Introduction
Significance of the problem
Following the reunification in 1975, the Vietnamese government implemented a centrally planned socialist economic system in 1976, which did not recognize private ownership, favoring state and collective ownership instead The government's goal of rapid industrialization and economic growth led to significant state investments; however, these investments were largely ineffective due to economic mismanagement and bureaucratic inefficiencies The initial rehabilitation efforts outlined in the Second Five-Year Plan (1976-1980) were unsuccessful, achieving a mere 0.4 percent annual growth rate, well below the government's target of 13-14 percent By 1980, food production reached only 14 million tons, falling short of the planned target by 7 million tons, compounded by natural disasters in 1978 and 1979 that exacerbated the country's dire situation.
Being aware of these facts, the government decided to adjust the development model after
In 1981, economic policies shifted towards greater private ownership and individual participation in production and circulation, leading to positive effects on the economy The average GDP growth from 1981 to 1984 reached 7 percent However, this economic recovery was short-lived, as the partial relaxation of the economic management system and adjustments to the pricing system resulted in significant budget deficits, high inflation, and increased income disparity This culminated in a macroeconomic crisis in 1985.
In 1986, the Vietnamese government initiated significant reforms to address the shortcomings of its centrally planned economy, which had demonstrated persistent inefficiency This period was marked by a notably low average GDP growth rate of just 3.85 percent from 1975 to 1986, highlighting the urgent need for economic transformation.
1 Masahiko Ebashi, Vietnam joins the world (New York: M.E Sharpe, 1997)
Figure 1: Vietnam's Gross Domestic Growth Rate (1975-1986) (1990 constant price, percent)
Source: Based on the data downloaded from: http://unstats.un.org/unsd/snaama/selcountry.asp (The United Nations) on 9th December 2009
General Statistics Office Statistical Yearbook of Vietnam 1985 - 1986, Statistics Publishing House
A movement for significant reform emerged within the government, advocating for an open policy and a shift from central planning to a market-driven economic management system.
Moreover, the international environment changed dramatically and that significantly affected the thinking of the Vietnamese government in many ways:
1 China's open-door policy in 1978 was effective, which drew the attention of Vietnamese government due to the similarity between the two states' conditions, though the relations between two states were tense and were not normalized yet
2 The reformation of the Soviet Union revealed some bad signals which urged Vietnamese leaders to reconsider the state's situation
3 The success of newly industrialized countries (NICs) in East Asia was the good examples of developmental methods for the agricultural based economies The foundations for the development were such as: promoting the national capacity, opening the market, export-oriented economy and attracting foreign investment
4 Confrontation among states was rapidly replaced by cooperation and competition This made states including Vietnam reorient their thinking about development The open-door policy should be replaced the close-door and self- sufficient economy
The decision to transform the economy was influenced by various factors, which will be explored in the next chapter As a result, the 6th Vietnamese Communist Party Congress in December 1986 introduced the "Doi Moi" (Đổi mới) policy, a comprehensive reform initiative Initially, only a portion of the program was gradually implemented during the first two years, with the full program being executed in 1989.
The Doi Moi policy established a "socialist market economy," characterized by a multi-sectoral commodity economy regulated by the state This unique blend of planned and market economies, once considered unconventional, has proven advantageous, as evidenced by China's initial success The socialist market economy focuses on innovating economic mechanisms and structures, promoting participation from various sectors, developing infrastructure, and upgrading legal systems to align with the new economic framework Vietnam's shift from a centrally planned to a socialist-oriented market economy has involved market liberalization, recognition of private property rights, and gradual integration into global trade and investment, with the growth of the private sector playing a crucial role in economic development.
Over 20 years, the Doi Moi policy has helped Vietnam gain achievements in many fields High and sustainable rates of economic growth have been achieved Intraregional trade and investments have been playing an important role in accelerating the pace of economic growth in Vietnam Therefore, the Government of Vietnam recognizes the importance of regional cooperation and integration in attaining Vietnam's development goals, which is always stated in the annual socioeconomic Development Plan of the Government
Globalization has led to increased international dependency, prompting the establishment of economic groupings worldwide, including in Southeast Asia Sub-regional economic zones are now a significant trend in the region To enhance regional cooperation and integration, Vietnam actively participates in various initiatives such as the Association of Southeast Asian Nations (ASEAN), the Greater Mekong Subregion (GMS), and the Ayeyawaddy - Chao Phraya - Mekong Economic Cooperation Strategy, among others.
In 1992, with support from the Asian Development Bank (ADB), Cambodia, the Lao People's Democratic Republic, Myanmar, Thailand, Vietnam, and Yunnan Province in China initiated a sub-regional economic cooperation program aimed at strengthening economic ties The Greater Mekong Subregion (GMS) program has played a significant role in developing infrastructure to promote growth within the region.
The GMS aims to facilitate the free movement of goods, services, and people within the sub-region while connecting it to broader markets This vision is driven by the 3Cs strategy, which focuses on enhancing Connectivity, boosting Competitiveness, and fostering a stronger sense of Community Key projects and initiatives under the GMS are supported by the Asian Development Bank.
