minister responsible for economic affairs under the previous administration of Phan Van KMi. This was done by Decision 1453/QD-TTg signed by the current Prime Minister on 8 October 2008. Without doubt, the role of the current Prime Minister has been declining because of the growing public discontent with the government's economic policies and its leaders' capability.46 Criticism of the Prime Minister for his disregard for independent opinions and advice is shared widely by both foreign observers and Vietnamese. For instance, he disbanded for good the independent Advisory Group for Economic and Administrative Reforms to the Prime Minister set up long ago by his predecessors, apparently stating in private that it was unnecessary because he already had the Ministers and other government agencies as advisors. This was indirectly confirmed by his recent response to a representative at the November 2008 meeting of the National Assembly. When asked if the Prime Minister has any plan to have a dialogue with scientists and intellectuals, he responded that "I don't know what your definition of an intellectual is; I talk to them every day."47 Jonathan Pincus of the United Nations Development Programme in Vietnam complained that "there is no shortage of people in Vietnam who understand the causes of the current economic instability and the steps needed to quell price inflation and restore stability to the markets" but "these people are not in a position to do much about it".48
At the November 2008 meeting of the National Assembly, many representatives demanded restrictions on the activities of the conglomerates, closer supervision supervision of their investment decisions and regular government reports on their doings. Probably because of the success of anti-inflation measures issued by the Politburo of VCP and carried out by his government, the Prime Minister emphatically defended his policy of supporting the conglomerates at that meeting and stated that the policy was party policy which had been decided by the Party's Central Committee. His statement to the National Assembly needs to be quoted as it is important for understanding the current political economy of Vietnam. He stated that:
* "[We] need to be in unison in [our] understanding of the role of the stateowned enterprises in a socialist-oriented market economy, as affirmed by the resolution of the Central Committee of the [CPV] IX Congress";
* "The state economic sector must have a decisive role in maintaining socialism and stability in the economic, political and social development of the country";
* "... financial decision making of state -owned enterprises must be respected, . . . except in some activities where objective conditions demand monopoly; then a closely supervised mechanism is needed";
* "The efficiency of the state-owned enterprises must be judged comprehensively on all aspects: economic, political and social."
The only thing he seems to concede is that the conglomerates and general corporations may have to be restricted in their scope of activities and these activities must be supervised and made transparent ? he therefore "welcomes the National Assembly to select the conglomerates and general corporations as a focus for general inspection in 2009". 49
In a nutshell, the basic question is whether the focus on expanding the scope and the size of state enterprises would lead to a better managed economy and a more stable and just society. How valid is Nguyen Tan Dung's theory that managers of state enterprises must be entrusted with independent authority in their investment and other business decision-making using taxpayers' money in order to maintain the socialist path of development? Or will the current policy simply allow the "organs of the Vietnamese state, political, administrative, and academic [to be] increasingly co-opted by interest groups who use them for self-enrichment and aggrandizement" as put by the Harvard Group report published in January 2008. 50 The removal of ministerial supervision of state -owned enterprises and the placement of the Prime Minister as the direct supervisor did not seem to work and instead created doubts about his leadership. Some foreign observers saw this as a conflict between the reform-minded Prime Minister and other conservative leaders,51 but the analysis in this article does not lend support to that conclusion. In fact, his actions and his statements do not suggest that he is a man spearheading further economic reforms; rather they suggest personal concentration of power, at least through the building up of conglomerates. To be fair to the Prime Minister, this observation is still of a tentative nature and needs to be further verified.
Nevertheless, it is not possible to see any of his critics coming up with a better way of managing the state-owned conglomerates. Another option advocated by many is to expose all enterprises, either private or state-owned, to the same level competition, and take away all privileges given to state-owned enterprises. However, this option might be just wishful thinking in a country dominated by one political party.
1 Decisions of the regular meeting of the government on October 2008 (Nghi quy?t phi?n hop chinh phu throwing ky th?ng 10 nam 2008), Website of the Government of Vietnam .
2 Minh Yen, "International reserve of Vietnam is US20.7 billion" (Du tra ngoai te c?a Vi?t Nam l? 20,7 ty US), reporting the statement of Nguyen Van Gi?u, Governor of the State Bank of Vietnam. 19 June 2008, VTC (Vietnam Television website)
3 The GSO of Vietnam defined those under poverty as having an average monthly income in 2004 of 175,000 dong, which was only US$0.37 a day at the average exchange rate in 2004 (see Vietnam Statistical Yearbook 2006, table 303).
4 Lan Huang, "Inflation is distorting poverty criteria" (Lam phát dang bóp méo chuân nghèo), Dân Trí, 11 September 2008. The article reported on a recent study by the Institute on Labor and Social Affairs of the Ministry of Labor, War Invalids and Social Affairs. The mentioned study is useful but not as reliable as those based on comprehensive surveys carried out by the General Statistical Office in 2000 and 2004. See
5 IMF, World Economic Outlook (WEO), October 2008, Chapter 2.
6 Thanh Tuy?n, "Money pumping to get the market recovered" (Bom tien vue day thi tracmg), Tuoi tr?, 29 October 2008
7 ICOR is capital/output ratio indirectly calculated by dividing change in capital over change in output, all in constant prices.
