2007: Vietnam does not need a big event!

VietNamNet Bridge - At the turn of the new year, Professor David Dapice (from Tufts University and the Chief Economist of Vietnam Program at Harvard University) talks to VietNamNet about the important economic events of 2006.

Some people say 2006 is the most exciting ever for Vietnam economy,with WTO accession, the APEC, the PNTR, the records in FDI, the stock market, etc. You have been following Vietnam economy for decades since the Doi Moi. Do you agree that 2006 is the most exciting year among the last 20 years?

- In my view, the WTO accession was the biggest story of 2006. This is because it not only meant that the leadership agreed that it was important, but also that it signaled to investors that reform would continue and the operating rules in Vietnam would continue to move in the direction of what was normal in most countries.

Do you agree that 2006 is the most exciting year among the last 20 years?

- This year (2006) was certainly very exciting – reaching $10 billion in licensed FDI, joining the WTO and having the stock market go up 170% were all very noteworthy. They marked Vietnam as a serious player, with the Intel and Canon investments showing that even long-term “heavyweights” thought it worth investing here. Smaller things also helped – the APEC summit here, the handling of bird flu (very good in spite of the recent new outbreaks), and growing tourism all suggest that Vietnam will not be “exotic” but “mainstream.” This means a higher level of capital and human flows, but also higher expectations.

Do you think the economic reform in Vietnam was speed up or slow down in 2006? If speeding up, is it because of the WTO pressures, the Party Congress? If slowing down, is it because two much efforts was put in fighting corruption and WTO accession?

- Was reform faster or slower in 2006? I think that preparations for and promises of future reform were more than before, but actual reform was not. The tax changes were not exciting and the new investment law could have been better. Financial opening was begun, but very cautiously. The scandals like PMU 18 were contained but it is unclear if lessons were learned and acted upon. Land prices remain too high and practices of obtaining land remain problematic, though some abuses are now being dealt with rather than ignored. If the promises made are fufilled, it is likely that reform will speed up in the next year or two.

- In VietNamNet, we are surveying the readers’ opinions for the most important events of 2006. Most of the votes are for WTO and changes in the stock market. The VN-Index went up from 300 in January to 630 in June, then quickly down to 420 in July, and jumped to 810 in December. Do you think these up and down movements indicated something of the economy, or mostly the speculation and herding effects?

The stock market boom is exciting, but there is an investment saying that “trees don’t grow to the sky.” If investors are ignoring fundamentals and buying because of momentum (they think the stock price is rising and they can sell to someone at a higher price), there are rising chances for a downturn.

- For some stock, the P/E went up to almost 100.

If a stock earns $1 a share and is priced at 100, the earnings will have to grow VERY fast, because a company like GE earns $15 and sells for $100 [in effect] and has earnings growth of 10% a year, year after year. I can believe that some companies in Vietnam will grow at 20-30% a year for 5-10 years, but what then? After ten years of 25% annual growth, they would be earning $9 a share. What would they be worth then? Momentum may go on for a while, but it usually goes too far and then prices drop, sometimes sharply. In Japan, the stock average is less than half of its peak sixteen years ago.

- The ODA committed to Vietnam went up every year and made a new record of $4.45 billion in 2006. When it will (or should) start to go down? Thailand a couple of years ago said that they no longer need ODA. When will be the time for Vietnam to say that? The foreign debt of Vietnam is over 30% GDP. It is yet over the limit, but does it indicates something?

ODA comes in different flavors. The sweetest is very low interest rate loans (about ½ of 1%), but these are given only to low income nations. About 2010, Vietnam will become a middle-income nation and start getting ODA loans much closer to world market levels of interest rates. The specific efficiency of ODA loans depends on the project, but what is often lost is that even if all of the loans are for “good” projects, it frees up non-ODA funds for “bad” ones. For example, the ADB railway renovation from Hanoi to China will cost only $0.2 million per kilometer, even though many bridges are being rebuilt with new grading and tracks, signals, etc. provided. But the Hanoi to Vinh high speed railway will cost over $30 million per kilometer. Now, even if some of that is for trains, the larger issue is not ODA per se but the overall efficiency of public investment. That has been and (in my view) remains an area that needs much more attention. Even when all of the costs are justified, some investments are just not needed right now, like the Dong Nai airport. It should only be phased in after Tan Son Nhat is further expanded, maybe after 2020. If you build things you don’t use much or which cost too much, the debt burden will become a problem.

- Do you think the WTO accession of Vietnam was delayed because other members had experience in China: many promises are not delivered, so they were more specific in negotiation with Vietnam. Do you think there will be same complains with Vietnam? It may happen from what points of the agreement?

Vietnam faced tough WTO conditions, tougher than previous nations. This is part of a general trend, not confined to Vietnam. However, I think the similarities of China and Vietnam and the difficulty of getting China to follow strictly its WTO promises made it more likely that Vietnam would be treated more strictly. In addition, China has more bargaining power and could press its position more strongly. But I think that Vietnam is already more open and more competitive than it would appear from the tariff data, due in part to smuggling and in part due to the size and geography of the country. For that reason, the WTO agreements will not be burdensome, though some adjustments will be required. While Oxfam is right that the process may not be “fair,” I think they are wrong about the result of the process. I think Vietnam will benefit a lot from WTO accession, and you can already see it in FDI. With a $10 billion target for 2007, that would mean $20 billion in licensed investment in two years! If even half or two-thirds of that is implemented, it will mean at least one million jobs directly and several million more through multiplier effects. If training programs and easy movement (including more attention to reasonably priced decent housing in cities, with nearby schools for the kids) are provided, then even those hurt by WTO will have good options. That means Vietnam will soon need a land and property tax to finance urban services and control speculation.

- The amount of investment from US (including investment via third countries) has been behind others from Taiwan, Singapore, Korea, Japan. There were high expectation for US investment after the US-Vietnam normalization in 1995, then after US-Vietnam BTA in 2000, but there were not yeat a boom. Do you think the WTO and PNTR will help to pull a surge of US investment in 2007, if not, what US investors are waiting for?

FDI is coming from many nations, and that is an advantage. If you are at a dance, it is always better if lots of people want to dance with you. With the Intel and Canon investments, there will be more US and Japanese investments. I think a lot of US investment comes through multinationals that appear in official data as coming from other countries like Singapore or elsewhere. If you counted that as US-sourced, then US FDI is already much higher than the official number. Overall, I would worry less about marketing than about infrastructure, regulation and education. If you get those things right, there will be plenty of investors.

- What do you think will be the most important economic event in Vietnam 2007? Not to mention the “regular” as you say, there will be high GDP growth rate, high FDI and ODA…

The biggest story in 2007? It could be the opening up of banking or the new tax law or further breakthroughs in FDI. I hope it is not the bird flu going pandemic. But really, Vietnam is getting to the point where it doesn’t need one or two big stories, but a lot of advances. You need them in law, education, housing, finance, taxes and public management. If you “just” do sensible things well, you will have rapid AND quality growth that will reduce poverty and be sustainable. A modern country is one that works well for its people. For that, the level of income is less important (because it will rise quickly) than the quality of the process.