Bank and other development partners are in nine sectors of cooperation, namely transport, energy, telecommunication, telecommunications, environment, agriculture, human resource development, trade facilitation, investment, and tourism
Since 1992, Vietnam has actively participated in the GMS Program, engaging in 13 loan projects totaling $2,475.6 million, with ADB contributing $1,571.5 million by December 2008 Additionally, Vietnam has been involved in 108 regional technical assistance projects aimed at integrating its economy into regional and international markets Key initiatives include the GMS Cross-Border Transport Agreement (CBTA), the Strategic Framework of Action on Trade Facilitation and Investment (SFA-TFI), and capacity-building programs for GMS officials A crucial aspect of these initiatives is their role in enhancing trade among member countries, particularly through the implementation of CBTA and SFA-TFI.
The GMS Cross-Border Transport Agreement (CBTA) is a multilateral initiative aimed at facilitating the cross-border transport of goods and people among GMS countries Initially, the CBTA was implemented on a pilot basis at five of the sixteen designated crossing points, including three in Vietnam: Hekou-Lao Cai, Bavet-Moc Bai, and Dansavanh-Lao Bao Currently, the CBTA has only been implemented at the Dansavanh-Lao Bao border crossing The agreement is expected to enhance cooperation between border agencies, expedite clearance for low-risk cargo, and improve processing times for people, vehicles, and goods, ultimately fostering an open market for transport services Additionally, the Strategic Framework of Action on Trade Facilitation and Investment (SFA-TFI), endorsed at the Second GMS Summit, will guide Vietnam's trade facilitation and investment efforts, focusing on customs procedures, quarantine inspections, trade logistics, and the mobility of business people.
Questions for research and objectives for research
1 How has Vietnam been transforming itself from a centrally planned economy to a market economy in terms of trade and investment since the implementation of the Doi Moi policy?
2 How has the GMS scheme assisted Vietnam in the process of economic transition?
3 How has the integration into the sub-regional scheme helped Vietnam in the process of economic transition?
To understand the process of economic transition from a centrally planned economy to a market-based economy;
To explore the contribution of a sub-regional scheme in assisting members to liberate and integrate themselves into the regional and global market;
To benefit students and people those who are interested in the sub-regional integration process and economic transition in Vietnam.
Main argument and hypothesis
The sub-regional integration process is crucial for transforming national markets and integrating into regional and multilateral economies A prime example of this is the Greater Mekong Sub-region and its impact on the Vietnamese economy.
Research methodology and scope
The research utilized a qualitative methodology, incorporating both primary and secondary documentary sources Primary sources consisted of in-depth interviews, speeches from Vietnamese leaders, government documentaries, and news reports Secondary sources included various books, theses, and articles In-depth interviews were conducted with officials, professors, and other individuals in Vietnam.
Provincial authorities of Quang Tri Province and Da Nang City
Ministry of Planning and Investment
Lao Bao Special Economic Border Area, Da Nang Port
Faculty of International studies– Da Nang University
Traders, truck drivers, shop owners, money exchangers and residents at Lao Bao Special Economic and Commercial Area
The thesis focused on 2 levels of governments to analyze the impact of the GMS Programs on Vietnam's socio-economy, namely,
Central government: the focus was on the guidelines and policies issued by the central government which involve into the cooperation and coordination with other partners within the GMS framework
The thesis examined how provincial and district governments, specifically in Quang Tri province and Da Nang City, coordinated and adapted their strategies to enhance proactivity and innovation, maximizing the benefits derived from the GMS Program.
The research spans from 1986 to the present, focusing on the significance and impact of the GMS scheme on economic transition, macroeconomic policies, and related factors.
This thesis focuses specifically on trade and investment within the context of the Vietnamese economy's transition, rather than exploring every aspect It emphasizes the catalytic role of the Greater Mekong Subregion (GMS) in facilitating trade and investment Trade facilitation is defined broadly, including customs procedures, trade infrastructure, transportation, and logistics related to international trade among GMS countries, as well as measures aimed at easing the movement of goods and people.
The transition from a centrally planned economy to a socialist market-oriented economy involves several key elements: opening the economy to private sector participation, developing essential infrastructure, upgrading legal systems to align with the new economic framework, and reforming state administrative practices Successful implementation of these changes requires effective coordination between central and local governments This thesis emphasizes two main aspects: the evolving relationships among government levels and the role of private sector involvement.
The thesis focuses on the East West Economic Corridor, a key initiative of the Greater Mekong Subregion (GMS), to analyze its impact on the local economies of Quang Tri province and Da Nang City.