8 These ratios are calculated on the basis of data compiled by the UN Statistical Division
9 Annual data published by the General Statistical Office of Vietnam (GSO) include trade in sendees, while monthly data reported by customs do not include trade in sendees and therefore these data are not fully compatible, but they are useful in showing the magnitude of the deficit in 2008. They also show that the threat of a full blown balance of payment crisis declined as the deficit decreased drastically during the last few months of the year 2008.
10 Lê Nguyên Minh, "Increasing FDI needs to focus on capital disbursement" (Thu vôn mróc ngoái trong t?m v?n l? gi?i ng?n von), Tuoi tr?, 5 November 2008
11 The value of implemented FDI reported by the GSO of Vietnam was US$9.1 billion, but on the basis of past experience, 30 per cent of this amount was contributed by Vietnamese partners; thus only US$7. 1 billion is estimated to be FDI as internationally defined. See Tong cue Thong k?, "Socio-economic situation in October 2008" (Tinh hinh kinh t? x? h?i 10 th?ng 2008)
12 Vân Anh, "The National Assembly approved GDP growth target of 8.5-9%" (Quoc hoi thong qua chi ti?u t?ng tnr?ng 8,5 den 9%), Vietnamnet, 12 November 2007
13 V? Quang Vi?t, "Labor-enterprises relationship after joining WTO" (Quan he lao dong va doanh nghi?p thai ma cira l?m th?nh vi?n WTO), Di?n D?n, 13 March 2007
14 Vu Quang Vi?t, "Inflation in Vietnam nowadays and the need to re-examine the 14 monetaiy theoiy" (Lam ph?t ? Vi?t Nam hi?n nay va sir can nh?n lai Iy thuy?t tien te). Thai Dai Mai, no. 3, November 2004
15 IMF, Vietnam: Selected Issues, IMF Country Report no. 06/422, November 15 2006, p. 5.
16 IMF, ibid, p. 19. 16
17 "The Prime Minister manages market and price at end of 2007" (TM tir?ng di?u h?nh gi? c? thi trir?ng cuoi nam 2007", Vietnam News Agency, reported on >http:// vietnamnet.vn/xahoi/2007/ll/757597/<.
18 Vietnam News Agency, "The Prime Minister gave orders on price management at 18 18 end of 2007" (Thong tan x? Vi?t Nam, "TM tir?ng chi dao di?u h?nh gi? c? thi tnr?ng cuoi nam 2007"). Vietnamnet
19 Amy Kazmin, FT interviews: Nguyen Tan Dung, Financial Times, 2 March 2008
20 Hong Kh?nh, "High inflation is not due to government poor management" (Lam ph?t cao kh?ng ph?i do ch?nh ph? dieu h?nh k?m), VNexpress, 27 March 2008
21 S?i G?n Gi?i ph?ng, 5 March 2008
22 The implied criticism of Nguy?n Tan D?ng policy by the Political Bureau of the Communist Party of Vietnam was first raised in an overseas Vietnamese website by Au Dirang The, "Political Bureau criticized Nguy?n Tan D?ng for his anti-price policies" (Bo ch?nh tri chi trich Nguy?n Tan D?ng trong vice ch?ng lam ph?t), Dan Chim Viet, 15 April 2008, reposted on
23 S?i G?n Gi?i ph?ng, 5 March 2008, ibid.
24 Government Decision, Nghi quy?t so 20/2008/NQ-CP ng?y 29 th?ng 8 nam 2008, The Electronic Journal of the Communist Party of Vietnam
25 Communiqu? on the 8th Meeting of the Central committee of the X Congress, by the Vietnam News Agency TTXVN as reprinted in N?ng thon Vi?t Nam
26 The issue has been partly discussed in Vu Quang Vi?t, "Conglomerates: economic implications and danger ahead" (Tap do?n t?i ch?nh: y ngh?a kinh t? va nguy hi?m traoc m?t), Kinh t? S?i G?n, 31 August 2008
27 Investment fund in the Vietnamese concept is not the same as the internationally accepted concept of gross capital formation. Investment fund also includes expenses that do not increase the volume of fixed assets and therefore are excluded from gross capital formation by the General Statistical Office of Vietnam. Thus Table 7 shows both values.
28 From Table 15, IMF, Vietnam Statistical Appendix, December 2007, capital expense of the government in 2007 was 8 per cent of GDP. Government capital funding for state-owned enterprises from the 2007 government budget was planned at VND 10,905 billion or at 1 per cent of GDP. Thus investment on infrastructure was 7 per cent of GDP. As public sector investment totalled 18 per cent of GDP, investment by the state-owned enterprises would be 11 per cent of GDP.
