ASIA	MARCH 9, 1998 VOL. 151 NO. 9
	Hard Road Ahead As investment drops and rural unrest intensifies, Hanoi discovers it isn't isolated from the region's economic ills. But radical reform seems unlikely By TIM LARIMER /HANOI he dramatic choice facing Vietnam's new leaders, who took office only last year, presented itself last week with a mixture of sobriety and absurdity. Prime Minister Phan Van Khai was busily trying to soothe disgruntled foreign investors and promising to enact a slew of economic reforms. "It is natural for people to become wealthy," one of his deputies explained. That farmers in the country's rice bowl, the Mekong Delta, are going into debt and selling off their paddy fields to rich landowners, was a logical, even desirable, development, another official chimed in. At about the same time, leading Hanoi cadres were filing past the hammer-and-sickle flag and one of the world's few remaining statues of Lenin to celebrate the 150th anniversary of Karl Marx and Friedrich Engels' Communist Manifesto. "Socialism is still the future of the human race," said a political commissar. "The target of Marxist-Leninist theory...is to eliminate private ownership and the free rights of capitalism." If the country's Communist Party leaders seem to be talking out of both sides of their mouths, it's understandable. Vietnam faces a stagnant economy, rebellious farmers, soured foreign investors, a rapidly expanding labor pool and even the ravages of El Nino. Predictions of drought in some parts of the country and flooding in others have farmers scurrying to pagodas to pray for spiritual intervention. "This is our most serious crisis in a decade," says reform-minded economist Le Dang Doanh. "We change," says a 40-something party member who is also a business entrepreneur, "or we die." A sense of urgency has even inspired some of Vietnam's normally quiet political dissidents to speak out. Says Phan Dinh Dieu, a mathematician: "In this new difficult period, democracy is essential to our development." In a few short months, Vietnam's confidence has devolved into near-panic. When the Asian contagion began moving through the region, Vietnam thought itself immune. It has no stock market; its currency isn't convertible. Wealthy urbanites in Ho Chi Minh City were flocking to Thailand to take advantage of the cheap baht and turn a profit by bringing back cigarettes, whiskey and electronics to sell at home. A news magazine headlined a story EXPLOITING THE CRISIS, and an official of the Ministry of Planning and Investment boasted that Vietnam could capitalize on its struggling neighbors' misfortunes. That all now seems short-sighted. Vietnam is at least as vulnerable to economic tremors as any other Asian country. Nearly three-fourths of its foreign investment comes from Asia; South Korea alone accounts for about 15%, almost $700 million, and plans for new projects are being shelved as foreign companies send employees home. Last year, foreign investment dropped nearly 50%. At the same time, Asia buys more than 60% of Vietnam's exports, which totaled $8.9 billion in 1997. With the region's economies weak, those numbers are sure to drop. Lacking a trade pact with the U.S. (negotiations have sputtered to a halt), Vietnam doesn't have many other markets. That might not matter, anyway, because the State Bank of Vietnam has devalued the currency, the dong, a modest 15% since the Asian meltdown, making Vietnamese textiles and shoes less competitive compared with products from Thailand and Indonesia, which have devalued more. Fujitsu Computer, Vietnam's largest exporter with $255 million in sales of hard-disk-drive components last year--mostly to Thailand, Japan and the Philippines--is scaling down its projections for 1998 and halting expansion of its Bien Hoa factory, where it had planned to go from 1,500 workers to 4,000 in two years. "Our market is Asian countries," says Shujo Kawashima, Fujitsu's general director in Bien Hoa. "We cannot sell anything to them, so we cannot expand." It's no surprise that Vietnam was slow to realize that the region's crisis imperiled its own growth, which has barreled along at 8% to 9% annually this decade. The country had been on a winning streak since adopting radical reforms in the early 1990s. In less than a decade, the country has gone from rationing food to exporting more than 3.5 million tons of rice, second only to Thailand. Most people couldn't afford a bicycle; now two-thirds of urban households own a motorbike. "They were clearly desperate in the late 1980s," says Erik Offerdal, the International Monetary Fund's Hanoi representative. "And they've had remarkable success in turning things around." The $29.5 billion pledged by foreign investors is "the