Despite continued human-rights failures, Hanoi is opening up the nation's economy.

he large meeting room at Hanoi's

Vietnam

International Convention Center was so filled with attendees that extra chairs were brought in for those who had to sit in a hallway and a connecting room. I was happy that I had a good working microphone so that my comments could reach beyond the main room. I had not expected such an overflow crowd.
        During the question and answer period, I was asked why American legal fees were so high. And how could a ceramics manufacturer based in Hanoi find a buyer in the United States? Also, how does one establish a letter of credit arrangement in Vietnam to insure payment on a shipment of goods to America? I struggled to field all the questions within the allotted time.
        As a Vietnamese-speaking lawyer, I returned to Vietnam in May 2002 under the cosponsorship of the U.S.-Vietnam Trade Council to present a series of briefings to various businesspeople in Hanoi and Ho Chi Minh City (Saigon) on the topic "Doing Business in/with the United States."
        The return visit was my sixth in the postwar years. I had served with the U.S. government during the war as a civilian adviser to then South Vietnamese government officials in a central province. With some aptitude for the Vietnamese language and a 22-year law practice in which I represented many Vietnamese in the United States, I felt that I had gained some insight that I could pass along.
        Before I started on this trip, I began to sense the pent-up demand for the type of information I wanted to bring to Vietnam by the frequency and content of the email messages coming from the in-country cosponsors of the visit. One, from the Vietnam Chamber of Commerce and Industry (VCCI), insisted that the presentation be billed as a full-day workshop.
        Eventually, I had to start turning down requests for appearances because of my already overloaded schedule. My hosts were, in Hanoi, the Vietnam Union of Friendship Organizations (VUFO) and the VCCI and, in Ho Chi Minh City, the Economics University, the Fulbright Teaching Center, and the city's bar association. What was intended to be a rather modest effort in front of a small audience brought instead an enthusiastic response from over 350 attendees at six presentations spread over five days. Where did all the enthusiasm come from?

THE JOURNEY TO THE MARKETPLACE

he process of Vietnam's initial exposure to the U.S. market and the American way of doing business started with the lifting of a U.S. trade embargo in 1994 and then moved on with the establishment of diplomatic relations in 1995 and the exchange of ambassadors in 1997. Economic normalization continued with annual refusals by the Clinton administration and Congress to block the existing, though modest, trade activity and then finally the entry into force of the Bilateral Trade Agreement (BTA) in December 2001.
        Observers say the BTA was a key step to further progress in normalizing relations. In exchange for sweeping commitments from Vietnam, including providing greater market access for trade in goods and services, protecting intellectual property rights, improving its investment regime, and establishing greater transparency, Washington granted Vietnam normal tariffs, a much sought-after trading opportunity for the Vietnamese. (Human rights watchers in America and the West, however, still look with concern on what they see as Vietnam's persecution of ethnic and religious minorities, and heavy-handed regulation of freedom of speech and assembly.)
 

Merchants unload bags of rice on the Thu Bon River at Hoi An. In recent years the government has enabled greater economic freedoms which has led to explosive growth. STEVE RAYMER / CORBIS

        Normal tariffs would mean that the 50 percent level imposed on Vietnamese products passing through U.S. ports would be immediately lowered to 5 percent. After watching U.S. business interests flood their country over the last six years, the Vietnamese saw the BTA's enactment as a signal that it was time to truly engage in the "bilateral" reality that the agreement had contemplated. Vietnam eagerly wanted to engage in business in the world's largest marketplace. And, as the second-most populous nation in Southeast Asia and the thirteenth-largest in the world, with a population of 81 million, over half of whom are under 25, Vietnam has enormous potential to compete at a higher level.
        The results were immediate. Over the first reporting period of 2002 (January-April), two-way trade between the United States and Vietnam was up over 60 percent from the same period in 2001. That trade grew steadily from $666 million in 1997 to $1.513 billion in 2001. Since then, trade between the United States and Vietnam has surged. Imports from Vietnam have soared from $1.05 billion in 2001 to $2.39 billion in 2002, following implementation of the trade agreement. Moreover, the United States has become Vietnam's biggest market following a dramatic 238 percent rise in Vietnamese exports to America over the first four months of 2003, according to Vietnam's Ministry of Trade. In short, the BTA has been the most significant economic reform measure to be adopted by Vietnam since the mid-1980s, when it abandoned central planning and moved toward acceptance of market mechanisms.

