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Vietnam's WTO hopes and dreams

HANOI - After nearly 11 years of protracted negotiations and intense horse-trading with the United States, Vietnam on Thursday officially became the 150th member of the World Trade Organization (WTO), opening the way for more foreign trade and investment to speed the communist country's capitalist transformation.

Vietnam's Communist Party leaders have stutter-stepped toward a market economy since the mid-1980s, at times encouraging foreign investors, at others driving them away with xenophobic regulations and restrictions. Over the past three years, leading up to final WTO negotiations, the pace of foreign-friendly reforms has increased. So, too, coincidentally, has Vietnam's total economic output, which has nearly doubled over the past five years. An average economic growth rate of 7.25% over the past decade has doubled per capita gross domestic product (GDP). Economic growth reached nearly 8.2% in 2006, the second-fastest clip in Asia, trailing only China.

Many economic analysts predict that Vietnam's accession to the WTO will facilitate faster foreign-trade and capital flows and push Vietnam's economic growth above that of China this year. Even before WTO accession, Vietnam presented stiff competition for manufacturing-oriented foreign direct investment (FDI) among its more established regional neighbors, including Thailand, Indonesia, Malaysia and the Philippines. Some economic analysts predict the investment-protection guarantees required of WTO members and recent anti-foreign investment signals from Thailand will accelerate FDI flows away from other Southeast Asian countries toward Vietnam. So will Vietnam's comparatively cheap, but industrious, labor. According to a survey last year by the Japan External Trade Organization, Vietnam's minimum monthly wage level was about US$50, significantly lower than India's $74, Indonesia's $90, the Philippines' $135, southern China's $92 and Thailand's $110. Creaky infrastructure remains an investor concern, but US technology giant Intel's decision to build one of the world's largest chip-making factories in southern Vietnam sent a warning to Thailand and Malaysia, which both rely heavily on electronics exports for economic growth. Likewise, Canon's recent decision to build the world's largest laser- and bubble-jet-printer factories indicates that Vietnam has firmly established itself on the FDI-led, export-oriented manufacturing scene.

"WTO is sort of the stamp of approval that many, many large American companies have been waiting for. They are just going to flood into this country," said Tim Tucker, country manager for Ford Motor, which already has one auto-assembly plant in northern Vietnam. It will also free Vietnam from prohibitive US quotas imposed against its textile and apparel industry, which stands to gain more from WTO membership than any other Vietnamese industry. With the European Union recently imposing new quotas on Chinese textiles, some analysts believe EU-based garment importers and China-connected exporters will increasingly turn to low-cost Vietnam to fill the gap. The Hong Kong Trade Development Council recently advised Hong Kong companies affected by the EU quotas to expand their operations in Vietnam. Jordan Lee, the council's economist, predicted: "Vietnam aims [to become] one of the major exporters of textile and apparel goods in the world after its entry to the WTO. The total projected export value of the sector is $5.5 billion, an increase of 15% from 2006."

Still, Vietnam's economy is still very much in transition from a command to a free-market system. Many outward-looking local businesses and entrepreneurs, while excited about the prospects of WTO membership, are still struggling to comprehend international business practices. At the same time, more foreign imports and competition will inevitably lead to wrenching change and dislocation across many industries, creating potential social pressures on the government. WTO-mandated removal of subsidies and increased foreign competition will directly hit and potentially send into bankruptcy as many as 2,000 state-owned enterprises, which currently account for 38% of GDP and provide millions of jobs. The government has applied pressure to speed up the privatization process, which in Vietnam is referred to as "equitization". How the government handles dismantling these inefficient state industries will have huge implications for social stability and the country's future attractiveness as a destination for FDI.

To deal with these weighty issues, the Communist Party-led government is already re-examining its now-meager social safety net, particularly in relation to income insurance and vocational training schemes. WTO accession will require not only a drastic overhaul of human resources, but retraining for thousands of stuck-in-their-ways state bureaucrats. That includes an overhaul of the agriculture sector, which accounts for nearly 20% of GDP and where more than half of the population is employed. Under WTO rules, Vietnam will be required to cut subsidies on a wide range of agricultural products, which will undermine the international competitiveness of many commodity exports. Faced with adversity, Vietnam has a reputation for achieving remarkable results - both on the battlefield and in the marketplace. Once faced with chronic rice shortages after the American War, technologically challenged Vietnam has since emerged as the world's second-largest rice exporter. It is also the world's biggest pepper exporter and second-largest exporter of coffee and cashew nuts. The agricultural sector is already racing to implement a number of new programs, including structural adjustment schemes aimed at developing regional competitive advantages, improving quality control and increasing production of farm products, and developing infrastructure and production facilities more in line with international standards.

Another area where WTO-encouraged foreign competition promises to be transformative is the banking sector. With the help of foreign banks, many Vietnamese financial institutions have already expanded their operational network, increased chartered capital and modernized their banking technologies, though there is no doubt still a long way to go. According to the State Bank of Vietnam, foreign banks have already established 34 branch offices, four joint ventures and 40 representative offices in the country. Foreign financial firms have also expressed their interest in establishing more wholly foreign-owned financial companies in Vietnam. Many joint stock banks, meanwhile, have recently moved to raise their ownership capital through either share issuances to existing shareholders or by selling stakes to foreign strategic shareholders, a fast and easy way to get technical assistance and best practice management skills. According to Le Dac Son, general director of VP Bank, demand for human resources in the sector could grow by at least 50% a year for the foreseeable future as banking talent migrates from local to higher-paid positions at incoming foreign banks.

The downside risk to Vietnam's ruling Communist Party is that WTO-inspired growth is not equitably distributed across the population and sparks widespread resentment among those displaced by freer trade. Already, economic development in Vietnam is not taking place in a balanced way. By all measures, Vietnam is still a poor country, with per capita GDP at a mere $620 and an economy less than half the size of nearby Thailand's. Vietnam's small and medium-sized enterprises (SMEs) still find it hard to access capital from the formal financial sector. According to Ministry of Planning and Investment statistics, only about 32.4% of SMEs have qualified for proper bank loans. If Vietnamese-owned businesses are to take advantage of the new access to foreign markets, they will need capital infusions from somewhere. Arriving at a financial mechanism that doesn't contravene WTO rules and regulations will represent a significant, if not daunting, challenge.

Vietnam's low-cost labor and FDI-invested export-oriented industries have already transformed the country into the region's belated rising star. Clearly, nobody wants to see a repeat of the early 1990s, when foreign investors were first welcomed then later run out on a regulatory rail when politicians perceived that foreign penetration into the local economy was too much, too fast. The new generation of communist leaders pushed hard to achieve WTO membership, and have quickly implemented various reforms to pave the way for more foreign investment. And all indications are that Vietnam has no intention of turning back.

By Karl D John - Asia Times - January 12, 2007.