Text: Ambassador Peterson Testimony on U.S.-Vietnam Trade
(Trade agreement may signal Vietnam on path to reform)If Vietnam is to succeed economically, it must integrate into both the Asian and global economies and, to do that, it needs a transparent, predictable business climate based on the rule of law, and it must move decisively from a centrally planned to a market economy, according to Douglas "Pete" Peterson, U.S. Ambassador to Vietnam.
In testimony before the Senate Foreign Relations Committee August 4, Peterson said: "The agreement we have recently reached in principal with Vietnam on a Bilateral Trade Agreement will commit Vietnam to undertake a broad range of measures to open its markets to U.S. goods, services and investment and to establish a transparent, predictable business market within reasonable transition periods. Good implementation of this agreement, once signed, would signal a fundamental shift in Vietnam's economic policy."
That agreement, Peterson said, also may be an indication that Vietnam's leaders finally are prepared to move forward with economic reforms in other areas. "This agreement will produce greater economic freedom and commercial opportunity for domestic private enterprise empowering the Vietnamese people to direct their own economic destiny," he said.
Vietnam's leaders recognize the need to pursue reform and are struggling to pick the right mix of policies, he said. "A prosperous Vietnam integrated into world markets and regional organizations will contribute to regional stability," Peterson said. "For these reasons, the United States seeks to encourage and support the Vietnamese leadership as it makes crucial decisions on economic reform."
Following is the text of Peterson's testimony, as prepared for delivery:
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TESTIMONY OF DOUGLAS "PETE" PETERSON U.S. AMBASSADOR TO VIETNAM
SENATE FOREIGN RELATIONS COMMITTEE
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY,
EXPORTS AND TRADE PROMOTIONAND
SUBCOMMITTEE ON EAST ASIAN AND PACIFIC AFFAIRS
AUGUST 4, 1999
Mr. Chairman, I would like to thank you for this opportunity to provide you with my views on prospects for the Vietnamese economy and U.S. business and exports in that market. Vietnam faces many serious economic issues as it enters the 21st century, all with significant social and political ramifications. If Vietnam is to succeed economically, it must integrate into both the Asian and global economies. As elsewhere in Asia, it must promote the private sector to increase productivity and growth to meet the aspirations of its large and youthful population. To do all this, it needs a transparent, predictable business climate based on the rule of law, and it must move decisively from a centrally planned to a market economy.
Vietnam's leaders recognize the need to pursue these goals and are struggling to pick the right mix of policies and timing to navigate this difficult course. If they are successful, the Vietnamese economy will grow and diversify, creating greater economic prosperity and empowering the Vietnamese people to shape their own destiny. And, if Vietnam succeeds economically, opportunities will expand for U.S. business in this potentially lucrative market of 78 million people. A prosperous Vietnam integrated into world markets and regional organizations will contribute to regional stability. For these reasons, the United States seeks to encourage and support the Vietnamese leadership as it makes crucial decisions on economic reform.
When I was nominated to be the first U.S. Ambassador to a unified Vietnam in 1996, enthusiasm about Vietnam's economic future ran high. In the late 1980's, Vietnam had begun making the transition from command to an open, market-based economy, in a process known there as doi moi. The results were impressive, Vietnam became one of the fastest growing economies in the world averaging around 8% annual GDP growth from 1990 to 1997. During this same period there was a three-fold increase in investment and a five-fold increase in domestic savings. Economic reforms also led to a dramatic increase in foreign trade, which now represents about 80% of GDP, and foreign direct investment inflows, equivalent to 8% of GDP in 1997. Based on Vietnam's initiation of market-based reforms and rapid economic growth in the mid-1990's, some even speculated that Vietnam was destined to be the next Asian tiger. With the lifting of the U.S. trade embargo in 1994, U.S. businesses rushed in to catch up to their foreign competitors that had entered in the early 1990s.
However, by 1997, Vietnam's economic reform process had stagnated. This, coupled with the Asian financial crisis and falling world prices for Vietnam's commodity exports, hit the Vietnamese economy hard in 1998, causing exports to drop, foreign investment to plummet and economic growth to slow dramatically. Many foreign businesses, having grown weary of the difficult, non-transparent Vietnamese business climate, began scaling back their operations and investment plans. A few even left the market altogether.
