Vietnam Trades Up

Ant

hony Salzman remembers the last time Vietnam was tipped to be Asia's next tiger economy. The former antiwar protester turned business consultant was representing Caterpillar in Vietnam when the country opened up to foreign investment in the early 1990s. Back then, Hanoi's streets were filled mostly with bicycles and all fax machines had to be registered with the police, but that didn't stop international executives from packing the bar of the only foreign-run hotel in Hanoi, the Metropole, to plot their future fortunes. "In that one bar on any given night," recalls Salzman, "there were people who, combined, could have pledged to invest $50 billion on the spot." The good times didn't last. In large part due to the communist government's murky investment rules and snail-pace economic reforms, investors grew frustrated and disillusioned over Vietnam's prospects. After the 1997 Asian financial crisis hit, the country's growth rate plunged from 8.2% to 4.8% in two years. "Vietnam didn't so much crash," Salzman recalls. "It was more like a dud."

Nearly a decade later, Vietnam's economy is sizzling, not fizzling?and investors are pouring back in, betting that the country is ready to adopt sweeping free-market reforms and open up to the world. There's a sound reason to think things are different this time. Last week, after many years of trying, Vietnam won its bid to join the World Trade Organization, a move that could help liberalize the country's economy and spark an export-driven boom similar to the boost China received after it joined the WTO in 2001. Vietnam is already on a roll. It's GDP growth rate this year is projected to be 8.2%, the second-fastest pace in Asia behind China and in a dead heat with India. Exports were up an estimated 24% in the first 10 months of 2006. The nascent stock market in Ho Chi Minh City is one of Asia's best-performing this year, up 70%. To top it all off, Hanoi is hosting this year's Asia-Pacific Economic Cooperation summit, on Nov. 18-19, which is expected to be attended by U.S. President George W. Bush and China President Hu Jintao. Salzman, who toughed out the lean years and built an industrial-materials distributorship with annual turnover of $100 million, says he thinks Vietnam has finally arrived as a modern economy. "Before, people said [the Vietnamese] weren't ready," he says. "Now, I think they're ready."

There's little doubt the country has a lot going for it. The workforce is educated and young?54% of Vietnam's 84 million citizens are under the age of 30. Wages are lower than they are in China's coastal cities, which compete for manufacturing jobs. The Communist Party recently installed a new government led by Prime Minister Nguyen Tan Dung, who has vowed to continue economic reforms and to tackle the country's pervasive corruption. While it's true that Vietnam's economy is still relatively small?at $53 billion last year, the country's total GDP is about half that of the Philippines?it is also vibrant, with a growing entrepreneurial class (40,000 private businesses were launched in 2005) and thriving commodity businesses. Vietnam is now the world's largest pepper exporter and second-largest exporter of coffee, cashews and rice. And multinational companies are increasingly selecting the country as a manufacturing base. Canon Inc. has two giant printer factories in Vietnam and is building a third in Bac Ninh province, 20 miles northeast of Hanoi. The new plant will be the largest inkjet printer factory in the world. Nike recently increased its annual production in Vietnam from 54 million pairs of shoes to 70 million, making the country the world's second-largest source of Nike sneakers (China is the largest).

Government officials are counting on WTO entry to maintain that momentum. As the organization's 150th member, Vietnam stands to get greater access to overseas markets such as the U.S. and Europe for its agricultural and manufactured exports; by hewing more closely to free-trade policies the WTO requires of its members, it may also be able to attract additional foreign investment in everything from factories to petrochemical plants, fueling job growth. (In the first 10 months of this year, foreign direct investment in Vietnam was estimated at $6.5 billion, surpassing the $6.1 billion total for all of last year.) "The WTO is sort of the stamp of approval that many, many large companies have been waiting for," says Tim Tucker, country manager for Ford Vietnam, which has an assembly plant outside Hanoi. "They are just going to flood into this country."

But that investment has a price attached. To gain WTO entry, Vietnam made greater concessions than other nations have been required to make upon joining, agreeing to lower trade barriers, reduce many subsidies and allow virtually unfettered foreign competition in some sectors of its domestic economy. "It's a tougher deal than even China got," says Jonathan Pincus, a Hanoi-based economist for the United Nations Development Programme (). For example, next April, Vietnam must allow foreign banks to set up their own branch offices in the country, without requiring them to partner with domestic lenders as banks wanting to enter China have been obligated to do. Vietnamese law now protects its state-dominated insurers by banning foreign insurance companies from selling to individuals, but that will change under the WTO. The stakes are high: less than 5% of Vietnamese people now have bank accounts or insurance, so the potential market is enormous. In the retail sector, dominant state-owned companies and small-shop owners alike are certain to feel the pinch as foreign chains launch offensives. "It's going to change very quickly," Pincus says. "Big supermarkets, big restaurant chains, big auto-repair shops will come in and offer better service?and customers will flock to them."