envy of every developing country," says Andrew Steer, the World Bank's Hanoi director. That represents about 20% of Vietnam's GNP--one of the the highest proportions in the world, according to Steer. What would make those figures more impressive, however, is if the money pledged were actually being spent. Official statistics show that projects worth more than $680 million have been suspended, and the real number is probably higher. Less than half of the project money licensed this decade has been used, and that includes ventures that have since died, as well as local joint-venture partner contributions, which are usually inflated property values. "The early success makes it look easier than it is," says Virginia Foote, president of the U.S.-Vietnam Trade Council. Just three years ago, Vietnam was the darling of emerging economies. Its population, at 76 million, represented one of the largest untapped consumer markets in the world. Politically stable with highly literate workers whose wages are among the lowest in Asia, the country appeared ripe for investment. Reformers were in the ascendancy, wasteful state-owned businesses were being dismantled and the country was emerging from years of isolation by shoring up ties with its Southeast Asian neighbors, China, Europe and its old wartime adversary, the U.S. Hanoi's grand old hotel, the Metropole, was lavishly rehabilitated with the World Bank's financial help, and its lobby bar was crowded with visiting capitalists. Now, once-buoyant investors are wondering if Vietnam missed its chance. Red tape, corruption and an opaque decision-making process turned many off even before the onset of the region's economic turmoil. "There isn't anything to invest in," Eugene Matthews, an early American business pioneer said shortly before shutting down his consulting firm last year. Petroleum companies invested heavily to tap Vietnam's offshore gas reserves, but they haven't been able to pump anything onshore for 18 months because they can't agree with Hanoi on a price. A U.S. utility company, after a year of watching deals fail to materialize, found out that even quitting in Vietnam can be difficult. The company needed permission from the Ministry of Trade and the Ho Chi Minh City People's Committee, as well as proof that it had paid its rent, turned in its official chop and paid all its taxes. Then it needed evidence that its landlord had paid all of his taxes on the rent collected. "The landlord refused so we couldn't get a termination certificate," says the company's lawyer. "We had to call the mayor to solve the problem, but you can't call the mayor every time you meet a corrupt official." Last week, vietnam faced a potentially embarrassing blow as U.S. consumer products-maker Procter & Gamble threatened to pull out altogether. At issue was a problem encountered by many foreign companies who link up with state-owned firms. P&G, disappointed by low sales of its toothpaste, laundry detergent and shampoo, wanted to inject more money into the venture, a 70-30 split with a local partner. But doing so would mean that the Vietnamese side would have to pony up 30%--in cash it doesn't have. P&G has proposed buying out its partner, something the Vietnamese don't seem likely to approve. The dispute has been played out in the pages of the state-run media, where the American company has been blamed, among other things, for "extravagant" spending on expatriate salaries and advertising budgets. Some articles have even insinuated that P&G is exaggerating its losses as an excuse to dump its local partner. Whether Vietnamese consumers can buy Tide detergent ultimately isn't important for Vietnam, of course. But foreign companies fear that the case will be used to drum up public sentiment against them in an environment already heavy on trade protectionism. Obviously panicked that the bubble of good fortune is about to burst, Prime Minister Khai held an unusual meeting in Ho Chi Minh City last month with hundreds of foreign investors. His government has announced regulations designed to streamline approvals, remove some onerous tax and customs regulations and reduce inflated land prices. Officials are starting to understand that investors don't just pump money into Vietnam out of goodwill. When asked why an investor should come to Vietnam at all, the vice minister for planning and investment, Nguyen Nhac, answered without hesitation: "For profit." Unfortunately, this new attitude follows years of other, so-far unfulfilled promises. "Their credibility is understandably low," says the imf's Offerdal. "There has been a lot of paper created, but in terms of real juicy reforms, they have sort of dried up." Regulations announced in recent weeks, Offerdal says, amount