Vietnam: Economic/Political Developments and U.S. Relations

Vietnam: Economic/Political Developments and U.S. Relations

96-898 F
Updated November 22, 1996
CRS Report for Congress
Received through the CRS Web
Vietnam: Economic/Political Developments
and U.S. Relations
(name redacted)
Specialist in Trade Relations
Foreign Affairs and National Defense Division
(name redacted)
Senior Specialist in International Politics
Foreign Affairs and National Defense Division
Summary
Vietnam's experiment with economic reforms continues to outpace liberalization of
its political system. The Eighth Vietnamese Party Congress, which ended on July 2,
1996, failed to resolve deep-rooted differences among the communist leadership
concerning the pace and scope of economic reforms. These continuing divisions among
Vietnam's top leaders likely will affect relations with the United States, including efforts
to normalize commercial relations.
Background1
Vietnam's political and economic reforms began in the latter 1980s. A major
generational change in leadership coincided with grave internal difficulties and external
pressures to prompt significant changes in Vietnamese policy. In late 1986, "old Guard"
leaders were eased from power in favor of a new generation of communist leaders. The
latter were more sensitive to the fact that their political standing rested to a considerable
degree on their ability to improve the livelihood of the Vietnamese people through
domestic reforms and international initiatives designed to reduce Vietnam's isolation
stemming, in part, from its 10-year occupation of Cambodia. They acted to revitalize the
Vietnamese economy, reform and improve the efficiency of the government-party
apparatus, and to broaden Vietnam's economic and political contacts beyond the Soviet
bloc.
1 This background section draws heavily from Sutter, Robert G. Vietnam in Transition and
Vietnamese Relations with the United States, CRS Report 95-254 S. January 31, 1995. 10 p.
Congressional Research Service ˜ The Library of Congress

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Economic Developments
In an effort to avoid the stagnant production, shortages, and limited famine that
characterized past, more orthodox Communist economic policies, Vietnam's leaders
initiated an economic reform program in 1986. Known as doi moi in Vietnamese (literally
economic renovation), the reforms attempted to replace a centrally planned economy with
a "regulated market economy."
At the heart of the reforms were measures that eliminated price controls, gave
farmers greater control over what they could produce, abandoned central planning,
clarified the legal status of private businesses, and tightened government spending. As part
of the latter attempt, efforts were made to limit subsidies to state-owned enterprises
(SOEs) by providing them greater autonomy in production, investment, and pricing
decisions. The authorities also moved to open the economy to foreign trade and
investment and to attract foreign assistance.
Vietnam's economy has prospered since the reforms commenced. After years of
negative growth, economic activity increased an average annual of 3.9% from 1986-1990
and of 7.6% from 1991-1993 in real terms. The economy grew by 8.8% in 1994 and by
9.5% in 1995. Another year of 9.5% growth is forecast for 1996. As a result, Vietnam's
gross domestic product is projected to reach $24 billion this year, a level that will raise its
average per capita income above $300 for the first time.2
Vietnam's rapid growth in 1996 is being accompanied by low inflation, due primarily
to tight monetary policy and a fall in commodity prices. Through September, the cost of
living increased by only 2.9%, in contrast to an increase of 17.1% for the comparable
period in 1995. The drop in inflation has allowed the central bank to lower interest rates
to around 16%.3
Against this favorable background, the Vietnamese leaders are confronted by both
immediate and longer-run economic challenges. The immediate problems facing the
economy include a rising trade deficit and declining foreign interest in Vietnam as an
investment site. Reform of the state sector is a top longer-term challenge.
Near-term Economic Challenges
Vietnam's trade deficit through the first eight months of this year totalled $3.2 billion,
nearly $1 billion more than the deficit for calendar year 1995. This widening trade deficit
is large by international standards (equivalent to 15% of GDP) and may force Vietnam's
policymakers to consider slower growth, import restraints, or a devaluation by 1997. Any
of these steps could prove controversial to different groups.
Lagging interest by foreign investors is a second near-term problem. Foreign
investment approvals totalled $3.58 billion in the first eight months of 1996, down 34%
from the comparable period in 1995. A number of longstanding problems help explain the
2 Schwarz, Adam. "Promises, Promises: Vietnam's Leaders Come Under Pressure to Speed
Up Reforms," Far Eastern Economic Review, October 24, 1996, p.46.
3 The Economic Intelligence Unit, "Vietnam: Country Report," 2nd Quarter 1996, 30p.