Basically, the thesis is organized to manifest the following points
The performance of the Vietnamese economy since the implementation of the Doi Moi policy
Subregional economic cooperation in the Southeast Asia and the needs to cooperate
The catalytic role of the GMS program to the process of economic transition in Vietnam
Conceptual framework
The thesis employed two concepts in order to analyze the role of the sub-regional integration process, namely, (1) regionalism under the functionalist approach, and (2) interdependence
Regionalism under the functionalist approach
The GMS is analyzed through the lens of regionalism, particularly the functionalist approach, to comprehend its cooperative nature Regionalism has become a significant aspect of international relations, influencing the development of international organizations and governance institutions Over the past fifty years, there have been two notable waves of regionalism: the first wave initiated European integration in the 1960s, while the second wave emerged in the late 1980s, coinciding with the establishment of the single market and the European Union in 1992, as well as the rise of new regionalism in North America.
Regionalism is based on the idea that states within a specific geographic area can more effectively tackle shared challenges A region is characterized by geographical proximity, interaction density, shared institutions, and common cultural identities Empirical identification of regions relies on data regarding trade flows, actor similarities, and shared values Regions are dynamic entities, and regionalism reflects the evolving nature of regional cooperation, marked by increased economic interaction and a growing sense of regional identity This phenomenon arises from the heightened exchange of goods, people, and ideas, leading to greater integration and cohesion within the region.
Regionalism is defined differently Traditionally, regionalism has involved the formation of interstate groupings that are less than global in scope In short, regionalism can be defined as
Sustained cooperation among governments, non-government organizations, and the private sector across multiple countries is essential for mutual benefit (Alapappa 1994:158) Two primary factors driving regionalism are political and economic influences Regionalism encompasses both regional cooperation and regional integration While regional cooperation involves area-based collaboration where governments select specific areas for cooperation without the need to harmonize domestic regulations, regional integration requires a more formal alignment of policies and rules.
2Martin Griffths et al, International Relations: The key concepts(New York: Routledge, 2008)
3 Margaret P Karns and Karen A Mingst International organizations The Politics and Processes of
Regional integration involves the processes through which states move beyond merely eliminating barriers to foster interaction among their nations, ultimately establishing a regional space governed by specific common rules.
This thesis examines the economic-driven cooperation among countries within the Greater Mekong Subregion (GMS) framework, highlighting it as a form of regional collaboration Among the various types of regional cooperation, functional cooperation, or functionalism, is particularly emphasized.
Functional cooperation involves limited agreements between states to collaborate in specific sectors such as transport, energy, or health, without necessitating political cooperation or obligations for joint action in international affairs Functionalists argue that social and international cooperation is essential for fostering political collaboration This type of regional cooperation focuses on promoting economic, social, or political collaboration while largely ignoring security concerns Many functionalists believe that addressing nonpolitical economic and social issues can help overcome political rivalries and establish cooperative habits among states The structure, mandates, and membership scope of functional organizations are shaped by the specific issues they address, typically reflecting a regional focus on economic matters with limited membership.
The Greater Mekong Subregion (GMS) comprises six countries working together to enhance economic and social development through strengthened economic linkages, while intentionally excluding political and security issues from its agenda The GMS aims to improve the quality of life and welfare of the region's people For Vietnam, regional cooperation and integration are crucial for achieving developmental goals and fostering a market-based economy, as emphasized in the Government's Socioeconomic Development Plan GMS projects facilitate the trans-border movement of people and goods, promote regional power trade, and significantly advance market-based integration.
4 John Baylis et al, The globalization of world politics An i ntroduction to international relations (London:
The grouping of international organizations has enabled Vietnam to effectively transition to a socialist market-based economy Additionally, intraregional trade and investment serve as key indicators of market liberalization, significantly contributing to the acceleration of Vietnam's economic growth.
The debate surrounding regionalism focuses on its impact on the global economy and world order, questioning whether it fosters polarization or cooperation The intricate relationship between regionalism and multilateral systems complicates the possibility of compromise There are two distinct types of regionalism: open regionalism, which promotes the simultaneous growth of regionalism and multilateralism, and closed regionalism, which posits that these two approaches are divergent.
I believe in the convergence of regionalism and multilateralism Regionalism may be helpful to strengthening of an open world economy
Regional arrangements can improve awareness of interdependence among trading partners, leading to greater acceptance of international rules They also address various challenges faced by the multilateral trading system, providing valuable experiences for overcoming similar issues in multilateral processes Additionally, enhancing inter-regional cooperation mechanisms can serve as a foundation for strengthening multilateralism Overall, there exists a mutually supportive relationship between multilateralism and regionalism.
Applying functionalism is essential for understanding cooperation within the GMS, as it provides Vietnam with the necessary knowledge and strategies to address various challenges in integrating into regional and international markets.
The term 'independence' emerged in the late 1960s to describe the growing interdependence of national economies, particularly among advanced industrial nations Interdependence signifies mutual dependence, which is often perceived as mutual benefit; however, it encompasses more complex dynamics In economic development, countries face various challenges with limited capacity to address them, prompting closer collaboration to foster a global economy through enhanced trade, investment, and monetary connections Nonetheless, this interdependence can undermine national autonomy, creating a paradox that encourages both cooperation and competition.
