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Vietnam: Selected Issues

Author(s):
International Monetary Fund
Published Date:
July 1999
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II. Recent Performance of the Vietnamese Economy1

1. Vietnam achieved an impressive record of GDP growth in the mid-1990s, averaging 9 percent per year during 1992-97 (Table II. 1). The output growth was closely associated with the surge in foreign direct investment (FDI) inflows and exports (Figure II. 1). However, growth began to slow sharply in 1998 as the Asian crisis started affecting the Vietnamese economy and exposed the underlying structural weaknesses, especially in the state-owned enterprise (SOE) and banking sectors. Despite efforts by the government to reorient development toward agriculture and rural areas, and support provided to the SOE sector through bank credit, the overall growth rate has decelerated sharply—based on staff estimates, real GDP rose just 3½ percent in 1998 and now projected for 1999. This chapter looks at the main sources of economic growth in Vietnam in recent years in order to explain the observed growth pattern. Section A focuses on the role of domestic demand and changes in the structure of output during this period, while Section B looks at the structure of FDI and its impact on the economy.

Table II.1.Vietnam: Gross Domestic Product and Components at Constant Prices, 1992-98(In billions of dong, at 1992 prices)
Staff est.
1992199319941995199619971998
Consumption88,227107,674119,045130,106145,830155,974165,549
Private81,85698,192107,193117,083131,118140,102148,709
Public6,3719,48211,85213,02314,71115,87216,841
Investment19,49830,72938,12245,96350,57760,07446,724
Public6,4508,3987,0387,97610,27911,86012,811
FDI4,32610,23919,61923,35819,19325,29311,240
Other private8,72212,09211,46514,62921,10622,92122,673
Change in inventories and statistical discrepancy0-7,920-7,292-4,141-8,329-25,270-17,592
Domestic demand107,725130,483149,874171,928188,078190,779194,682
Net exports of goods and services2,808-11,011-19,842-29,491-32,337-22,267-20,272
Exports35,76540,68057,41572,35396,563127,419155,126
Goods27,66832,24442,62350,00471,117102,228124,388
Services8,0978,43614,79222,34925,44625,19130,737
Imports-32,957-51,691-77,257-101,844-128,900-149,686-175,397
Goods-28,339-44,107-62,650-80,970-102,881-118,291-138,298
Services-4,618-7,584-14,606-20,874-26,019-31,395-37,100
Real GDP110,535119,472130,032142,437155,741168,512174,410
(Annual percentage changes)
Consumption16.922.010.69.312.17.06.1
Private7.620.09.29.212.06.96.1
Public49.948.825.09.913.07.96.1
Investment27.857.624.120.610.018.8-22.2
Public30.2-16.213.328.915.48.0
FDI136.791.619.1-17.831.8-55.6
Domestic demand18.821.114.914.79.41.42.0
Exports28.413.741.126.033.532.021.7
Goods23.116.532.217.342.243.721.7
Imports42.456.849.531.826.616.117.2
Goods39.655.642.029.227.115.016.9
Real GDP8.68.18.89.59.38.23.5
(Contribution to GDP growth, percentage points)
Private consumption8.814.87.57.69.95.85.1
Investment6.410.26.26.03.26.1-7.9
FDI5.37.92.9-2.93.9-8.3
Domestic demand12.820.616.217.011.31.72.3
Net exports of goods and services-4.7-12.5-7.4-7.4-2.06.51.2
(Annual percentage changes)
Deflators
Consumption 1/18.28.49.417.05.83.27.7
Investment 2/-0.33.5-5.710.2-3.1-7.9-1.4
Domestic demand20.013.611.917.15.07.68.4
Exports of goods 3/-3.5-1.55.910.1-1.0-7.7-4.4
Imports of goods 3/-5.20.43.210.1-1.4-7.7-3.9
Exports and imports of services 4/-2.615.45.8-1.30.1-4.2
GDP deflator32.614.314.519.56.16.68.5
Real per capita consumption17.26.97.19.95.04.2
Sources: Data provided by the Vietnamese authorities, and staff estimates.

Consumer price index.

Manufacturing unit value (MUV) index.

World Economic Outlook (WEO) component-based goods trade deflators (average of the export unit value for manufactures, the petroleum price, and the commodity price, weighted by the 1987-89 composition of trade of Vietnam.

Derived from partner country CPI (in U.S. dollars) and dong depreciation.

Sources: Data provided by the Vietnamese authorities, and staff estimates.

Consumer price index.

Manufacturing unit value (MUV) index.

World Economic Outlook (WEO) component-based goods trade deflators (average of the export unit value for manufactures, the petroleum price, and the commodity price, weighted by the 1987-89 composition of trade of Vietnam.