The prospects for 1999 are little better. The International Monetary Fund estimates that the Vietnamese economy will grow less than three percent this year. In the first quarter, exports and foreign investment declined over the previous year's already depressed figures. Vietnamese leaders have begun warning the country's population to expect more belt-tightening before things get better.
Meanwhile, uncertain about the possible economic and political consequences of reinvigorating and broadening the reform process, the leadership is deeply divided over the content and pace of future economic reform. Those who favor reform have until now been stalemated in their efforts by those wary of change. Many worry that economic reform will have unintended social consequences, such as an increase in unemployment, especially in the inefficient state enterprise sector. Their concerns have not been assuaged by arguments that recent economic crises in Asia, Russia and elsewhere were the result of the failure to reform enough not the failure of reform itself.
We should not ignore the tangible changes already wrought in Vietnam by the process of opening to the world. Vietnamese society in 1999 bears little resemblance to the isolated, bankrupt and tightly-controlled society of a decade ago. With continued opening and expansion of economic opportunity, the middle class will grow, the population will become more educated and exposed to more ideas, and Vietnam will evolve to become a more open society. We should do all we can to support those who favor economic liberalization.
The U.S. Government is providing support for economic change in Vietnam both to maximize the opportunities for U.S. business and to advance our interests in the rule of law and democracy. Both in Vietnam and here in Washington, U.S. government officials actively engage Vietnamese officials in an ongoing dialogue on economic reform and necessary improvements to the country's business climate. OPIC insurance and financing programs are available for U.S. investors. EXIM is close to signing agreements which will make its export support programs available to U.S. exporters. We are providing technical assistance on drafting commercial laws and formulating trade and investment regime reforms as part of a rule of law program.
Negotiations on a bilateral trade agreement and accession to the World Trade Organization (WTO) provide leverage, holding out the prospect of possible Normal Trade Relations (NTR) treatment in the future. The agreement we have recently reached in principal with Vietnam on a Bilateral Trade Agreement will commit Vietnam to undertake a broad range of measures to open its markets to U.S. goods, services and investment and to establish a transparent, predictable business market within reasonable transition periods. Good implementation of this agreement, once signed, would signal a fundamental shift in Vietnam's economic policy. It may also indicate that its leaders are now prepared to move forward with much-needed and long-delayed economic reforms in other areas. U.S. business will not be the only beneficiary. This agreement will produce greater economic freedom and commercial opportunity for domestic private enterprise empowering the Vietnamese people to direct their own economic destiny.
We know from past experience that we can achieve significant results by working in close cooperation with the Vietnamese government. The excellent cooperation we have received from the Vietnamese government and people resulted in the repatriation of dozens of remains of our missing from the war in Vietnam and the collection of vast quantities of information that will lead to the resolution of many more cases. This cooperation has formed that foundation of our bilateral relationship and has permitted us to move forward in other areas. Likewise, Vietnam has made consistent progress on emigration issues in recent years. With Vietnam's cooperation, we are approaching completion of many refugee admissions categories under the Orderly Departure Program.
I am optimistic that Vietnam and its leadership may be poised to turn the corner on economic reform. Vietnam's Principal Deputy Prime Minister recently admitted to the people of Vietnam that the country was indeed facing grim economic prospects and that failure to move forward quickly with economic reform was, at least in part, a cause. In so doing, he took the first, essential step down the path to economic reform by admitting that there was a problem, that the government shares responsibility for this problem, and that economic reform must form part of the solution.
We can help move this process forward by working with the Vietnamese on implementation of their commitments under the bilateral trade agreement. We will then continue working with the Vietnamese on making the additional changes needed to accede to the WTO. We will also maintain pressure to expand economic reform to other areas including state enterprise privatization, financial sector reform and movement to a flexible exchange rate regime. U.S. business will benefit. And the Vietnamese people will become more prosperous and better to direct their own destiny. The world will benefit as Vietnam becomes more integrated into regional organizations and the international community, gaining a greater stake in being a constructive world player.