START-UPS SKYROCKET

n addition to the BTA, a second measure enacted recently by the Vietnamese government may have also encouraged principals from private-sector companies to attend the business briefings. The Enterprise Law was enacted in 2000 to facilitate the formation of small businesses in Vietnam by removing many of the traditional obstacles that had long been fixtures of past government policy.
        The new legislation marked a turning point in Vietnam's efforts to reform the private sector. According to the World Bank, more than 30,000 small and medium-sized enterprises (SME) were registered under the Enterprise Law in its first year. The number of firms started in the six months after the law went into effect equals the total number of businesses founded in the previous nine years. By the end of 2001, there were an estimated 53,000 new businesses moving into the formal economy, creating over a million jobs in the country, or one-third of Vietnam's annual labor-force increase. These figures are significant, given the small size of Vietnam's fledgling private sector.

Back From the Marxist Brink Vietnam's communist government formally abandoned Marxist state planning and introduced free-market incentives in 1986. The nation's prospects started rising in 1994 with the lifting of a U.S. trade embargo, then accelerated with the establishment of diplomatic relations with Washington in 1995 and the exchange of ambassadors in 1997. The economy really took off with passage in 2000 of the Enterprise Law, which made setting up small and medium-sized businesses far easier. Economic growth was kicked up another big notch in 2001 with the U.S.-Vietnamese Bilateral Trade Agreement. The economy grew 6.8 percent in 2001 and 7 percent in 2002. Now it is the spunkiest economy in Asia after China. Still, Hanoi is badly lagging in privatizing state-owned enterprises, which are a big economic weight around the country's neck.

        I found that at least 30 percent of the attendees at my briefings in Hanoi were from the private sector, a refreshing note and a development that would not have occurred only five years before. I had wanted to focus on middle-sized companies, and they, for the most part, were from the private sector. The large state-owned enterprises (SOE)--those engaged in oil, rice, coffee, and seafood production--were already exposed to international trade.
        A recent government survey revealed that, unlike the more cumbersome SOEs, the private companies had "total freedom in deciding their own investment activities"--all of this from a government whose ideology not too long ago considered private enterprises to be a form of capitalist exploitation.
        The number of Vietnamese private enterprises engaged in trade quintupled between 1997 and 2000. As a result, the share of private domestic firms increased from 4 to 16 percent of total imports and from 10 to 17 percent of total exports. For nonoil exports, the percentage was higher (22 percent). Total nonoil exports grew by 42 percent from 1997 to 2000; private domestic exports grew by 161 percent during this period and accounted for 46 percent of the overall increase.
        In Ho Chi Minh City alone, a total of 6,881 new enterprises were established in the first five months of 2003, with a combined registered capital of $720 million, up by 11 percent in number and 20 percent in total value over the same period the previous year.

NEW ECONOMIC LIFE

ccording to Vietnam's Ministry of Planning and Investment (MPI), the number of private companies doubled between 2000 and 2002 (to around 70,000). Typical of them was the firm of Tran Luong Son, a returning Massachusetts Institute of Technology Fulbright exchange student who has 35 employees in Hanoi handling computer software outsourcing for IBM. If his nascent private-sector example can be replicated, Vietnam can slowly wean itself from the command economy that has prevented it from truly moving away from burdensome socialist state enterprises and their outdated technology, overstaffing, and heavy debts.
        Many observers believe that much of Vietnam's recent rapid economic growth has been generated by private-company production, while state-owned enterprises have limped along. At a meeting in Washington, D.C., in June 2002, Nguyen Xuan Thao, deputy minister of the MPI, said, "We feel a breath of life with the entry of private enterprise into the economy." However, Vietnam's SOEs remain a drag on economic progress, and analysts warn that the country must rein in its enthusiasm for pumping credit into inefficient state firms and massive infrastructure projects lest it jeopardize its economic future.
        "Despite upbeat forecasts of 6.9 percent GDP growth for [2003] and even faster 7.3 percent GDP growth in 2004," warns the Far Eastern Economic Review, "the danger signals are flashing. Among them: 16 percent credit growth during the first 6 months of 2003, with most loans funneled into state projects by the four leading state-owned commercial banks." And much of that credit, the magazine says, is being funneled unwisely to industries such as cement, steel, and paper that will soon face stiff competition within the Association of Southeast Asian Nations.
        A third development in the move toward a market-run economy was an effort to privatize the country's SOEs. In April 2002, the World Bank and other development agencies urged Vietnam to speed up this process. According to a Vietnam State Enterprise Reform Board official, only 915 state-owned companies had been "equitized" since the start of the country's reform program in 1992. (The Vietnamese government dislikes use of the word privatize, preferring the more acceptable socialist term equitize.) Apparently, about 5,600 SOEs remain in operation, but the government wants to reduce that number to 2,000 by 2005.

