Vietnam Economic Situation

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Carol Douglas

9:47pm Thursday 29 July

Vietnam Economic Situation

A renewed period of economic reform began in 1986 with the goals of improving living standards and encouraging foreign investment through more open economic policies. The initial steps of economic reform ("doi moi") had been gradual. But during the 1990s, enhanced institutional support and steadily improving infrastructure made Viet Nam's growth rate one of the highest in the region. This growth brought impressive gains in incomes and in the quality of life of the Vietnamese people.

The investment-led growth of the mid-1990s began to tail off even before the Asian financial crisis dealt a further blow. Investor expectations were not being met, and many projects suffered from excessive bureaucratic interference. However, the cautious economic policies of the government enabled the economy to avoid the serious balance of payments, fiscal, and banking crises common elsewhere in the region. Since 2000, GDP growth rates have continued to track strongly, reaching 8.3% in 2007, but dropping back to an estimated 6.2% in 2008. In recent times, the Government has had to focus its policy efforts on avoiding a macroeconomic crisis; however, with inflation likely to have peaked and the merchandise trade deficit having eased back, there are now concerns that policymakers will become complacent, with the government potentially shifting its focus back to boosting growth rather than stabilising the economy.

The government has started to heed the calls of donor governments and investors for greater transparency, reform of the SOE, financial and trading sectors, and improved public sector governance. Implementation has been slow, however, and Viet Nam retains a strong commitment to state enterprise and outmoded financial and trade regimes. Reforms and restructuring have reduced the numbers of state owned firms to around 6,000, but despite preferential access to credit through the state banking sector, these enterprises are not growing strongly enough to absorb the growing numbers of unemployed.

Viet Nam's growth over the medium term depends on whether it becomes a truly multi-sector economy in which private businesses are able to grow and compete in an undistorted environment with the same freedoms as state enterprises. In 2007, FDI inflows exceeded government's expectations and credit growth rose by approximately 50 percent. However, forecasts for growth are being scaled down in light of rising inflation and other signs the Vietnamese economy is overheating.