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declining interest of foreign investors. These include a constantly shifting legal structure,
excessive and time-consuming licensing procedures, a huge amount of bureaucratic
corruption, and financing difficulties.
This catalogue of problems recently led the Hong Kong-based Political and Economic
Risk Consultancy to downgrade Vietnam's attractiveness as a site for foreign investment.
In the process, Vietnam may be losing its image as an emerging "Asian Tiger."4
Longer-term Economic Challenge
Despite progress in closing down some 6,500, mostly small and town-based SOEs
since Doi Moi commenced, Vietnam still operates an estimated 6,000 state enterprises.
Although the remaining SOEs account for less than 10% of total employment, they
dominate strategic sectors of the economy such as banking, construction, trade,
telecommunications, energy, steel, and chemicals. Altogether, the SOEs reportedly still
account for 75% of Vietnam's assets, obtain about 65% of the bank credit, provide more
than half of the government's budget revenues, and represent roughly 25% of the
economy's total output.5
As about two-thirds of these enterprises are thought to be unprofitable, reform of the
state sector is required for the modernization of the economy. Although most direct
subsidies to state enterprises have been eliminated, the SOEs still retain immense
advantages in gaining access to credit and land. This, in turn, handicaps privately owned
small and medium size enterprises, which comprise the most dynamic sector of Vietnam's
economy.
To improve the efficiency of the SOEs, the government is trying to put together
several dozen conglomerates, known as general corporations, in industries such as rubber,
steel, coal, power, and textiles. Patterned after the South Korean model of huge
conglomerates or chaebol, the government hopes that combining several SOEs in the same
field will allow them to compete more effectively internationally, while at the same time
retaining control over their activities. Skeptics believe that the general corporations will
act as monopolies, thereby undermining efforts to allow more scope for private sector
activity.
So far the government has resisted outright efforts at privatization, but it has
established a pilot "equitization program" in which it has sought to issue shares for 21
small state firms. The hope is to raise money, while retaining majority control. Any large-
scale privatization program, however, faces formidable opposition from the army,
individual ministries, and regional authorities that now control them.
4 Grant, Jeremy. "Political Pall Over Vietnam Investment," Financial Times, June 27, 1996,
p. 7
5 Ahearn, Raymond J. "Vietnam's Transition to A Market Economy," Congressional Research
Service, Report 96-489 F, May 30, 1996, 6 p.

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Political Developments
Vietnam's experiment with political reform, begun in the late 1980s, lagged far behind
economic changes, and has been largely superseded by an orthodox drive to maintain tight
political control. Reform-minded leaders appeared following the Vietnamese landmark
Sixth Communist Party Congress in December 1986. "Old Guard" leaders were retired
and the new General Secretary set about to revitalize the ossified political structure and
stagnant economy through reforms and experiments, reductions in central control, and
curbs on the party's power over aspects of state and society. The reformers' standing
remained uncertain as many senior-level leaders harbored concerns about the diminution
of their control. The political crisis in China after the June 1989 Tiananmen massacre and
the collapse of communism in Europe caused these leaders to reassert their views against
the reformers.
The Seventh Party Congress, held in Hanoi in June 1991, saw a leadership emerge
that was dominated by relatively younger political hard-liners anxious to reassert party
prerogatives and avoid political changes incompatible with Communist Party control. A
new constitution, which went into effect on April 18, 1992, confirmed the political
monopoly of the Communist Party. Opposition to the Communist Party is not tolerated.
Political and religious dissidents are jailed or otherwise repressed.
Vietnam today is not the highly regimented, centralized, and doctrinaire communist
state that it was a few decades ago. People may not have political freedom, but the Doi
Moi process has weakened the position of the party, particularly in economic and social
affairs. In these areas, the Vietnamese people appear to have considerable personal
freedom. Provincial and local officials also have considerable power, and often act
contrary to decrees issued from Hanoi. Top party leaders are most often described as
pragmatists who are focused on two overriding objectives: bringing economic prosperity
to Vietnam and maintaining the party's monopoly on political power. The pace and scope
of the economic reform process, however, is a matter of serious divide among Vietnam's
ruling elite.6
Debate Over Economic Policy
One group of so-called "reformers" advocates more active policy reforms that
support development of a stronger private sector, the contraction of the largely inefficient
state sector, and the country's continued integration into the regional and world economy.
A second group of "conservatives" worry that an increase in the pace of economic reforms
could undermine the country's "socialist" values, as well as undermine the party's
monopoly on power through an increase in societal demands for political reforms.
The Eighth Party Congress held in July 1996 failed to resolve these differences over
the pace and depth of the reform process. By maintaining the present top leadership team
for at least another year, the Congress confirmed that while there will be no turning back
of the liberalization process, reforms will also proceed in the slow and cautious manner
that has increasingly frustrated foreign investors.
6 Pruzin, Daniel. "Vietnam's Communists Feud on Pace of Reform," Wall Street Journal, p.
2.