True cooperation hinges on the coordination of domestic policies, which in turn enhances transnational economic relations Despite interdependence, countries prioritize their national interests Various forms of interdependence lead to distinct political roles and responses to technological and market changes Optimistic liberal analysts argue that global economic forces, particularly transnational corporations, will eventually overshadow political considerations, compelling states to adapt.
Interdependence analysts, including Robert Keohane and Joseph Nye, suggest a blend of politics and economics, arguing that while markets won't replace politics, economic changes will foster a new political landscape This perspective merges realism with liberal international political economy, contrasting with traditional views that prioritize military power and the role of nation-states in global politics The modernist school acknowledges the significance of technology and non-state actors Keohane and Nye recognize the dominance of military power in economic relations but assert that its relevance varies across different issue areas, indicating that military force may not always be pertinent to every political issue.
Mutual dependent relationships extend beyond mere mutual benefit, encompassing a broader framework that inherently involves costs due to the restriction of state autonomy The nature of these relationships and the values of the involved actors significantly influence the associated benefits and costs Interdependent relationships are complex and typically exist within networks of rules, norms, and procedures that regulate state behavior These governing arrangements, known as international regimes, play a crucial role in shaping the dynamics of interdependence.
Literature review
The Mekong development issue dates back to the establishment of the Mekong Committee in 1957, which included Vietnam, Lao PDR, Cambodia, and Thailand Despite this long history, there has been limited research on the evaluation of development in the Greater Mekong Sub-region (GMS) Most available resources come from the Asian Development Bank (ADB), which publishes various materials, but academic contributions from countries like Vietnam remain scarce Existing literature primarily focuses on economic transition and the socioeconomic impacts of GMS, with a notable lack of studies examining the effects of GMS programs on economic transition in Vietnam This gap presents challenges for my thesis, as there are few references for comparison.
The following substantial literatures are categorized into two main aspects
The evolution of the GMS economic cooperation and the economic cooperation within the GMS framework
The socialist market-oriented economy and the economic integration of Vietnam
1.6.1 The evolution of the GMS economic cooperation and the economic cooperation within the GMS framework
In 2005, Dosch and Hensengerth published a significant article examining the evolution of the Greater Mekong Sub-region (GMS) Their analysis highlights key developments and transformations within the GMS, providing valuable insights into its progress and dynamics.
6 Jorn Dosch and Oliver Hensengerth, “Sub-regional cooperation in Southeast Asia: The Mekong Basin”,
The article in the European Journal of East Asia Studies (Vol 4, 22, 2005, pp 263-285) primarily focuses on the security dimension, rather than emphasizing economic cooperation among riparian states It illustrates how economic collaboration has been pursued to achieve security and stability in a region historically marked by conflicts Additionally, the historical context provided is significant for understanding the evolution of economic cooperation in the Greater Mekong Subregion (GMS).
The Greater Mekong Sub-region's history began in 1957 with the establishment of the Mekong Committee, initiated by the UN Economic Commission for Asia and the Far East (ECAFE) alongside four countries: Cambodia, Laos, Thailand, and South Vietnam The committee aimed to address critical issues such as poverty and political instability in the Lower Mekong Basin, promoting peace, progress, and prosperity through the collaborative use of the Mekong's resources.
The implementation of sub-regional integration in the Mekong region was postponed until 1992 due to ongoing conflicts With support from the Asian Development Bank (ADB), six countries—Cambodia, China, Laos, Myanmar, Thailand, and Vietnam—initiated the Greater Mekong Sub-region (GMS) program This initiative aims to promote sustainable economic growth and enhance living standards across the Mekong region.
In their book, "Cooperation within the Greater Mekong Sub-region: Present and Future," Nguyen Tran Que and co-authors explore the history of the Greater Mekong Sub-region (GMS) They highlight that the Mekong River is the twelfth largest river globally and the largest waterway in Southeast Asia The GMS encompasses five countries and one province of the People's Republic of China, covering approximately 2.3 million square kilometers and home to around 245 million people This region presents significant potential for economic cooperation.
They stated that the foundation for establishing the GMS is as follows
7, Hiroshi Hori, The Mekong: Environment and Development (Tokyo: United Nations University Press,
8 Nguyen Tran Que et all Hop tac tieu vung Me Cong mo rong: hien tai va tuong lai (Ha Noi: Publishing house of Social Sciences, 2007)
The Mekong River serves as a vital connection among the six riparian states, highlighting the importance of collaboration for maximizing its potential By working together, these nations can effectively harness the resources and opportunities that the Mekong offers.
Second, the globalization and regionalization strongly impacted on the region which created a demand of enhancing cooperation within the region in all aspects
Third, the states in the GMS draw the concern of international organization, notably the Asian Development Bank which tried to push the foundation and expansion of sub-regional cooperation
The book is structured into four chapters that explore the historical context and achievements of the GMS program, while also examining the challenges and opportunities within GMS cooperation The final chapter presents the Vietnamese government's perspective on GMS and offers recommendations to enhance its effectiveness and efficiency.