Derived from partner country CPI (in U.S. dollars) and dong depreciation.

Figure II.1.Vietnam: Real GDP, Exports, and Foreign Direct Investment, 1992-99

(Annual percentage changes, except FDI)

A. Sources of Output Growth

2. During the high-growth period of 1992–96, the main impetus to growth came from private consumption and FDI inflows, which on average contributed over 13 percentage points annually to the real growth rate of GDP (see tabulation below). The external sector, by contrast, made a large negative contribution to growth in this period. This suggests that the mid-1990s were a period of domestic demand-led growth, notwithstanding the strong expansion in Vietnam’s foreign trade. Large FDI inflows and imports of goods and services were essentially fueling a boom in consumption and domestic investment—growing by 12½ percent and 23 percent per year, respectively (Table II. 1)—that ultimately could not be sustained by Vietnam’s exports and productivity growth. The adjustment that began in 1997 was thus inevitable, and was compounded—rather than caused in a fundamental sense—by the Asian crisis.

Contribution to real GDP growth
1992–9719971998
(In percentage points)
Domestic demand13.41.72.3
Of which: Private consumption9.15.85.1
Foreign direct investment3.43.9-8.3
Net exports of goods and services-4.66.51.2
Real GDP (percent per year)8.88.23.5

3. The pattern of actual and potential GDP growth over the past decade further confirms this conclusion. After the initial round of market-oriented reforms in the early 1990s, real output expanded rapidly, and by 1993 the large output gap left over from the central planning period was closed (Figure II.2). During 1993–97, however, real GDP was growing about 2 percentage points per year faster than potential GDP. Exports were growing rapidly in this period (29 percent per year on average), but were outpaced by the growth in imports (42 percent per year). Output per worker also increased rapidly, but mainly reflecting capital intensive investment in the SOE sector (Appendix Table 15). While inflation remained subdued due to a stable exchange rate and cautious fiscal and monetary policies, there were many signs of a build-up in excess demand pressures as the economy’s capacity to absorb large FDI inflows—especially in the state enterprise sector—was limited. Following the onset of the Asian crisis, real GDP growth dipped below potential, estimated by the staff at about 5½-6 percent (Figure II.2).2 Assuming continued macroeconomic adjustment and a gradual recovery in exports and private investment, the output gap—currently estimated at ½–1 percent of GDP—would be closed by 2001.

Figure II.2.Vietnam: Actual and Potential GDP Growth, 1990-2001 1/

1/ Data for 1999-2001 are staff projections.

4. Limited data on the expenditure breakdown of GDP do not allow a more detailed analysis of the sources of growth on the aggregate demand side. The production side data provide, however, several additional insights.

  • Sectors that made the largest contribution to growth during 1992–98 were manufacturing (accounting for 27 percent of total growth in value added), wholesale and retail trade (15 percent), and agriculture (13 percent) (Table II.2).
  • Within manufacturing, import-substituting industries—metallurgy, machinery, chemical, and materials industries—contributed on average 40 percent of total growth in manufacturing value added (Appendix Table 8).
  • Industries producing nontradable goods and services—utilities, construction, wholesale and retail trade, real estate, and public services (not counting the large domestic component of transportation services) on average accounted for 48 percent of growth in GDP during 1991-98 (Table II.2).
  • Although the state sector (including government administration) accounted for a solid 42 percent of GDP in recent years, its contribution to real GDP growth fell sharply, from 51 percent in 1996, to 24 percent in 1998 (see tabulation).3 By contrast, the contribution of the nonstate sector (mainly agriculture) increased rapidly in 1998— despite the impact of the Asian crisis—and accounted for 61 percent of over-all growth in 1998.
  • The main source of growth in industry in recent years were foreign-invested enterprises: their share in industrial production increased to nearly one-third, and they accounted for more than half of the increase in industrial output in 1998 (see tabulation). However, much of the increase in output of foreign-invested enterprises was concentrated in import-substituting industries (discussed below).
Table II.2.Vietnam: Contribution to Real GDP Growth by Sector, 1994-98(In percent of total contribution)
Average
19921993199419951996199719981992-98
Agriculture, Fishery and Forestry27.012.410.913.812.413.311.313.9
Agriculture24.612.110.010.710.913.09.813.0
Forestry1.0-0.60.10.80.30.00.00.2
Fishery1.40.80.92.31.20.31.51.2
Industry42.241.442.041.246.348.557.444.3
Mining and Quarrying7.27.78.913.19.2
Manufacturing34.128.2-54.421.222.525.328.727.2
Electricity, Gas and Water Supply3.13.33.43.93.4
Construction8.113.113.89.712.911.011.710.6
Services30.846.247.145.041.338.231.341.8
Wholesale and Retail Trade13.712.916.520.017.914.711.915.2
Hotels and Restaurants11.117.03.63.83.01.79.0
Transport, Storage and Communication3.43.43.14.13.24.32.73.6
Financial Intermediation2.03.34.42.92.51.11.52.7
Real Estate3.53.34.23.33.6
Public Administration, Defense
and Compulsory Social Security0.69.73.42.71.71.84.1
Education and Training2.83.13.14.13.2
Health and Social Work1.51.20.71.11.1
Other3.23.85.43.23.9
Gross Domestic Product100.0100.0100.0100.0100.0100.0100.0100.0
Sources: General Statistics Office and staff estimates.
Sources: General Statistics Office and staff estimates.
Contribution to Real GDP Growth
199619971998
(Percentage points)
GDP9.38.810.3
State4.74.12.4
Nonstate3.23.16.3
Foreign invested1.41.61.6
(Percent of total)
State50.847.023.8
Nonstate34.634.961.2
Foreign invested14.718.215.1
Share in GDP (percent)
State42.843.141.3
Nonstate49.548.349.5
Foreign invested7.78.59.2

