Asia may leave Vietnam behind

Asia may leave Vietnam behind

By Dean Yates

HANOI (Reuters): Most Asian countries are upbeat about their economies as signs of recovery emerge after two years of crisis.

In Vietnam the outlook is likely to get grimmer.

Economic growth may be positive but a host of problems make the communist-ruled country a risky investment prospect, analysts say.

The key risk is government inaction on economic reform.

Despite official promises from Hanoi and attempts by the World Bank, the International Monetary Fund (IMF) and Japan to tie quick disbursing aid to implementation of economic reforms, little significant progress has been reported.

Some diplomats say Vietnam -- which partly avoided the wrenching regional downturn because it has no financial markets -- wasted a golden opportunity to implement economic reforms while the economies of other Asian countries contracted.

That hesitation is expected to mean growth of three percent this year from an official estimate of 5.8 percent in 1998.

Meanwhile, investors still moan about incomplete laws, tough foreign exchange rules, tight labor laws, lengthy licensing procedures, restricted access to certain sectors of the economy, corruption and a lack of infrastructure.

All that makes it pretty hard to justify fresh investment in a country that once promised so much but fails to stack up against Thailand, Malaysia or the Philippines, they say.

"I think the lack of reforms has made it clear Vietnam is really still a command economy at heart, in spite of the changes...over the past few years," Ari Kokko, a Vietnam expert from the Stockholm School of Economics, told Reuters.

"This will make some investors more cautious when it comes to future decisions about investments in Vietnam. It will also make it harder for the Vietnamese government to be credible."

Hanoi has long insisted it would reform at its own pace, and few doubt Vietnam's economic strides since the late 1980s when the country verged on the edge of bankruptcy.

But apparently keen to regain some lost credibility the government last Sunday promised Japan it would implement a series of economic reforms in return for US$162 million in aid and the possibility of additional funds.

However, besides containing vague intentions such as "improving the business environment for foreign firms", other commitments appear to promise more on paper than in reality.

One key commitment was to conduct an audit of 100 large state- owned enterprises, a sector that gobbles vast portions of bank credit and is generally considered a drag on the economy.

But a source who has seen the list of companies slated for audit said no major firms such as Vietnam Airlines, Vietnam Coal Corp or Vietnam Posts and Telecommunications were included.

The other question is whether these donor carrots work.

Quick disbursing aid currently held up by the World Bank and the IMF because of slow reforms will be partly used to support the country's balance of payments.

But some economists believe that due to a recent increase in disbursed project aid, tight controls on foreign currency and a narrower trade deficit thanks to curbs on imports, Vietnam can do without the money for the moment.

"Because project aid disbursements have risen so much the balance of payments is in remarkably good shape," said Adam Fforde of the Australia Vietnam Research Project.

"It is precisely because of this that Vietnamese have not had to go running to the IMF," added Fforde.

At cocktail parties, foreign investors and diplomats no longer bother to ask each other when Vietnam will accelerate economic reform. The answer is no one knows.

At the moment a mixture of consensus-based leadership, powerful vested interests and a simple aversion to risk could keep economic reform measures locked up.

"I think they had an opportunity to seize some initiative and take advantage of the circumstances that were occurring elsewhere in the region," U.S. Ambassador to Vietnam Pete Peterson told Reuters.

"But Vietnam failed to do so because they became frightened about the impact of such reforms and they essentially opted for the status quo. This has had a gradual negative impact on the country's economy."