It is the evening of Thanksgiving Day and I am looking at the wide variety of Vietnamese dishes on offer at a charming restaurant located in the courtyard of a former Buddhist monastery in Hanoi. No turkey or apple pie tonight. I pass up the charcoal-grilled squid and opt for large barbecued shrimp, which are delicious, washed down with several bottles of local beer. This unconventional Thanksgiving dinner was occasioned by a consultant project which brought me to Vietnam for the second time in several months. Despite the ill timing, I welcomed the chance to return and observe further this young, dynamic economy that is well advanced in transforming itself from a centrally planned system to a so-called "socialist market economy"..
The process of opening the Vietnamese economy to foreign investment and undertaking market-based economic reforms began some 20 years ago with the "Doi Moi" policy of renovation and economic reforms. At that time, Vietnam was an isolated, very poor, agriculture-based economy. The Soviet model of a centrally planned economy clearly had failed. The early pace of the reforms was gradual, although there was an early move to open the doors to foreign investment. The most important advances have come in recent years with a new Investment Law that provides for equal treatment of foreign and domestic investors in most respects, a new Enterprise Law, a new Competition Law and considerable reductions in bureaucratic red tape. The most important development has been the entry of Vietnam into the World Trade Organization (WTO) in January 2007. Obtaining WTO membership required successfully negotiation of bi-lateral trade agreements with all of Vietnam’s trading partners, including the United States, and undertaking an extensive list of trade and investment liberalization commitments.
Vietnam is seeing the fruits of its market reforms. The economy is booming, sustaining growth at the remarkable average annual rate of 7% over the last 20 years. A dynamic and entrepreneurial private sector, practically non-existent in 1986, has emerged. A contributing factor is a high literacy rate (90.3% for adults). By 2006 the domestic private sector together with the foreign investment sector accounted for 60% of the total output of the economy.
Foreign investment in Vietnam is growing rapidly and is playing a critical role in the economy. Vietnam is seen by international firms as an alternative or supplement to China as a manufacturing base for supplying the global markets. Labor costs are relatively low but there are shortages of skilled labor. For example, Intel reports the firm has yet to find the workers it requires for the one billion US dollar factory it is building. Infrastructure deficiencies are another constraint holding back the full potential of foreign investment.
A walk around the French quarter of Hanoi illustrates some of the characteristics of Vietnam today. The French legacy is evident in the wide tree-lined boulevards, the parks and the French architecture of the older buildings like the Opera, modeled after the Garnier Opera in Paris. In the streets, motor cycles vastly outnumber cars – a reflection of both relatively low income levels and the high duties on imported cars. Some motor cycles carry whole families, others surprisingly large volumes of commercial or agricultural goods. The traffic flows in many directions with a remarkable avoidance of collisions. Overseeing this ballet a traffic policeman in a crisply ironed uniform stands at attention, not moving a muscle. Almost no one wears a helmet.
I am wishing I had a helmet as I stand at an intersection waiting for a gap in the flow to dash across. A smiling man tugs at my sleeve, asks if I am an American and then leads me out into the flow, raising his other hand. The traffic flows smoothly around us. That event, although somewhat embarrassing, was a good example of the friendly attitude of the Vietnamese I encountered. The population is young; many speak some English, are eager to advance themselves, participate in and enjoy the benefits of a market economy. Those that have already made it to the still small but rapidly growing middle class are evident in the up-market multi-floor shopping malls. Yet, even in the streets containing the nicer shops one sees a considerable signs of poverty. I understand the income levels in the countryside, particularly in some disadvantaged regions, are still very low. Measures of income inequality are rising. The contrasts are striking.
Raising my eyes above the traffic chaos, I suddenly notice a vivid indication of one of the most serious infrastructure problems in Vietnam, an amazing complex mass of black telephone wires hanging over the side walks and meeting at street intersections. One of my colleagues reported encountering a traffic jam caused by efforts to rescue a man who somehow became entangled and trapped in the wires above the street (perhaps as he was connecting a new phone).
Addressing Vietnam’s infrastructure needs will require substantial investments. Foreign investors are being looked to for both capital and technology. It will also require improving the ability of the domestic financial system to mobilize savings and channel funds efficiently to their most economic use. Vietnam has committed in the WTO to open up its financial sector over a period of years. The authorities are likely to find it desirable to move at a more rapid pace.
The country’s two stock exchanges in Ho Chi Minh City (former Saigon) and Hanoi have registered significant increases recently in trading volume. Like other young exchanges, price volatility (risk) has been high. For example, investors in the Ho Chi Minh market saw their investments increase by almost 60% in the first three months of this year, followed by a 30% decline over the next five months, and several more sizable swings. Market capitalization is still too small to have Vietnam play a significant role in Cumberland’s Emerging Market Equity ETF portfolio, but we will follow the development of this market.