5. In summary, the structure of output growth in the mid-1990s has been relatively unfavorable: growth has been to a large extent generated by import-substituting and nontradable industries. Furthermore, the state sector remains very large despite its declining contribution to growth.

Contribution to Industrial Sector Growth
199619971998
(Percentage points)
Industry14.213.212.7
State6.05.35.8
Nonstate2.82.31.6
Foreign invested5.45.67.3
(Percent of total)
State41.940.430.2
Nonstate19.817.312.3
Foreign invested38.242.457.5
Share in GDP (percent)
State49.348.246.2
Nonstate24.023.222.0
Foreign invested26.728.531.8

B. Trends in Foreign Direct Investment

6. Vietnam has benefitted from large inflows of foreign direct investment (FDI) in recent years, averaging over 9 percent of GDP per year between 1993 and 1997. These inflows were attracted by several factors, notably relatively rich natural resources (including oil, gas, and coal), large agricultural potential, good geographic location, and the relatively large domestic market (close to 80 million people). The Asian crisis, however, dealt a severe blow to foreign investment in Vietnam, both because the bulk of FDI originated in Asian countries hit by the crisis, and because it revealed the weaknesses in Vietnam’s investment environment, which were masked by the high growth in the mid-1990s. Given the relative size of FDI inflows and their structure—much of FDI was channeled to heavy industry and real estate—the recent developments raise a number of issues, including the capacity of Vietnamese enterprises to repay large FDI-related loans falling due in the next few years and to compete with enterprises from neighboring countries that are implementing deep structural reforms.

7. Against this background, this section analyzes the structure of FDI inflows in the 1990s and their impact on the Vietnamese economy, and compares the investment environment in Vietnam with some of its key competitors—China, Thailand, and the Philippines. As the lack of accurate data is a major analytical constraint in this area (see Box II.1), many conclusions are tentative. Nonetheless, the available data raise concerns about the impact of FDI on the Vietnamese economy. A picture that clearly emerges is that instead of using FDI to develop a solid export base in low-cost, labor-intensive industries—which was the approach followed, for example in China since the early 1980s—FDI in Vietnam has been channeled to high-cost, capital-and import-intensive industries in which Vietnam has no comparative advantage. Moreover, most FDI projects were implemented through joint-ventures with state-owned enterprises, which are considerably less flexible than the private sector.

Box II.1.Vietnam: FDI Data Issues

FDI data in Vietnam are compiled primarily by the Ministry of Planning and Investment (MPI) from a quarterly survey of enterprises that covers actual FDI commitments, disbursements as well as revenue, turnover, exports, tax obligations, and the number of employees associated with FDI projects. In addition, biannual audit reports of FDI activity are prepared by independent auditors who report to the MPI. Due to resource constraints, however, MPI is unable to verify the accuracy of the data reported by enterprises through on-site inspections or cross-checks with other data banks (e.g., commercial bank data). Because enterprises receive tax incentives for FDI-related activities, the MPI data are likely to be biased upward.

The State Bank of Vietnam (SBV) monitors only the loan component of FDI inflows through registration of loans by enterprises. Except for projects specifically targeted at the domestic market, FDI-financed projects are subject to a foreign exchange balancing requirement, under which foreign exchange outlays have to be financed from foreign exchange earnings generated by the project. As a result, many foreign-invested enterprises did not separately register their FDI-related loans in the past, so the SBV data on FDI inflows are biased downward.