Background on the Vietnamese Economy
Although traditionally an agricultural-based economy, Vietnam has met some success in diversifying its economy. Thus, while agriculture's share of economic output has declined, falling as a share of GDP from 40% in 1990 to 26% in 1997, industrial output has climbed from 22% to 31% in the same period. Vietnam is heavily dependent on agricultural exports such as rice, coffee, tea, cashews and rubber for its future economic development. Earnings from rice and other agricultural exports will remain an important factor in funding Vietnamese industrialization. Land reform and the decollectivization of agriculture produced improvements in agricultural productivity in the 1990s, and the country became the second largest exporter of rice in the world. However, Vietnamese agriculture is close to the limit of its ability to feed Vietnam's population, now growing at 1.8% a year. Industrial development shows the most promise in the export sector, particularly in light industrial products. Most branches of heavy industry -- cement, phosphate, steel, etc. -- have stagnated or declined. State-owned enterprises which comprise most of the limited modern industrial sector are marked by low productivity and inefficiency, the result of a command-style economic system applied in an underdeveloped country. Southern industry -- largely composed of textiles, food processing and light manufacturing -- is somewhat more efficient.
Subsidies have been cut to some inefficient state enterprises. The government has also repeatedly stated its intent to privatize -- or "equitize" as it is known locally -- state enterprises;, although few enterprises have been privatized to date. These reforms have not been sufficient to significantly increase Vietnam's industrial competitiveness. For the time being, the low quality of the current output of state enterprises will continue to prevent Vietnam from becoming a world competitor in advanced manufactured goods. Reform of the state enterprises has been identified by both the World Bank and the International Monetary Fund as key to promoting higher economic growth.
From the late 1970s until the 1990s, Vietnam was heavily dependent on the Soviet Union and its allies for trade and economic assistance. To compensate for drastic cuts in Soviet-block support after 1989, Vietnam liberalized trade, devalued its exchange rate to increase exports, and embarked on a policy of regional and international economic re-integration. As Vietnam's integration into the global community progressed, bilateral and multilateral aid to the country resumed.
As a result of these reforms, exports expanded significantly, growing by 20-30% per year. By 1997, exports accounted for 35% of GDP. However, imports also rose during the same period, which led to persistent trade and current account deficits. Despite strong export growth and considerable efforts to control import growth, Vietnam ran a $1.7 billion trade deficit in 1997.
Prospects for Vietnamese exports and overall current account performance will improve once the country has completed discussions now underway on accession to the World Trade Organization and for a Bilateral Trade Agreement with the United States. The Bilateral Trade Agreement (on which much work has been done, but some work remains) must be completed and approved by Congress before Vietnam receives normal trading rights (formerly known as "most-favored nation" treatment).
Foreign investment in Vietnam grew rapidly until 1997. By the end of 1997, more than 2,200 investment licenses had been issued to foreign firms valued at $31.4 billion, with firms from East Asia predominating. As of December 1997, Singapore firms have received licenses to invest $4.9 billion in Vietnam. Other important international sources of investment include Taiwan, Hong Kong, Japan and South Korea. The United States is the eighth largest source of foreign investment with licenses to invest over $1.1 billion in the country. Foreign direct investment inflows reached an all time high of $2.1 billion in 1997, more than covering the country's $2 billion current account deficit. However, structural economic problems and the Asian financial crisis have taken a toll, causing foreign investment license applications and approvals to fall dramatically and warning of potential future balance of payments probleMs. New investment reached only an estimated $800 million in 1998 and $600 million in 1999.
Among the serious structural problems that the Vietnamese government must still address are its perennially high current account deficit, a relatively high level of external indebtedness at 36.6 percent of GDP in 1998, and rising levels of non-performing loans in the banking sector. In addition, Vietnam's national savings rate, at just over 20 percent in 1998, is among the lowest in East Asia and must be raised to fund much needed public investment. The international community has called for a bold new round of structural economic reforMs. While the Asian financial crisis has helped focus Vietnam's leaders on the importance of a continuing commitment to economic reform, the reforms implemented to date have not adequately addressed the core issues. Both the World Bank and the International Monetary Fund have recommended that Vietnam promote private sector growth by increasing efficiency and downsizing state enterprises. This will also require financial sector reform, trade liberalization, and a flexible exchange rate system. These reforms could produce higher growth by promoting the development of small and medium private enterprises and attracting greater foreign and domestic private investment. International financial institutions have indicated a willingness to support a well-targeted safety net to ease the potential social impact. However, to date, the country's leadership has chosen to follow a less ambitious, slow-paced reform program.
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