29 Government website
30 Nguyen Quang A, "Listening to the conglomerates" (Nghe c?c t?p do?n ?s? n?i), 30 Lao D?ng, 4 May 2008
32 Nguyen Trang, "Reform the conglomerates: Dare to?" (C?i each tap do?n nh? mr?c 32 va mot ch? d?m), Vietnamnet, 10 September 2008
33 Nguy?n Linh, "National Assembly has plans to regulate the conglomerates" (Qu?c h?i 33 c? k? hoach gi?m s?t t?p do?n), an interview with Nguy?n Duc Ki?n, Vice Chairman of the National Assembly and Member of its Economic Committee, Vietnamnet, 29 October 2008
34 "Multiple wrong-doings at the High Tech Zone of Hochiminh City" (Nhi?u sai pham tai khu C?ng ngh? cao TP.HCM), Vietnamnet, 2 April 2008
35 "Uncovering the scheme of corruption at the Petroleum General Corporation" (B?c 35 tran duong day tham nh?ng ?s? ? Tong c?ng ty Dau khi), Vi?t Bao, 3 June 2004
36 Pham Bien, "Director of Electricity Company of Hochiminh City suspended" (Gi?m 36 36 doc c?ng ty di?n lue TP. HCM bi tarn d?nh chi c?ng tac), radio rfa, 19 July 2005
37 It is interesting to observe that the website of Vinashin in English lists only a veiy 37 few associated companies, but the Vietnamese version lists almost a hundred associated companies, including many with titles linked to ship-building industry, but many are not, like Habubank (a joint stock commercial bank) and other financial, construction, high tech companies, etc. website of Vinashin, see
38 Nguyen Quang A, Lao Dong, 4 May 2008
39 Anh Qu?n, "Government does not force bank lending to Vinashin" (Ch?nh ph? kh?ng 39 buoc ng?n hang cho Vinashin vay), Kinh t? Vi?t Nam, 21 October 20008, interview with the Chairman of Vinashin, P ham Thanh Binh
40 This is based on a fax response to Port News Information, see
41 Vu Van Bue, "Vietnam's Ship-building industry: first success, difficulties ahead", 41 (C?ng nghi?p d?ng tau Vi?t Nam: th?nh c?ng bu?c d?u, kh? khan trong tir?ng lai), Qu?n D?i Nh?n d?n, 15 November 2008
42 Tran TMy "Ship-building conglomerate asks for investments in electricity and steel 42 production again" (T?p do?n t?u th?y lai xin d?u tu v?o di?n, th?p), Vietnamnet, 9 September 2008
10 The same analysis has been mentioned in Vu Quang Vi?t, "Different circumstances 43 different solutions" (Tinh hinh kh?c gi?i ph?p kh?c), Kinh t? Saigon, 6 November 2008
44 Typical was the statements of the Deputy Chairman of the Economic Committee 44 44 Le Quoc Dung, such as "conglomerates establishment are spreading without any restraint and invest all over the places"; "[we need] to rectify the conglomerates by both economic and administrative measures"; "First, limit their opening of more business, second examine the soundness of their ventures [resorts and banks], and stop them if unsound, even if these actions are painful." See "No support of VND4,100 billion for Petroleum Conglomerate" (Kh?ng h? tro cho t?p do?n d?u khi 4,100 ty d?ng", Vienamnet, 8 November 2008
45 The title in Vietnamese, "Quy?t dinh v? ph?n c?ng c?a TM tu?ng va Ph? TM tu?ng" signed respectively on 28 July 2006 and 24 August 2007.
46 See the reactions of the public in Vietnam in Long S. Le, "Vietnam in denial over economic woos", Far Eastern Economic Review, October 2008.
47 "No need to advertise when having dialogue with intellectuals" (Boi thoai v?i tri thiic 47 kh?ng c?n treo bang, D?n tri, 13 November 2008
48 See previous reference.
49 To?n van bao cao c?a TM tu?ng Nguy?n Tan D?ng (the full speech of the Prime Minister), Lao Dong, 13 November 2008.
50 See Long S. Le, "Vietnam in denial over economic woos", Far Eastern Economic 50 Review, October 2008.
51 Roger Mitton, "Vietnam: Behind the Journalists' Jailins", Asia Sentinel, 24 October 51 2008
VÙ QUANG VIET, a former Chief of National Accounts Section at the United Nations Statistical Division (2003-08, New York), served as a member of the Advisory Group on Economic and Administrative Reforms to former Vietnamese Prime Minister Vo Van Kiet (1992-95). Recently he served as a consultant to the USAID to assist the ASEAN Secretariat in a project to improve national accounts statistics in the ASEAN community (2008). (2008).…
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Publication information: Article title: VIETNAM'S ECONOMIC CRISIS: Policy Follies and the Role of State-Owned Conglomerates. Contributors: Viet, Vu Quang - Author. Journal title: Southeast Asian Affairs. Publication date: January 1, 2009. Page number: 389+. © Institute of Southeast Asian Studies 2008. Provided by ProQuest LLC. All Rights Reserved.
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