Ky Ha Port in Chu Lai Open Economic Zone.

The level of U.S. investment in Vietnam is frequently underestimated because a large percentage of U.S. investment in Vietnam is conducted through U.S. companies based in Singapore.  Singapore is the regional headquarters of U.S. businesses for a variety of reasons, including tax reasons. So many companies that show up on the books here as Singaporean are really American. We’ve looked at these numbers, if you count American investment through Singapore as well as direct investment from the U.S. at this point we’re probably the fourth largest foreign investor in Vietnam, something along those lines.

The potential is clearly even greater; there is no question about that. What makes a good investment environment for foreigners is the same thing that makes a good investment environment domestically. There is no difference. This will be more obvious I believe when the new Enterprise Law comes into force, because the new Enterprise Law, as I understand, is going to eliminate the distinction between a foreign company and a domestic company. It will be a unified investment law and it should be more transparent.

Vietnam has set a very aggressive growth target for the next five years. The goal that the General Secretary has laid out is that Vietnam will no longer be a “least developed country” in five years.  If you do the numbers, that means going from about five hundred dollars annual per capita GDP now to about nine hundred dollars by 2010. That means annual growth in the ten to twelve percent range, and closer to twelve then ten. That is hard to do, but it is not impossible. The most successful provinces in Vietnam have achieved that level of growth over the last few years, and that includes parts of the Mekong Delta and the Ho Chi Minh City area and I think Hanoi is growing at that rate as well. 

But it is going to require a lot more investment both domestic and foreign. The financial system has to be modernized and updated. There is an awful lot of capital in Vietnam that is not being channeled into productive investment. It is going to real estate speculation, it is going into gold, it is held in cash (dollars) because people do not have effective investment opportunities.  That needs to change. Vietnam needs to create a system that allows small and medium sized companies to borrow effectively to grow.  Right now the collateral requirements that banks require for small business loans are completely unpractical and unfeasible.  Banks need to start lending based on cash flow rather than just against assets if companies are to grow.  There needs to be financial reform.  Right now the state-owned banks and state-owned enterprises have a cozy relationship where credit flows to the state-owned enterprises almost on an allocated basis, and it is not for the most productive investment opportunities. That has got to change if investment is going to move forward, both domestic and foreign.

Licensing and regulation has to change. Right now every single business activity has to be specifically licensed. If you are a company here, whether your company is foreign or domestic, and you are in the business of making widgets, and you decide that you want to produce wadgets instead of widgets, you have get a new license. You have to go through all of the hassles of getting a new license, and the people that control those licenses are in a position to collect all sorts of fees in the licensing process.  Because everything is licensed, people who hold a specific license, especially exclusive licenses, more or less have a license to print money.

For example, if I have the right to export product X, and others do not, then everybody who produces product X has to pay me to get their product exported.  This is not an efficient way to run an economy. When the state allocates economic rights, it creates a whole system for those rights-holders to collect economic rents. That kind of licensing makes this a more difficult business and investment environment whether you are a foreign or domestic company.

I read recently that the state had decided to give up its monopoly on the production of calendars. That is a very positive step, but it is indicative of the problem. The notion that a government, that a government official somewhere knows what kind of calendars people need better than publishing companies or better than the consumers who buy the calendars is frankly ridiculous.  It is indicative of a system that is still evolving from a centrally-planned economy to an open market economy. And that level of regulation is what has to be thrown overboard to really open Vietnam up and make it as effective as it can be.

As you’ve mentioned, the financial infrastructure is a problem in Vietnam? How long does it take to make the financial infrastructure become effective?

How long does it take to change?  That depends on how bold Vietnam is prepared to be. Things can be changed very quickly if people are prepared to accept the challenges and risks of rapid change. There is tension between rapid economic growth and stability.  Vietnam wants both.  By definition, an economy that is growing at twelve percent a year is not stable, it is unstable, and it’s unstable in a very positive way.