During 17 years of establishment and development, there is still doubt whether the GMS brings real benefits for member states and there is concern about the future of the GMS as the development of larger regional cooperation Of course, there are different views towards the development of the GMS; some viewpoints skew toward the success of the GMS, while the others thinks that the way to success is still far to be reached In an article written by Krongkaew 9 , who believes the GMS is a "real promise"; it stated the rationale for the economic cooperation within the sub-region Despite the differences in economic endowment and stages of economic development, the six countries can gain some common and national interests from sub- regional cooperation Each individual country has its own reason to join this cooperation, but in short, the cooperation will link the countries closer together, which in turn will accelerate the economic growth of the country He said that the GMS Program had served as a catalyst for the member countries to form cooperation agreements through encouraging broad-based economic
The article by Medhi Krongkaew (2004) discusses the development of the Greater Mekong Subregion (GMS) and questions whether it represents genuine promise or merely false hope It emphasizes the importance of cooperation and resource mobilization among member countries, highlighting the need for adjustments in legal and regulatory frameworks to enhance collaborative efforts.
Krongkaew is confident in the bright future of GMS cooperation, as evidenced by its ongoing achievements The initiative benefits from open regional collaboration, a non-compulsory framework, and the avoidance of sovereignty conflicts, positioning the GMS to successfully meet its goals in the coming years.
Alfred Oelers highlights the numerous challenges facing the GMS Program, despite the historical animosities, ideological differences, and conflicting national interests among its members While all six countries recognize the importance of economic cooperation, there are concerns about the feasibility of achieving sustainable development that effectively addresses poverty alleviation.
The GMS requires enhanced productive structures and a solid institutional foundation to effectively reduce poverty and maximize its potential Oelers emphasized that the current non-official nature of the GMS is a disadvantage, highlighting the need for a regional supranational organization to support and maintain regional cooperation To achieve this, the GMS Program must prioritize the development of robust productive structures and relationships while addressing the actual constraints, needs, and challenges faced in the developmental processes.
The establishment of the Greater Mekong Subregion (GMS) was driven by security and economic concerns, as highlighted in existing literature The six countries in the sub-region recognized the importance of economic cooperation following a period of political turbulence and subsequent stabilization.
The GMS plays a crucial role in boosting economic growth by innovating infrastructure that connects the sub-region Additionally, GMS cooperation enhances economic integration, particularly benefiting transitional economies like Laos and Vietnam.
10 Alfred Olehlers, “A critique of ADB Policies towards the Greater Mekong Sub-Region,” Journal of Contemporary Asia, vol 36,4, (2006)
Vietnam’s economic transition process from centrally planned
The 1954-1975 economy
The period from 1954 to 1975 in Vietnam was marked by significant division, as the country was split into two regions governed by distinct regimes, each implementing different economic policies reflective of their social foundations This division began following the victory at Dien Bien Phu in 1954, leading to the Geneva Accord, which mandated the withdrawal of French troops and established the 17th parallel as the boundary between the Democratic Republic of Vietnam (DRV) in the North and the Republic of Vietnam (RVN) in the South.
The economies of North and South diverged significantly, with the North adopting a Soviet-style, or "Stalinist-Maoist," approach to socialism, while the South pursued a capitalist trajectory.
In the North, the industrialization encountered enormous difficulty ahead when the French colonists withdrew out of the country Before withdrawing out of the North Vietnam, the
The French and American armies undertook various actions to hinder the establishment of socialism in North Vietnam, including shutting down factories, relocating machinery to South Vietnam, and attracting skilled labor to the South As a result, the North was left with outdated technology and a significant labor shortage in its industrial sector after the French withdrawal At that time, industry contributed only about 8.9% to the GDP, with no heavy industry present.
In response to the challenges faced by its agrarian economy, Vietnamese leaders opted to adopt the Soviet Union's economic model, viewing it as the fastest route to economic development This approach prioritized heavy industry and the state-owned enterprise (SOE) sector.
The government's focus on heavy industry resulted in significant investments, with 78 percent of the capital allocated to this sector between 1961 and 1965 State investment in industry saw a gradual increase, rising 2.6 times in 1960 compared to 1957 The funding for industrialization primarily came from the National Budget and financial assistance from the socialist bloc.
A decade post-war, heavy industry experienced significant growth in both scale and quantity, with key sectors like electricity, mechanical, metallurgy, chemical, and building materials emerging and advancing rapidly, especially in electricity and mechanical industries The socialist nation's heavy industry became well-established, partially fulfilling the country's demands Simultaneously, the government prioritized the development of heavy industry while also striving to restore existing light industry within its capabilities.