On the basis of discussions with the staff from the MPI, the SBV, and the Ministry of Finance, the staff have adjusted the MPI data based on information on the loan component of FDI provided by the SBV. Specifically, total net outstanding FDI-related loans reported by the MPI were adjusted to US$4.1 billion, compared with US$6.2 billion reported by the MPI, and US$3.5 billion reported by the SBV.

Different FDI data have vastly different implications on the historical balance of payments (in terms of large errors and omissions), but even more so on the medium-term balance of payments outlook, as large repayments of FDI-related loans will start falling due in the next few years. A simple simulation shows that, based on the MPI data, projected repayments of FDI-related loans could be up to US$640 million a year higher during 2001-04 than the projected repayments based on the staff estimates (Table II.3).

Table II.3.Vietnam: Simulation of FDI Loan Repayment Obligations, 1998-2005(In millions of U.S. dollars)
19981999200020012002200320042005
Staff estimates 1/
FDI disbursements (cumulative)9,7059,2408,5557,6616,7756,1375,7295,589
Equity5,5895,5895,5895,5895,5895,5895,5895,589
Loan4,1163,6512,9662,0721,1865481400
Repayments8421,0891,2751,4361,3741,081820535
Divident on equity383391391391391391391391
Interest on loan2372331991519852214
Principles222465686894885638408140
MPI data
FDI disbursements (cumulative)12,57312,03111,24010,0738,6887,5606,7036,310
Equity6,3106,3106,3106,3106,3106,3106,3106,310
Loan6,2635,7214,9303,7632,3781,2503930
Repayments1,0811,3431,5531,8692,0111,6791,348846
Divident on equity429442442442442442442442
Interest on loan3383603202611841094912
Principles3145417911,1671,3851,128857393
Difference in repayments-239-254-277-433-637-597-529-311
Cumulative-239-492-770-1,203-1,839-2,436-2,965-3,276
Assumptions:
Profit (percent)7.07.07.07.07.07.07.07.0
Interest rate (percent per year)6.06.06.06.06.06.06.06.0

Based on various versions of MPI data, SBV data, and discussions with staff from MPI, SBV, and MOF.

Based on various versions of MPI data, SBV data, and discussions with staff from MPI, SBV, and MOF.

Structure of FDI inflows

8. The following are some salient features of recent FDI inflows into Vietnam.

  • Total FDI commitments in the period 1988-98 (including domestic capital contribution) were estimated at about US$33 billion, and total disbursements at US$10 billion (32 percent of commitments), of which the bulk was foreign equity contribution (57 percent) (Table II.4).
  • Two-thirds of FDI inflows originated in the Asian region, most of it coming from Taiwan POC (13½ percent of total disbursements during 1988–98), Japan (12 percent), and Singapore, Hong Kong SAR, and Korea (Table II.4). The large concentration of investors in the Asian region partly explains why FDI inflows fell so sharply following the onset of the Asian crisis in 1997—preliminary data indicate that new FDI commitments fell by almost a half in 1997, and were further substantially reduced—by two-thirds—in 1998. Outside of Asia, the main investors came from United Kingdom (5¾ percent of total disbursements during 1988-98), Australia (4 percent), and France, Switzerland, and British Virgin Islands.
  • FDI disbursements are concentrated in the industrial sector (34 percent of total disbursements during 1994–98), oil and gas (28 percent), and real estate (17 percent) (Table II. 5). Within industry, FDI was disbursed mostly to heavy industries (15 percent of total disbursements during 1994–98), and light manufacturing and food industries. Heavy industry, hotels, and other real estate (office property and apartments) also were the sectors with the largest uncommitted disbursements (Figure II.3). Actual disbursements were the highest in the oil and gas sector (80 percent of commitments).
  • The bulk of FDI disbursements took place between 1993 and 1997, peaking at 11.3 percent of GDP in 1995. Large investments in oil and gas, food, and services started as early as 1993, but tapered off by 1998 (Statistical Appendix Table 31). Only FDI in construction continued strongly in 1998.
  • Two-thirds of total FDI commitments during 1991–98 were made in joint ventures with state-owned enterprises (SOEs), and only 2 percent in joint ventures with the private sector (Table II.6). Investments in fully foreign-owned enterprises accounted for 22 percent of total commitments, while investments in the form of BCC (a business contract between a foreign investor and domestic partner that does not involve setting up a legal entity in Vietnam) and BOT (build, operate, and transfer) contracts accounted for 12 percent of total commitments. In terms of disbursements, however, joint ventures with SOEs accounted for a smaller share of the total (54 percent), while disbursements in the form of BCC contracts were much higher (24 percent), suggesting that many investors faced administrative hurdles and had to change their approach after initially committing investments to joint ventures with SOEs.
Table II.4.Vietnam: Foreign Direct Investment by Country of Origin, 1988-98 1/(In millions of U.S. dollars)
CommitmentDisbursementEquityForeign loansUndisbursed
disbursementcommitments
Singapore5,8579985644344,859
Taiwan POC4,0281,3759134622,653
Japan3,2661,1976835142,069
Korea2,9039414914501,962
British Virgin Islands2,7723522411102,420
Hong Kong SAR2,6719825834001,689
France1,4893281901381,161
Malaysia1,182763308455418
USA1,05927017199789
Thailand994334164170659
Australia873398286112474
UK693586260327107
Switzerland653303127176350
Other4,1021,4368635732,666
Total32,54210,2655,8434,42222,277
(In percent of total)
Singapore18.09.79.68.29.8
Taiwan POC12.413.415.615.710.4
Japan10.011.711.712.211.6
Korea8.99.28.48.410.2
British Virginlslands8.53.44.14.12.5
Hong Kong SAR8.29.610.09.29.0
France4.63.23.23.43.1
Malaysia3.67.45.35.210.3
USA3.32.62.92.82.2
Thailand3.13.32.82.83.9
Australia2.73.94.94.72.5
UK2.15.74.45.47.4
Switzerland2.03.02.22.04.0
Other12.614.014.815.612.9
Total100.0100.0100.0100.0100.0
Source: Ministry of Planning and Investment (MPI), State Bank of Vietnam (SBV); and staff estimates.

