Overview of the Vietnamese economy

overview vietnam economy

Viet Nam embarked on Doi Moi policy in 1986. Since then, the country has seen dramatic changes, first and foremost in the economic thinking. The centrally-planned economy was replaced by the socialist-oriented market economy; national industrialization and modernization were initiated together with the policy of diversification of external economic relations, openness and international...

...integration. Doi Moi process helped Viet Nam rapidly reduce hunger and poverty rate, lay the initial foundation for an industrialized economy and maintain a high growth rate and a relatively equal society.

The 1987 Foreign Investment Law was the first legal document that helped form the legal framework for the Vietnamese market economy. In 1991, the Private Enterprise Law and Corporate Law were introduced. The amended 1992 Constitution affirmed the existence and development of a multi-sector economy under a market mechanism, including the foreign-invested sector. This was followed by the promulgation of a number of laws essential for the formation of the market economy, including Land Law, Tax Law, Bankruptcy Law, Environment Law, and Labour Code, etc. Hundreds of ordinances and decrees were enacted by the Government to guide the implementation of these laws for national socio-economic development.

Along with the law-making process, market economy institutions have also been established. It is Government policy to eliminate the central planning mechanism, emphasize monetary - market relations, focus on economic management measures and establish an array of financial institutions, banks and basic markets for money, labour, goods and land, etc. The administrative reform was promoted so as to improve economic competitiveness and to help create a more favourable business environment and mobilize all resources for economic growth. The political will of the Vietnamese Government is also reflected in the strategy for administrative reform in 2001-2010, which emphasizes the simplification of administrative procedures, amendment of laws and improvement of economic management. These changes will help establish a dynamic mechanism to meet the development requirements of the country in the new context.

Overall, tremendous economic reforms taking place over nearly two decades of Doi Moi have yielded encouraging results. Viet Nam has created an ever more competitive and dynamic economic environment. The multi-sector economy has been encouraged to develop, thus mobilizing effectively all social resources for economic growth. External economic relations have been expanded and the flow of foreign direct investment increased. Export of goods and labour, tourism industry and remittances from overseas Vietnamese have been strongly promoted to generate increasing foreign earnings for Viet Nam. As Viet Nam's GDP continuously increases, the economic structure has also witnessed notable changes. From 1990 to 2005, the contribution of agriculture sector dropped from 38.7% to 20.89%, whilst that of the industry and construction was up from 22.7% to 41.03%. The service sector stayed relatively constant, 38.6% in 1990 and 38.08% in 2005. In each sector, the structure has also positively shifted. The agriculture sector has seen a decline in the role of agriculture and forestry from 84.4% to 77.7% during the period 1990-2003, while fisheries gained a higher share. In the industrial sector, the proportion of the processing industry was up from 12.3% in 1990 to 20.8% in 2003 with improved product quality. In the service sector, the share of high-quality services is increasing rapidly such as finance, banking, insurance, tourism and so on.

The economy is well on the road to a multi-sector model operating according to market mechanism under state regulations. This means that the private sector enjoys freedom to develop in all areas not specifically forbidden by law. The legal framework has been revised to facilitate gradual shift from the former centrally planned economy to a market one, which unleashes production capacity, mobilizing resources effectively and creating a momentum for economic growth and development.

Upon the amendment of the Enterprise Law in 2000, private businesses have enjoyed strong encouragement for development. This Law institutionalized the freedom of all individuals to doing business in areas not prohibited by law. It also removed administrative obstacles that hampered enterprises such as complex licensing procedures or fees, etc. In the 2000-2004 period, 73,000 private enterprises were registered, up by 3.75 times against the period 1991-1999. By 2004, the total number of private enterprises operating under the Enterprise Law amounted to 150,000 with the total capital of VND 182 billion. From 1991 to 2003, the private sector's share in GDP was up from 3.1% to 4.1%; other non­state sectors increased from 4.4% to 4.5%; and foreign-invested sector from 6.4% to 14%; and the household sector was down from 35.9% to 31.2%. 2005 Enterprise Law, which was applied to both domestic and foreign- invested enterprises and came into effect on July 1st 2006, provides more encouragement through equal rights and obligations of enterprises for all ownership forms.