to "tinkering." An overhaul is what's needed. The state sector is still loaded down with thousands of unprofitable companies that are draining the country's domestic capital. The banking system, which the IMF estimates has as large a proportion of nonperforming debt as did Thailand's troubled banks, is saddled with loans to state companies that have no incentive to pay them back. The banks also lack basic regulatory procedures, which has meant politicians, bankers and businessmen have been engaged in shoddy, if not illegal, lending practices that have already brought down two major Ho Chi Minh City companies. The IMF is now pursuing a harder line, refusing to hand over a $180 million loan previously committed to bolster the country's foreign reserves until it gets guarantees that Hanoi will begin fixing its problems. "Pain is inevitable," says Offerdal. "The kind of reforms we are talking about are big bullets, not peanuts." Vietnam's consensus-style leadership doesn't lend itself to quick maneuvers; leaders weaned on two long and destructive wars have come to value stability. "Why did the reforms slow down?" asks Robert Glofcheski, senior economist with the United Nations Development Program in Hanoi. "After a period of dramatic reform, they needed a period of consolidation, of stability." That, Glofcheski argues, has been achieved, the evidence an inflation rate of just 5%. "Now there is scope for a whole new round of concrete reform." It's an absence of radical reforms, especially in the legal system, that has created instability in rural areas. Since last May, farmers in dozens of communes in Thai Binh province have turned the countryside upside down with demonstrations against local cadres. They were upset about the number of taxes they have to pay; in some villages, officials levy as many as 30 separate fees every year. One woman in her 50s complained that out of a 120-kg paddy harvest, she has to pay 90 kg in taxes. Another farmer said officials charged him a fee for crossing a road with ducks. The taxes were bad enough. But watching local officials getting wealthy was too much. "We all have the same land, the same weather and do the same work," says a farmer in Thai Binh. "So how come they are so much richer than the rest of us? We went together to their offices and asked them to teach us their secrets." In several cases, the protests turned violent. In one village, for example, insurgents shut down roads and rivers leading in and out of the village, closed the markets and took hostage policemen and cadres sent in to restore order. Here and elsewhere, rebels essentially took control. The entire province was shut off to visitors for weeks at a time. Provincial officials concede that at least 20 cadres were punished for corrupt behavior. In February, the government finally allowed foreign journalists to visit the province. Phan Nguyen Duyen, 57, a retired Army officer who was asked to take over the top Communist Party post in one particularly hostile village late last year, analyzes the unrest this way: "We could lead the people in the fight against foreign invaders very well, but we have made some mistakes in economic management. Our cadres were not very well qualified and disciplined, causing waste and misappropriation." The unrest in Thai Binh was especially alarming to leaders in Hanoi, 100 km away, because that area, the most productive rice-growing province of the northern Red River Delta, has been a staging ground for revolution throughout this century. Some of the first uprisings against French colonialists were in Thai Binh; and even after the province was hit by a devastating famine in 1945, its people rallied to fight Japanese occupiers. The region sent the largest proportion of soldiers to do battle against the U.S. during the Vietnam War. And in the 1980s, demonstrations over food shortages spurred the government to institute economic reforms in the first place. While the unrest in Thai Binh might well be a special case, there is another cause for worry in Hanoi. People can live with poverty for years without moving to overthrow a government. It's often when they get a taste of wealth, when there are expectations that their lives will improve, that they began demanding political change. Vietnam has had nearly a decade of robust growth. Stomachs aren't empty anymore. Says one economist, who asks not to be named: "If motorbikes and TV sets become too expensive, then you have got the potential for real unrest." The challenge for Vietnam's new leadership, then, is making sure that prosperity continues--but in the corruption-free way its communist loyalists and strong-willed peasants have come to demand.
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