MPI data, adjusted on the basis of SBV data and staff estimates and discussions with the authorities.

Source: Ministry of Planning and Investment (MPI), State Bank of Vietnam (SBV); and staff estimates.

MPI data, adjusted on the basis of SBV data and staff estimates and discussions with the authorities.

Table II.5.Vietnam: Cumulative Commitments and Disbursements of FDI, 1994-98 1/(In millions of U.S. dollars)
19941995199619971998Average1994-98
Com.Disb.Com.Disb.Com.Disb.Com.Disb.Com.Disb.Com.Disb.
Industry4,1429346,6091,6719,3442,51411,0023,48412,1873,814
Heavy industries1,4644172,9437134,2261,0445,2111,4665,6831,568
Economic processing zones3661561255612177830252892277
Light industries1,3052141,8154462,6777702,9951,1353,642
Food1,0072881,2394591,8295231,9666311,970711
Oil and gas1,2131,1331,2131,7151,2652,0161,3162,0182,5882,068
Construction919891,6052022,2354752,9466273,013877
Transportation and communications7991241,2382831,9263642,7104413,108456
Real estate3,9034746,6019079,9011,27310,2391,6968,8411,808
Hotels and tourism2,7013543,5116073,4468273,5581,1244,3201,197
Office property and apartments1,2021203,0902996,4564466,6815724,520612
Agriculture, forestry and fisheries573958912161,0042921,5935762,014617
Services375193489308673331997498792500
Total11,9243,04218,6465,30226,3487,26530,8049,33932,54210,140
(In percent of total)
Industry34.730.735.431.535.534.635.737.337.437.635.834.4
Heavy industries12.313.715.813.416.014.416.915.717.515.515.714.5
Economic processing zones3.10.53.31.02.32.42.72.72.72.72.81.9
Light industries10.97.09.78.410.210.69.712.111.212.410.410.1
Food8.49.56.68.66.97.26.46.86.17.06.97.8
Oil and gas10.237.26.532.34.827.84.321.68.020.46.727.9
Construction7.72.98.63.88.56.59.66.79.38.68.75.7
Transportation and communications6.74.16.65.37.35.08.84.79.64.57.84.7
Real estate32.715.635.417.137.617.533.218.227.217.833.217.2
Hotels and tourism22.711.618.811.513.111.411.612.013.311.815.911.7
Office property and apartments10.13.916.65.624.56.121.76.113.96.017.35.6
Agriculture, forestry and fisheries4.83.14.84.13.84.05.26.26.26.15.04.7
Services3.16.32.65.82.64.63.25.32.44.92.85.4
Total100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Source: Ministry of Planning and Investment (MPI), State Bank of Vietnam (SBV); and staff estimates.

MPI data, adjusted on the basis of SBV data and staff estimates and discussions with the authorities.

Source: Ministry of Planning and Investment (MPI), State Bank of Vietnam (SBV); and staff estimates.

MPI data, adjusted on the basis of SBV data and staff estimates and discussions with the authorities.