With a view to raising the productivity of the state-owned sector, policies have been formulated with concrete measures to adjust and reorganize SOEs. The management of SOEs' finance and state equity in SOEs has been strengthened and the process of SOEs' equitization has been well monitored. As the multi-sector economy has further developed, the proportion of SOEs in GDP decreased from 40.1% in 1991 to 38.3% in 2003. The collective sector dropped from 10.2% to 7.9% during the same period. In 2002 and 2003, 1,655 SOEs were listed for reorganization and reform. The figure for 2004 and 2005 were 882 and 413 respectively Viet Nam has succeeded in translating economic achievements into social progress. Benefits of Doi Moi process, for instance, are delivered to the majority of the population on a relatively equal basis. Economic growth is combined with the improvement of life quality and development of healthcare and education. The Human Development Index of Viet Nam increased from 0.583 in 1994 with a rank of 120/174 to 108/177 in 2005. The average life expectancy was raised from around 50 in the 1960s to 72 at present. The poor household ratio dropped from 70% in 1980 to below 7% in 2005.

1. Foreign trade and international economic integration

The policy of openness and industrialization has opened up new opportunities for Viet Nam to make full use of its inherent comparative advantages, i.e. vast natural resources, abundant workforce and low labour cost. These advantages are being exploited to raise Viet Nam's exports, which generate an increasing flow of foreign income for economic growth and industrialization. Over the years of Doi Moi process, Viet Nam's export growth has averaged 20%. From around US$ half a million before the introduction of Doi Moi policy, the total export volume of Viet Nam reached US$ 71.6 billion in 2010.

The structure of exports has also seen a positive change. During the 1991-1995 period, major exports of Viet Nam were crude oil, fisheries products, rice, textiles, coffee, forestry products, rubber, peanuts and cashew nuts. In 2005, Viet Nam was mainly exporting crude oil, garment and textile, footwear, seafood, wood furniture, electronic appliances and rice. This structure reflects the rise in processing and manufactured products and decline in unprocessed products, including agricultural, fisheries, forestry products and minerals. Despite this shift, unprocessed export products still make up a large proportion. Therefore, greater efforts are needed to rapidly raise the proportion of industrial exports.

The policy of diversification of international relations has helped Viet Nam integrate more deeply into the world and regional economy. Before 1990, Viet Nam had trade relations with only 40 partners. Now with the foreign policy of openness, which is to befriend and cooperate with all countries in the world on the basis of equality and mutual benefit, Viet Nam has established diplomatic relations with 170 countries, and has signed multilateral and bilateral trade agreements with over 80 nations. The country has MFN status with more than 70 countries and territories, including countries and regions with large capital resources, high technologies and vast markets, such as the United States, Japan, the EU and newly industrialized economies in East Asia.

Following the introduction of Doi Moi, Viet Nam signed an economic and trade cooperation agreement with the EU in 1992, joined ASEAN in 1995, AFTA in 2001 and APEC in 1998. Viet Nam also signed the Bilateral Trade Agreement with the United States in 2000. Viet Nam started negotiations for WTO accession in 1995 and became the 150th member of the WTO in 2007.

 2. Foreign direct investment

In December 1987, the Foreign Direct Investment Law of Viet Nam was introduced to help form the basic legal framework for foreign investment activities in Viet Nam. To better respond to business requirements and feedback from foreign investors, this Law was amended and supplemented several times, notably in 1996 and 2002, which created a more open and attractive environment to draw foreign investors into crucial industries such as export-oriented processing and manufacturing, and key economic zones of the country.

2005 Investment Law and 2005 Enterprise Law, which came into effect on July 1st 2006, have been a significant progress in creating an attractive environment. Foreign investors now can invest in any area not prohibited by laws, instead of areas allowed by state agencies. This principle has been applied for the domestic private sector since 2000; now it is applied to the foreign investment.

In addition, the Vietnamese Government made a number of adjustments and conducted reforms to create more incentives for foreign investors such as tackling business obstacles, lowering Personal Income Tax, adopting one-stop-shop policy, reducing telecommunication tariffs to gain competitiveness over other countries in the region, improving infrastructure, expanding investment areas, including those previously closed to foreign investors, such as telecommunication, insurance and supermarkets, etc. As such, Viet Nam has become an attractive venue for foreign investment.