Fast growth means rapid economic change, people have more money, tremendous investment potential, and that is very different from having a nice quiet developing economy that chugs along at three or four percent. So there is tension between stability and rapid development.

The financial system as it stands now is an impediment. It could be liberalized very quickly.  Foreign financial service providers, banks, insurance companies, accounting firms all serve to push the development of the domestic sector. The more they can do, the more competitive they make the industry. And if they become more competitive, then their domestic counterparts are forced to become more competitive as well. You can’t keep on doing business the same old way if your competitor is doing a better job.

The domestic organizations have some real advantages, they have the client base, they have the business contacts, and they know the local environment. The foreign establishments have very good products and very competitive services. The foreigners are working hard to develop the client base and contacts. It is time for the domestic financial services industry to work just as hard to develop competitive services and products. Liberalization will bring enormous benefits to business as business gains access to capital.

What are your comments on the investment environments in central provinces with open economic zones i.e. Chu lai, Nhon Hoi and Dung Quat? Are these economic zones are open enough to attract US investors? What need to be changed?

I am planning to spend some more time in central Vietnam over the next few months. I am hoping to travel to Danang and Quang Nam. I am planning to spend sometime in Binh Dinh, which is a fairly successful province, and Quy Nhon seems to have some interesting things going on.  So I hope to have the chance to better understand the potential of some of the special economic zones.
 
Some countries have been very successful in developing their export industry through special economic zones. It is not completely clear to me whether that is the best model or whether you are better off covering you whole country as a special economic zone. Not having different condition depending on which side of the fence you are on. Vietnam has been very successful for the past ten years in export and growth. If it is going to grow more, and even faster, domestic growth is going to have to go up as well. It’s going to have to be a better balance between the foreign sector, the trading sector, and the domestic economy.

There is a tremendous need to develop infrastructure in Vietnam.  There is a tremendous need for capital equipment. There is still far too much in Vietnam that is powered by human labour, people carrying things, it doesn’t make any sense at this level of development.  That is where machinery should be introduced, and as machinery is introduced it will free up people, labour -- the guy who’s carrying the things -- to go and work in a factory and produce more value for higher wages.

Domestic growth, domestic-led growth, needs to catch up to export-led growth. I am not sure that a sharp division between special economic zones and ordinary industrial parks, or between the export sector and the domestic sector is necessarily helpful at this point in Vietnam’s development.  The conditions needed to spur domestic growth, to create a virtuous circle of high levels of domestic investment leading to higher wages and higher consumption that is what will lead to a doubling of the growth rate.

In Vietnam, we are experimenting with economic zones, like Chu Lai and Nhon Hoi. If those economic zones are successful, all the country will then open like such economic zones, do you think that’s a good idea?

The more open, the better.  If it works in a special economic zone like Chu Lai, then maybe it should work in an entire province or the entire country.  This doesn’t mean that there isn’t a role for export zones of course.  There is a good role for export zones and a numbers of countries have been very successful on this basis.

But Vietnam is not Singapore, Vietnam is not Hong Kong, it is not a city-state. It is a big country of eighty million people. This is the fourteenth or fifteenth largest country in the world in terms of population.

I always get a chuckle when Vietnamese leaders present themselves as representatives of a small developing country.  Eighty million people is a BIG MARKET. There is great potential for domestic-led growth, this is not just an export oriented economy. The domestic sector has to develop at the same time.

This is a fabulous market for all sorts of products.  8mil Vietnamese consumers are eager to consume more next year than they consumed last year. There should be more production that is focused on the domestic market.  It is worth taking a look at China in this regard. China of course is larger, it is enormous, but China has been very effective in moving from producing just for the export market to taking advantage of its domestic market to develop products and develop industry. Vietnam is obviously much smaller, but it’s still a market of eighty million people.  That’s bigger then all but a few European countries.  It is something that needs to be considered.

Interviewer: Khanh Linh