Figure II.3.Vietnam: Outstanding FDI Commitments, 1994-98

Table II.6.Vietnam: FDI by Form of Investment, 1991-98 1/(In millions of U.S. dollars)
TotalAverage
199119921993199419951996199719981991-981991-98
(Percent)
Commitments
100 percent foreign-owned2644261,0228231,6831,1511,1994397,00521.5
Joint ventures1,4441,2922,3972,7144,6425,9072,23599621,62766.5
With SOEs1,4231,2762,3592,6314,5155,7872,11890821,01864.6
With private sector21163884127120117876091.9
BCC674575167127365907953043,0969.5
BOT00003255422708142.5
Total2,3812,2933,5853,6646,7227,7024,4561,73832,542100.0
Disbursements
100 percent foreign-owned380186263413554689842,27122.4
Joint ventures1041454358371,1691,1461,3372785,44953.7
With SOEs1001404238121,1451,1221,2882705,30152.3
With private sector35122424244981491.5
BCC6192302537674263474352,41023.8
BOT0000402390.1
Total1683169221,6362,2601,9632,07480010,140100.0
Foreign equity
100 percent foreign-owned485142166214250358751,29423.1
Joint ventures791303505567274756281353,08055.0
With SOEs761273425467124645941252,98553.3
With private sector3381116103410951.7
BCC757920531134216614251,21721.7
BOT00004025110.2
Total1582946971,0331,2878911,0022405,601100.0
Foreign loans
100 percent foreign-owned0447952082633333597721.5
Joint ventures820952734316267061702,36952.2
With SOEs819912594236146901682,31551.0
With private sector01414812162541.2
BCC2149722635032323551,19426.3
BOT00000000-20.0
Total10382385949899211,0725604,538100.0
Memorandum items(Percent of total disbursements)
Share of foreign loans
100 percent foreign-owned0.94.425.236.350.447.548.441.243.0
Joint ventures7.713.721.832.636.854.752.861.143.5
With SOEs7.813.221.531.836.954.853.662.243.7
With private sector5.827.834.157.733.650.432.423.836.4
BCC2.915.632.142.151.912.168.681.749.5
BOT-21.3
Total5.811.925.936.343.846.951.770.044.8
Source: Ministry of Planning and Investment (MPI), State Bank of Vietnam (SBV); and staff estimates.

MPI data, adjusted on the basis of SBV data and staff estimates and discussions with the authorities.

Source: Ministry of Planning and Investment (MPI), State Bank of Vietnam (SBV); and staff estimates.

MPI data, adjusted on the basis of SBV data and staff estimates and discussions with the authorities.

Contribution to the Vietnamese economy

9. Total turnover by enterprises established through FDI expanded rapidly from 2 percent of GDP in 1991 to 14¼ percent of GDP in 1997, but declined by 1 percent of GDP in 1998 (Table II.7).4 Transportation and telecommunications accounted for the largest share of turnover (on average, 26 percent of the total), followed by heavy and light industries, agriculture and forestry, hotels and tourism, and construction. These data indicate that much of FDI has been channeled to import-substituting industries (heavy industry, light industries producing consumer goods) or nontradables (construction, large segments of transportation and telecommunications, office property and apartments).

Table II.7.Vietnam: Turnover by Enterprises Established Through FDI, 1991-98 1/(In millions of U.S. dollars)
Average
199119921993199419951996199719981991-98
Heavy industries728651674146831,2321,526
Petroleum and gas0000010010
Light industries71973180380582734787
Food industry1363162362442434
Agriculture and forestry8112986141165313278
Fisheries5519111119232012
Construction003146943152181
IP/EPZ infrastructure 2/0005671712
Hotels and tourism101731801698918247
Office property and apartments0342225403724
Services0682823121215
Transportation and communications6311519125039944536154
Banking and finance000026419243
Culture, health, and education0261825274048
Total1512244851,0252,0572,6993,6283,343
(In percent of total)
Heavy industries4.712.413.416.320.125.333.945.621.5
Petroleum and gas0.00.00.00.00.03.70.00.00.5
Light industries4.88.515.017.618.521.620.223.516.2
Food industry0.71.313.115.817.616.412.09.510.8
Agriculture and forestry5.05.16.08.46.96.18.68.36.8
Fisheries36.38.62.31.10.90.80.50.36.4
Construction0.00.10.61.43.31.64.25.42.1
IP/EPZ infrastructure 2/0.00.00.00.50.30.30.50.40.2
Hotels and tourism6.87.66.47.88.23.35.01.45.8
Office property and apartments0.01.50.82.21.21.51.00.71.1
Services0.02.61.62.71.10.50.30.41.2
Transportation and communications41.451.239.424.419.416.510.01.625.5
Banking and finance0.00.00.00.01.31.52.51.30.8
Culture, health, and education0.31.01.31.81.21.01.11.41.1
Total100.0100.0100.0100.0100.0100.0100.0100.0
Memorandum item
Turnover as percent of GDP1.92.33.86.910.211.514.213.38.0
Source: Ministry of Planning and Investment (MPI), State Bank of Vietnam (SBV); and staff estimates.