The aforesaid measures were conducive to recovery and rapid increase of the FDI inflows in 2005. The sharp rise of FDI is also attributed to political, economic and security stability, high economic growth rate, continuation of economic reform in accordance with market economy principles, improved living standards leading to higher domestic demand, greater international integration and the emergence in the international market of Vietnamese trademarks and Viet Nam's growing reputation.

Over the past years, Viet Nam has drawn increasing inflows of FDI. From a negligible figure of 1986, FDI into Viet Nam reached US$ 3.2 billion in 1997. Due to the negative impacts of the 1997 Asian financial crisis, the FDI flow then saw a drop during 1998-2000 period, with only US$ 1.58 billion in 1999. In the past few years, Viet Nam has enjoyed a recovery of FDI, from US$ 2.6 billion in 2001 to US$ 21.48 billion in 2009 and US$ 18.50 billion in 2010. FDI not only generates profits for foreign investors but also represents a significant capital source which comes along with technology transfer and advanced business skills.

Since the introduction of the Law on Foreign Investment in 1987, leaving aside projects which have expired or been withdrawn, until March 2011 there have been 12,587 active licensed projects with a total registered capital of US$ 196.49 billion. 49% of foreign investment projects are in the industrial area, whilst 30% of projects belong to real estates and construction.

By March 2011 investors from 92 countries and territories have invested in Viet Nam. Top five countries and territories investing in Viet Nam are all from Asia: Singapore, Taiwan, Korea, Japan and Malaysia. These five countries and territories account for 60.8% of the licensed projects with a total investment capital and for 54.6% of the total foreign investment capital of Viet Nam. The next five countries and territories are British Virgin Islands, the United States, Hong Kong, Cayman Islands and Thailand. These top ten countries and territories make up over three quarters of the total licensed projects and foreign registered capital in Viet Nam.

While there are foreign invested projects in most provinces and cities in Viet Nam, a major part of investment has been placed in the key economic areas in the South (Ho Chi Minh City, Ba Ria - Vung Tau, Dong Nai, Binh Duong) and in the North (Ha Noi, Hai Duong, Hai Phong and Quang Ninh). Particular focus has been in Ha Noi and Ho Chi Minh City which have more developed infrastructure, higher purchasing power and a more skilled labour force.


 In recent years there has also been an increase in projects in the 100% foreign owned form. These projects now account for 78.5% of the total licensed projects and 62.2% of the registered capital, while joint venture enterprises make up 18.1% and 30.6% respectively. The rest are in forms of business cooperation contracts, BOT, share-holding companies, holding companies.

The foreign invested sector has seen rapid growth, gradually asserting itself as a dynamic component of the economy, and has made an important contribution to enhancing the competitiveness and efficiency of the economy. In recent years, the foreign invested sector has accounted for a quarter of the country's total investment, 56% of the national export, and 15.5% of the GDP of Viet Nam. Foreign invested enterprises accounts 100% in oil exploration, automotive industry, manufacturing of refregirator, washing machine, air conditioner, office equipment. They are also comprised of 60% of steel production, 28% of cement output, 33% of electronic appliances and 76% of healthcare equipment.

3. Transport, communications and infrastructure

Roadways: 86,327 km

*   Ha Noi - Ho Chi Minh City: 1,738 km

*   Ha Noi - Dien Bien Phu: 474 km

*   Ha Noi - Hai Phong: 102 km

*   Ha Noi - Hue: 654 km

Railways: 3,219 km (1995).

Air way: The Viet Nam Airlines has 17 international routes and 16 domestic routes. Large airports are: Noi Bai (Ha Noi), Tan Son Nhat (Ho Chi Minh City), Da Nang, Phu Bai (Hue), Cat Bi (Hai Phong), Dien Bien (Lai Chau), Vinh (Nghe An), Nha Trang, Can Tho.

Main sea ports: Hai Phong, Ho Chi Minh City, Da Nang, Ha Long, Quy Nhon, Cam Ranh, Vung Tau.



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