The government also started to establish the SOE sector by both nationalizing the existing privately owned enterprises and building new SOEs As the result, by the end of 1960,
All industrial establishments, 99.4% of commercial establishments, and 99% of transportation facilities previously owned by foreign and Vietnamese capitalists were nationalized and converted into state-owned enterprises (SOEs) This transformation was supported by significant investment from the National Budget.
19 Nguyen Chi Hai, et al, (2004) Lịch sử kinh tế quốc dân [History of National Economies], (Hanoi:
Between 1960 and 1975, the State-owned enterprises (SOEs) in Vietnam experienced significant growth, becoming the primary production units in the industrial sector The number of SOEs rose from 1,014 in 1960 to 1,132 in 1965, and further increased to 1,335 by 1975, highlighting their expanding role in the economy.
State-Owned Enterprises (SOEs) operated under the direct control of central and local government ministries, functioning solely as production units without any decision-making power regarding what, how, or for whom to produce Their primary responsibility was to execute plans set by these ministries, which outlined specific production targets, input sources, and output management Any operating profits were mandated to be transferred to the government budget, while losses were covered by government expenditures By 1960, the private sector had virtually disappeared.
The significant investment transformed the economic structure, with the ratio of industry to agriculture in GDP shifting from 31.4% to 68.4% in 1957 to 42.6% to 54% in 1960 Following the five-year plan from 1961 to 1965, the industrial sector experienced notable progress, including an annual growth rate of 14-20%, light industry fulfilling 90% of consumer demand, and the establishment and development of several industrial zones.
Ha Noi, Thai Nguyen, Nam Dinh, Hai Duong, Quang Ninh and Hai Phong
Between 1965 and 1975, despite the economic challenges posed by the war, the industry experienced significant growth and positive outcomes Central enterprises were rehabilitated, leading to a notable increase in productivity compared to 1965 By 1975, the industrial sector represented 42.6 percent of the GDP, up from 39.6 percent in 1965 Additionally, the industrial production value in 1975 was 16.6 times greater than in 1955, reflecting an average annual increase of 14.7 percent.
20 Nguyen Chi Hai, et al, Lịch sử kinh tế quốc dân [History of National Economy], (Hanoi: Publishing House of
Vietnam National University, 2004) increased remarkably compared to those in 1955, such as: electricity increased 13.8 folds, coal: 4.8 folds, cement: 25.2 folds, paper: 14.5 folds, sugar: 4 folds 21
During this period, North Vietnam implemented an economic development program focused on rapid collectivization and the production of goods After 20 years, the industrial sector underwent significant reforms, leading to impressive results By 1954, North Vietnam transitioned from lacking heavy industry to establishing key heavy industries that achieved high productivity The industrial sector's contribution to the national economy increased annually, highlighting the state's dominant role in the industrialization process.
Between 1954 and 1975, South Vietnam (RVN) followed a distinct economic trajectory compared to North Vietnam, characterized by significant changes in production relations and forces Influenced by Western ideologies, the RVN developed an open market economy The United States played a crucial role in this development, providing substantial economic and technical assistance, primarily in the form of military aid, which constituted the largest portion of total support Figure 1 illustrates the annual U.S economic assistance to South Vietnam during this period.
21 Source: Vietnamese Government Website: http://www.chinhphu.vn/cttdtcp/vi/nuocchxhcnvn/thongtintonghop/thongtintonghop_kinhtexahoi html downloaded on April 28th 2010
22 The support ranged from military aid, technical support, and relief supplies There were four USA aid programs: the Commercial Import Program, PL 480, Project Aid, and Piaster Subsidy Aid
Figure 2: US economic assistance to South Vietnam by fiscal year, 1955-1975 (million dollar)
Source: Douglas, C., Dacy (1986) Foreign aid, war, and economic development: South Vietnam, 1955-1975.Cambrige University Press
Basically, the industrialization in the South developed at different pace during this period, which can be summarized as follows:
1957-1967: There was an explosion of industrial development thanks to the industrial policy, especially with some protective measures
Between 1967 and 1972, a clear distinction emerged among various industries, as subsidies were eliminated for sectors like textiles and sugar, allowing exports to dominate the domestic market In contrast, food processing, wood processing, and building materials thrived due to their essential role in wartime supply Notably, the metallurgy sector experienced rapid growth despite the absence of metal mines in the South, relying on abundant and inexpensive metal waste generated from the war.
Between 1972 and 1975, the industrial sector experienced a recession due to a shrinking consumer market following the withdrawal of the American military and its allies from Vietnam Despite this downturn, the metallurgy and power industries continued to grow, leading to the establishment of numerous new enterprises.
The centrally planned subsidized economy (1975-1986)
April 30, 1975, signified the conclusion of the Vietnam War and the subsequent unification of the nation Under the guidance of the Communist Party of Vietnam, the country embarked on a path of economic recovery and development However, this period was marred by significant economic challenges stemming from various factors, particularly due to the centrally planned economy that was established nationwide in 1976.
