Will Vietnam again show its survival skills?

Harish Mehta

VIETNAM has a history of innovation in times of war, but can Hanoi do it again in peacetime? Hanoi's leaders are aware of the potential of the current economic crisis to cause widespread problems among the population, and are conscious of the need to maintain social stability.

But there are alarming signs of a loss of confidence in the dong, the national currency, as some Vietnamese are showing a preference for gold. At gold markets in Ho Chi Minh City, Vietnamese are seen buying the yellow metal in which they have traditionally had more faith than the dong currency.

The dong gained credibility following several years of rapid economic growth but the current economic slowdown and dizzying inflation has caused some Vietnamese to return to the safe haven of gold. Despite this trend, the dong remains the most commonly accepted currency in Vietnam. The government has long been concerned that the Vietnamese would prefer the American dollar, but the greenback circulates primarily in the urban areas, and not among the vast rural populace.

The International Monetary Fund recently forecast that Vietnam's economic growth will slow to just 4.75 per cent this year, substantially below the Vietnamese government's expectation of reaching 6.50 per cent growth. Now, the Vietnamese government is considering a further downward revision of economic growth to 5 per cent.

Prime Minister Nguyen Tan Dung has indicated that economic growth in the next few quarters will increase, that the budget deficit will not exceed 8 per cent, and the inflation rate will be kept below 6 per cent.

The real worry is that if inflation rises, it can cause social instability. Inflation hit a 17-year high of 28.25 per cent in August last year, but has eased recently to 17.50 per cent in January 2009. As a result, many Vietnamese firms raised wages, but wage increases slowed as economic growth slowed further this year.

Thus, the Vietnamese government recently began implementing measures to attract more foreign investments during the global economic crisis. These measures include better coordination between the government and local authorities to improve supervision of foreign investment projects, speeding administrative reforms and listening to the concerns of foreign investors. It recently announced an economic stimulus plan to boost economic growth.

But Vietnam's development strategy has been excessively reliant on foreign investments. Lacking the means to generate vast sums for investment projects, it has developed a model that rests almost totally on foreign investments. But there is not much that the government can do to ensure that investment inflows remain healthy.

Foreign investments in Vietnam declined 17 per cent to US $6.36 billion in the first four months of this year. Given the severity of the global economic crisis, the fall in foreign investments could have been worse. Factors influencing the decline in economic growth are a fall in export earnings, private remittances and foreign direct investments.

Vietnam needs to produce some out-of-the-box policies if it wants to emerge victorious from the current economic crisis. Hanoi's economic planners do not need to go far to look for inspirational examples of how to revive their economy. They only need to look at how President Ho Chi Minh's economic planners kept the wartime economy afloat.

Despite the war, the Ho Chi Minh government set an ambitious export target of 500 million roubles for 1968-1970. According to a Government Planning Committee report dated July 2, 1968, economic planners devised an ingenious triangular counter-trade arrangement: Cuba would supply Hanoi with 80,000 tonnes of raw sugar, which Hanoi would use to produce 80-100 million litres of wine that would, in turn, be exported to Russia, generating income worth 90-100 million rubles. This was highly profitable because Havana delivered sugar free of cost to Hanoi. Vietnam produced such novel solutions even under heavy American bombardment that destroyed most of its factories and oil facilities. Despite its isolation from the non-communist world, Hanoi even succeeded in importing much-needed commodities from non-communist countries.

The example of how Vietnam applied creative economic solutions to survive in the past may help it overcome current economic challenges.

All said and done, Vietnam is an attractive destination for foreign investors. If the government maintains sound macroeconomic policies and continues reforms to enhance competitiveness, economic growth could to rise to 7.50 per cent by 2013.

The writer was formerly BT's Indo-China correspondent