MPI data, adjusted on the basis of SBV data and staff estimates and discussions with the authorities.

Industrial promotion (IP) and export processing zones (EPZ).

Source: Ministry of Planning and Investment (MPI), State Bank of Vietnam (SBV); and staff estimates.

MPI data, adjusted on the basis of SBV data and staff estimates and discussions with the authorities.

Industrial promotion (IP) and export processing zones (EPZ).

10. Another indication of the import-substitution bias of FDI inflows is the relatively small share of exports by enterprises established through FDI: on average, these enterprises accounted for only 8½ percent of total exports during 1991-98 (Table II.8). And while merchandise exports generated by FDI-related projects are estimated to have increased steadily to about US$1.5 billion (16 percent of total exports) in 1998, these exports represented on average less than a third of total turnover of foreign-invested enterprises. Moreover, almost 90 percent of exports by enterprises established through FDI came from just two sectors—oil and gas and food industry. While Vietnam has a comparative advantage in these industries, the export potential of industries such as textiles and garments, footwear, and the vast agricultural sector has hardly been tapped through FDI.

Table II.8.Vietnam: Exports by Enterprises Established Through FDI, 1991-98 1/(In millions of U.S. dollars)
Average
199119921993199419951996199719981991-98
Heavy industries00000000
Petroleum and gas0058829154441653
Light industries0000001511
Food industry26145146260446539686
Agriculture and forestry00321023526760
Fisheries00311235
Construction001512847
IP/EPZ infrastructure 2/0000010010
Hotels and tourism005848591028668
Office property and apartments00330236
New cities001000125
Services0014121415189
Transportation and communications00000000
Banking and finance002791091615
Culture, health, and education001013196
Total263562383978931,2251,531
(In percent of total)
Heavy industries000000000
Petroleum and gas00163717364315
Light industries000000110
Food industry10010041616550444563
Agriculture and forestry009466544
Fisheries001100000
Construction004001001
IP/EPZ infrastructure 2/0000011001
Hotels and tourism0016201511749
Office property and apartments001100000
New cities000000100
Services004542112
Transportation and communications000000000
Banking and finance008421112
Culture, health, and education000000200
Total100100100100100100100100
Memorandum item
Exports by FDI enterprises
As percent of total exports0.10.211.95.97.612.213.416.38.5
As percent of turnover
by foreign-invested enterprises1.12.773.423.219.333.133.845.829.0
Source: Ministry of Planning and Investment (MPI), State Bank of Vietnam (SBV); and staff estimates.

MPI data, adjusted on the basis of SBV data and staff estimates and discussions with the authorities.

Industrial promotion (IP) and export processing zones (EPZ).

Source: Ministry of Planning and Investment (MPI), State Bank of Vietnam (SBV); and staff estimates.

MPI data, adjusted on the basis of SBV data and staff estimates and discussions with the authorities.

Industrial promotion (IP) and export processing zones (EPZ).

11. The import content of FDI projects is very large: total imports by foreign-invested enterprises amounted to US$2.7 billion in 1998 (26 percent of total imports), and were almost 80 percent higher than total exports generated by these projects (Table II.9). It is of particular concern that import-substituting and nontradable industries—heavy industry, construction, real estate, and transportation and telecommunications—accounted for 57 percent of total imports by enterprises established through FDI, and less than 1 percent of their total exports in 1998.

Table II.9.Vietnam: Contribution of FDI to Domestic Economy, 1998 1/
No. ofNo. ofTurnoverImport ValueExport Value
ProjectsWorkersIn US$ mil.In US$ mil.InUSSmil.
Heavy industries51940,5391,5266390
Petroleum and gas3880300653
Light industries574148,75578754211
Food industry12712,956317194686
Agriculture and forestry32534,36627815260
Fisheries905,95212105
Construction2379,6641815927
IP/EPZ infrastructure 2/1449912510
Hotels and tourism18717,5344717568
Office property and apartments1433,576241146
New cities332005
Services1082,20015119
Transportation and communications1258,799542220
Banking and finance321,237431415
Culture, health, and education844,08348156
Total2,606290,9953,3432,7321,531
Percent of total
Heavy industries19.913.945.623.40.0
Petroleum and gas1.50.30.00.042.7
Light industries22.051.123.519.80.7
Food industry4.94.59.57.144.8
Agriculture and forestry12.511.88.35.63.9
Fisheries3.52.00.30.40.3
Construction9.13.35.421.70.4
IP/EPZ infrastructure 2/0.50.20.41.90.0
Hotels and tourism7.26.01.46.44.4
Office property and apartments5.51.20.74.20.4
New cities0.10.00.00.00.3
Services4.10.80.40.40.6
Transportation and communications4.83.01.68.10.0
Banking and finance1.20.41.30.51.0
Culture, health, and education3.21.41.40.60.4
Total100.0100.0100.0100.0100.0
Source: Ministry of Planning and Investment (MPI), State Bank of Vietnam (SBV); and staff estimates.