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The current three top leaders of the Vietnamese regime -- President Le Duc Ahn,
Prime Minister Vo Van Kiet, and party Secretary General Do Muoi -- are widely seen to
represent different policy perspectives, with Prime Minister Vo Van Kiet seen as the most
forward looking reform advocate. The inability of the Party Congress to determine the
proper mix of "reformers" and "conservatives" in a successor leadership lay behind the
Congress' decision to keep the current three top leaders in power, despite their advanced
age.7
Signs of retrenchment also emerged from the Congress. Membership in the party's
19-Member Politboro includes more members from the military and internal security
branches. The central committee's report also made clear that changes in the Vietnam's
political system will be vigorously resisted and that foreign sources of instability will be
closely monitored. In addition, although a controversial pledge to raise the state sector's
share of economic activity to 60% by 2020 was dropped, the final report pledged to
maintain the state sector's leading role in the economy.
A number of external forces, however, make it likely that the rhetoric of Vietnam's
leadership will continue to be socialist while its practice continues to be increasingly
capitalist. For example, Vietnam's membership in the Association of Southeast Asian
Nation (ASEAN) and its application to become a member of the World Trade
Organization (WTO) are strong incentives for keeping the country moving in direction of
a more market-oriented economy. For Vietnam, membership in both groupings will help
it gain wider access to markets and increase its acceptability to international investors. In
addition, preconditions for loans established by the World Bank and Asian Development
Bank serve as strong pressures for continuing the reform process.
Continuing divisions among the top leadership are likely to ensure that the pace of
Vietnam's transition towards a market economy will not be smooth. A likely scenario,
barring a crisis, is for a continuation of the two-steps forward and one-step back process
where the state will continue to play a large role and where small entrepreneurs will
continue to operate somewhat handicapped. In this context, Vietnam's leadership struggle
will continue to condition relations with the United States, including efforts to normalize
commercial relations.
Relations with the United States
Since President Clinton ordered an end to the U.S. trade embargo on Vietnam on
February 3, 1994, U.S.-Vietnamese economic relations have grown. Two-way trade
doubled from $224 million in 1994 to $450 million in 1995, with the United States running
a trade surplus of $122 million in 1994 and $54 million in 1995. From just $3.3 million
in 1993, U.S. investment in Vietnam increased to $1.2 billion in 1994, making the United
States the sixth largest foreign investor.
Future increases in trade and investment flows could depend on steps to normalize
the economic relationship. A number of U.S. statutory provisions preclude Vietnam from
7 Grant, Jeremy. "Power of Vietnam's Leaders Criticised," Financial Times, July 2, 1996, p.
6.

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being eligible for most-favored-nation (MFN) treatment, trade financing, and insurance
guarantees for private investment.
To become eligible for U.S. export financing and insurance guarantees, the President
must waive Title IV of the 1974 Trade Act, known as the Jackson-Vanik amendment. For
the waiver, the President must certify that Vietnam has a liberal emigration regime. In this
context, issues regarding refugee resettlement and the manner in which Vietnam processes
exit permits are likely to be discussed.

During 1996, the Clinton Administration undertook preliminary discussions with
Vietnamese leaders regarding a bilateral trade and investment treaty -- a necessary first
step for granting Vietnam MFN treatment. Section 405 of the 1974 Trade Act requires
that trade agreements with non-market economies include safeguard provisions, certain
intellectual property provisions, and a dispute settlement agreement. In addition, the
Clinton Administration is seeking commitments bearing on market access, government
control over trade and investment flows, and protection of intellectual property rights.

While U.S. officials have reported making progress on the issues of intellectual
property protection, much less progress has been made on some central market access
issues such as import licensing and customs valuation. Vietnam's current systems of
import licensing and customs valuation continue to provide major problems for U.S.
exporters. U.S. negotiators are also seeking guarantees of market access for services,
including insurance, legal services, banking, and telecommunications. In addition, U.S.
negotiators are likely to insist that Vietnam's regulatory and administrative procedures
become much more transparent.
Most reports indicate that Vietnam has a long distance to travel before it is ready for
a bilateral agreement. Whether Vietnam will be able to enact the necessary reforms before
the end of 1997 remains problematic.
In the meantime, a number of other issues will affect bilateral relations. Heading the
list are continuing controversy over whether Vietnam has fully accounted for U.S.
prisoners of war and missing in action (POW/MIAs) from the Vietnam War, and U.S.
concerns about the Hanoi government's hard line against political dissent and arrests of
religious activists. The controversy over the Clinton Administration's appointment of
Congressman Pete Peterson to be Ambassador to Hanoi appeared likely to be resolved
once Peterson's term ends and his appointment would no longer be subject to restrictions
in the U.S. constitution barring the President from appointing a U.S. Congressman to such
a post.8
8 For a full discussion of bilateral relations, see Sutter, Robert G. Vietnam-U.S. Relations:
Issues for Congress," Congressional Research Service, Issue Brief 96033, [Periodically Updated].

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