TWO STEPS FORWARD, ONE BACK

f course, all of these changes in the business sector of a communist state have occurred against the backdrop of a failed socialist economic model and the country's turn from a command economy to a market economy in 1986. The transition, called doi moi or "economic renovation," was initiated to encourage the development of a free-market economy and private enterprise, all designed to reform a stagnating economy by energizing the entrepreneurial spirit of the Vietnamese.
        The policy reversal struck a note abroad and, in the late 1980s and into the '90s, investors flocked to Vietnam with visions of a new Asian tiger. The excitement lasted for a while, based more on rhetoric than reality, more an enthusiasm driven by hope (and some signs of change). Then in 1997, the financial crisis in the region brought the reformers down, and a sobered government began to oppose the "evils" of excessive foreign involvement. Investment dried up. Construction projects halted. The construction of one planned skyscraper hotel in Ho Chi Minh City stopped at the fifth floor.

Vietnam Revitalizing Official Name: Socialist Republic of Vietnam Capital: Hanoi Geography: Area: 125,600 square miles (about the size of New Mexico). Location: Southeast Asia, on the east coast of the Indochina peninsula. Neighbors: China on the north; Laos and Cambodia on the west. Climate/Topography: The long, narrow nation has a 1,400-mile coastline. Farming occurs in the north's densely populated Red River valley, in the center's narrow coastal plains, and in the south's spreading, frequently swampy Mekong River Delta. Semiarid plateaus, barren mountains, and some stretches of tropical rain forest round out the landscape. People: Population: 81 million. Ethnic groups: Vietnamese, 85-90 percent; Chinese, 3 percent; Hmong, Tai, Meo, Khmer, Man, Cham. Principal languages: Vietnamese (official), French, Chinese, English. Chief Religions: Buddhism, Taoism, Roman Catholicism, indigenous beliefs. Education: Literacy: 94 percent. Economy: Industries: food processing, garments, shoes, industrial machinery. Chief crops: rice, potatoes, soybeans, coffee, tea, corn. Minerals: phosphates, coal, gas, manganese, bauxite, chromate, oil. Crude oil reserves: 1.8 billion barrels. Arable land: 17 percent. Per capita GDP: $1,950. Government: Communist.

        However, another cycle has now taken hold. The new leadership in place is facing challenges with a resolve unheard of in previous administrations. For example, in March 2003, Vietnamese Prime Minister Phan Van Khai signed an amendment decree granting more privileges to foreign investors in a bid to reverse the plunge in foreign direct investment. Other recent reforms to attract foreign investment apparently have paid off. In August 2003, the country recorded an eight-month high of 50 licensed foreign direct investment projects worth $306 million.
        Thus, 17 years after the doi moi of 1986, the country appears to be moving forward again. The economy expanded by 6.8 percent in 2001 and 7.04 percent in 2002. Now it is the most robust economy in Asia behind China, and many are promising a 7.3 percent growth figure for Vietnam in 2003.
        Now, with the Enterprise Law and the BTA in place and the country slowly moving its state enterprises into competition with the private sector, what's ahead for the Vietnamese?
        I found an audience of eager businesspeople--but their challenge is a daunting one. I started many of the briefings by describing the most basic of business arrangements, the written contract--the document that brings parties together in a legal relationship. In a country less accustomed to written agreements than to personal trust as the underpinning of business dealings, the use of written contracts can be a bit unsettling. A Vietnamese often finds it difficult to sign a document that sets forth his understanding with another, believing it to be an unnecessary intrusion into a relationship built on trust.
        I advised that the written agreement is the first substantive step in a business transaction; if controversy arises out of the contract, parties then seek redress in the courts. However, the Vietnamese have no such reliance on written contracts. Two U.S. economists found from a 1995--97 survey conducted of 259 companies in Ho Chi Minh City that "more than 90 percent of managers surveyed said the courts are of no use to them in resolving disputes." Therefore, "in order to avoid conflicts or disputes," they told the researchers, "they rely totally on reputation and gossip to select [trading] partners."
        Against a normal cultural inclination in Vietnam for businessmen to "go it alone," I urged them to build a team that could assist their entry into the U.S. market. I noted that consultants and experts could advise on quality control, pricing, and marketing of the Vietnamese products. I added that selection of these team members should be based solely on their professional reputation, expertise, and fees, not on whether they speak Vietnamese or are family members who happen to be living in America.
        Amid the development of an emerging private sector and a nationwide desire to engage the West in trade, one should remember that the country is still run by an autocratic government that is controlled by the Communist Party of Vietnam. Be that as it may, however, many in the West remain convinced that there can be no turning back from free markets.
        The government is closely monitoring this "public to private" phenomenon and is hoping that it will work. It appears that they have no choice, as some of their wise elders have already signed off on it. David Lamb, in his new book Vietnam, Now, noted that Pham Ngoc Uyen, a much-respected Communist Party intellectual, wrote, "Marxist-socialism together with nationalism helped in the primary task of liberating the country, but after 1975, Marxist-socialism failed to help solve the crucial task of combating poverty and backwardness. Therefore, our people are silently abandoning it. The new revolution is one of brains, not guns, [and] Vietnam can succeed only if communism bows out in favor of the free market."