In response to the challenges following unification, the Vietnamese government implemented a centrally planned economy in 1976, guided by five-year plans At that time, Vietnam was predominantly an agrarian nation, with 80% of its population and 70% of its labor force residing in rural areas and relying on agriculture Despite a population increase of 5 million within four years of unification, food production grew slowly, resulting in a per capita availability of less than 300 kg of paddy Additionally, inflation soared to 128% in 1976, prompting the government to adopt a centrally planned subsidized economy with strict state control to ensure equitable access to national resources.
The 25 Political Report of the 9th Central Party Committee at the 10th Party National Congress emphasized the importance of central control in ensuring that the government's economic development plans remain on the right track.
A centrally planned economy is characterized by state control, where economic activities are dictated by government plans rather than market forces In this model, business autonomy is significantly restricted, as all operations must align with the directives set by the state.
In Vietnam's centrally planned subsidized economy, the management mechanism operated through state control via commands, where the government established strict production norms for business units This included regulations on product lists, total production outputs, actual turnover values, salary units, contributions to the national budget, state-funded capital construction, production costs, and retail prices.
Under the new system, private ownership was abolished, leading to the rapid transformation of former Southern businesses into Northern-style state-owned enterprises (SOEs) Starting in 1976, numerous agricultural cooperatives and production collectives were established, but the lack of incentives from collectivization negatively impacted productivity, particularly in agriculture Peasants were prohibited from owning land or production means, and they were required to sell surplus output to the State at unreasonably low prices Consequently, many peasants, especially in the South, opposed the collectivization efforts.
Many organizations faced collapse shortly after their establishment due to stringent state control, which diminished production incentives and worsened the economic situation Consequently, GDP growth remained minimal and showed a declining trend by the late 1970s.
The country's poor performance in agriculture and industry, along with other contributing factors, pushed it to the brink of crisis, prompting the government to revise its development model Between 1979 and 1981, significant reforms were introduced, including the legalization of certain private activities and the encouragement of all economic agents to engage in the production and distribution of goods Limited autonomy was granted to farmers and enterprises, and a pivotal reform in 1981 involved the introduction of output contracts in agriculture, which allowed for the allocation of cooperative land to production groups and the sale of surplus products in the free market These reforms led to immediate short-term improvements, particularly in the agricultural sector.
The positive economic impacts diminished by the mid-1980s due to unresolved structural issues The economy remained centrally planned, with the state sector receiving substantial subsidies despite its inefficiency.
The macroeconomic crisis of 1985-1986 highlighted the need for a new economic model to foster development in the country Table 1 below illustrates the GDP and sectoral growth from 1977 to 1985, supporting this assertion.
Table 1: GDP and sectoral growth during 1977-1979 (percent)
The decade following unification was marked by sluggish economic growth despite attempts to address issues stemming from the previous economic system Key reforms included a shift in agricultural management from a cooperative model to an output contract system, which successfully boosted agricultural production with minimal investment Additionally, the 1985 reforms aimed to align public sector prices with market rates, increase wages, and implement monetary changes However, these measures led to an alarming inflation rate of 775 percent in 1986, highlighting the urgent need for further economic renovation.
The end of the Vietnam War in 1975 marked the challenging integration of the Northern centrally planned economy with the Southern foreign-aid reliant economy, which had followed different industrialization models In the North, industrialization was driven by government-set goals through five-year plans, often neglecting consumer preferences and leading to chronic shortages This forced consumers to settle for available goods instead of their desired products, while the country relied heavily on imports for all means of production.
The economic system prioritized heavy industry, significantly overshadowing other sectors Between 1976 and 1980, heavy industry received nearly 40 percent of state fixed investment, while agriculture received only half that amount, and light industry, which focused on essential goods for domestic use, received an even smaller share.
The central authorities upheld a stringent approach towards the private sector, reinforcing their control over the market to protect their neo-Stalinist economic model This restriction on private enterprise has hindered economic development, prompting the government to refocus its efforts on fostering growth.
26Janos Kornai, Economics of Shortage ( New York: North-Holland Publishing Company, 1980)
In the article by Phan Minh Ngoc (2008), titled “Sources of Vietnam’s Economic Growth,” it is highlighted that substantial investments were directed towards the industrial state-owned enterprises (SOEs) The central government provided various grants to these SOEs to stimulate production, ensuring that profitability was not a concern for individual enterprises, as any losses incurred were offset by state subsidies.
By early 1978, 1,500 large and small-scale capitalist enterprises, which employed 70 percent of the workforce in private capitalist enterprises, were nationalized and converted into
650 SOEs Despite a large amount of investment in industry and the rapid expansion of the SOE sector, none of the targets set by the government were met (See Table 2)
Table 2: Targets and actual performance for selected economic indicators of second Five-Year-
Indicators Measurement Unit Plan targets Actual performance
Sources: Vo Nhan Tri, Socialist Vietnam's Economy 1975-85: an Assessment (Tokyo: Institute of Developing Economics, 1987)
After two short booms in 1977 and 1978 (10.8 percent and 8.2 percent, respectively), the industrial sector began to decrease sharply in the next two years (-4.7 percent and -10.3 percent, respectively) (See Figure 7)
Socialist market economy (1986 – now)
2.3.1 Factors contributed to the economic reform
In the early 1980s, the economy operated as a blend of central planning and market systems In response to challenges posed by the central planning approach, the Communist Party attempted to re-regulate the economy, but these efforts ultimately proved unsuccessful.