MPI data, adjusted on the basis of SBV data and staff estimates and discussions with the authorities.

Industrial promotion (IP) and export processing zones (EPZ).

Source: Ministry of Planning and Investment (MPI), State Bank of Vietnam (SBV); and staff estimates.

MPI data, adjusted on the basis of SBV data and staff estimates and discussions with the authorities.

Industrial promotion (IP) and export processing zones (EPZ).

12. Finally, the impact of FDI on employment is small—the 2,600 FDI projects in operation as of end-October 1998 employed 291,000 workers (Table II. 9), only 4 percent of total urban employment of 7.1 million. The average FDI project employed just 112 workers.

The regulatory framework

13. A frequent complaint by foreign investors has been the relatively high cost of doing business in Vietnam, both in terms of time needed to set up and operate foreign-invested projects, and relative to business costs in other Asian countries. As shown in the tables below, Vietnam does not fall behind its competitors in terms of incentives for attracting foreign investments.5 In terms of the cost of land, electricity and water, however, it does not score well. Another shortcoming of the investment environment in Vietnam is that regulations favor projects (on a positive list) that are export-oriented and import substituting. Businesses outside this positive list are required to balance their foreign exchange outlays and earnings, effectively preventing them from selling their products domestically if raw materials are imported. Furthermore, domestic producers (especially the SOEs) are protected through extensive trade restrictions (see Chapter V).

Table II.10.Foreign Investment Incentives in Selected Asian Countries, April 1997 1/
Vietnam 2/ChinaThailandPhilippines
Profit tax10%15%20%20%
15%20%25%25 %
Tax holidays2-4 years2 years3-8 years6-10 years
import duty

exemption
Equipment

Raw materials

Kits

Commodities
Equipment

Raw materials

Kits

Commodities
Equipment

Raw materials

for construction
All kinds of

raw materials
Source: World Bank staff estimates.

Applicable to industrial and export processing zones.

Government Decree of January 23, 1998 extended profit tax exemptions for certain projects to four years, and widened import duty exemptions to capital goods and raw materials not produced locally.

Source: World Bank staff estimates.

Applicable to industrial and export processing zones.

Government Decree of January 23, 1998 extended profit tax exemptions for certain projects to four years, and widened import duty exemptions to capital goods and raw materials not produced locally.

Table II.11.Prices of Land, Electricity, and Water for Industrial and Export Processing Zones in Selected Asian Countries, April 1997
CountryLand US$/sq. mElectricity US$/KWhWater US$/cub.m
China0.06-3.2 (per year)0.015-0.0370.02-0.06
Thailand39.5-66.7 (for project life)0.100.36
Malaysia6.3-22.2 (for project life)0.620.35-0.46
Indonesia45.0-61.7 (for project life)0.050.42
Philippine0.20-0.24 (per month)0.037-0.073n.a.
Vietnam65-150 (for 50 years)0.080.45
(1.3-3.0 per year)
Source: World Bank staff estimates.
Source: World Bank staff estimates.
1This chapter was prepared by Dubravko Mihaljek, Il Houng Lee, and Etibar Jafarov.
2Potential GDP was roughly approximated by applying the Hodrick-Prescott filter to annual GDP data in constant 1994 prices over the period 1988–98. The estimated current growth rate of potential GDP is sensitive to the endpoints of the data series, and is hence given as a range.
3The share of state management in GDP is stable at about 10½ percent of GDP.
4Staff estimates based on MPI data as of end-October 1998.
5The Foreign Investment Law of November 12, 1996 and the implementing regulations (Decree 12-CP of February 18, 1997) established tax incentives for foreign investors and decentralized the authority for issuing investment licenses (except for some investments in oil and gas, telecommunications, and construction sectors). A separate regulation (Decree 36-CP of April 24, 1997) governs the granting of tax incentives in industrial zones, export processing zones, and high-tech zones.

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