Vietnam's economy was still in a serious crisis Moreover, the world had changed which also influenced strongly on the ideology and action of the Vietnamese government
By the late 1980s, three significant international events influenced the government's decision to reform the country: the uncertain future of the Soviet Union following its restructuring, China's open-door policy and the development experiences of newly industrialized countries (NICs), and the emerging characteristics and trends in global development.
In 1986, Mikhail Gorbachev came to power in the Soviet Union and implemented the Perestroika restructuring program, which ultimately worsened the situation in the country This anticipated a bleak future, including a reduction in aid to Vietnam, prompting the Vietnamese government to confront a looming fiscal crisis As a result, leaders recognized that further reforms were essential to decrease the country's dependence on financial assistance.
China, as Vietnam's second brother in the socialist bloc, experienced significant economic growth following its "open-door" policy Observing this progress, the Vietnamese government reassessed the country's circumstances Additionally, the emergence of Newly Industrialized Countries (NICs) in East Asia further widened the economic and technological gap between Vietnam and its neighboring nations.
The global environment has shifted towards greater peace, allowing for increased economic cooperation and integration Amidst the wave of globalization, Vietnam has embraced interdependence with other nations as a crucial strategy to overcome its crises and thrive in the international arena.
By 1986, Vietnam faced severe economic challenges due to uncontrollable inflation and weaker-than-expected economic activities The country was impacted by a mass influx of refugees, ongoing conflicts at its borders, and isolation from the United States and Western nations, compounded by natural disasters that resulted in poor crop yields Following the war, a significant rural-to-urban migration occurred, but the manufacturing sector was unprepared for the influx of workers As a result, Vietnam experienced its most serious socio-economic crisis in the early 1980s, with inflation soaring to a staggering 774.7 percent in 1986.
The centrally planned economy implemented nationwide since unification exhibited significant flaws, particularly in its disregard for market principles A critical assessment highlighted that "The Party has committed a mistake of subjectivism and voluntarism, breaking the objective laws."
In a centrally planned economy, the government plays a crucial role in determining the production of goods and services, including what to produce, how to produce it, and for whom it is intended However, this system has two significant flaws that impact its effectiveness.
The central command system failed to motivate management boards and workers, as their efforts went unrecognized, leading to a lack of accountability This environment stifled competition and offered no incentives to foster creativity and innovation.
The government faced challenges due to inadequate information regarding public demand, leading to a disconnect between what people needed and what was available for consumption As a result, resource allocation was inefficient, with planners producing goods based on assumptions rather than actual demand Additionally, a lack of management skills and monitoring capabilities further impeded the development process.
Moreover, the Politburo’s credibility was reduced as they could not solve the economic crisis
Given this fact, the Sixth National Congress of Vietnam's Communist Party, held in December 1986 launched an overall economic renovation policy This policy had been known as
"Doi Moi", which aimed at improving the standard of living of the people through relaxing macro-economic policy and reducing the government intervention in the market In addition,
Vietnam has introduced incentive measures to attract foreign direct investment (FDI), which have been positively received by the business sector The country has undertaken significant reforms to transition from a planned economy to a market-driven economy, opening itself up to global and regional opportunities.
In December 1986, the Vietnamese Communist Party launched a critical move from a centrally planned economy to a more market one at the Sixth Congress under the policy “Doi Moi”
The Doi Moi policy primarily focused on economic reform while also addressing political, social, and cultural objectives It shifted Vietnam's economy from a self-sufficient model to a commodity-based economy, moving away from centrally planned and subsidized systems towards market mechanisms governed by the laws of value, supply and demand, money-commodity, and competition The government's goal was to create a multi-sectoral commodity economy regulated by market forces alongside state oversight.
In 1989, the government initiated a significant shift by liberalizing its control over state-owned enterprises (SOEs), ceasing financial support from the state budget This change granted SOEs greater operational freedom, allowing them to manage their activities more independently.
Firstly, the number of mandatory targets was reduced and SOEs could operate outside the plan after the mandatory targets have been met
SOE managers now enjoy greater autonomy, allowing them to enter into economic contracts based on their discretion rather than being restricted to predetermined partners and fixed prices.
A commodity economy is characterized by a division of labor and the exchange of goods and services among individuals, contrasting with a self-sufficient economy where people produce and consume for themselves.
35 Vietnam Communist Party, Nation-building program in the transition period to socialism (Adopted at the 7 th Party Congress, 1991)
Thirdly, SOEs stopped contributing to the government budget through a special system as before, and started to pay tax in the same way as those enterprises of other economic sectors 36