The conquest of Vietnam by France began in 1858 and was completed by 1884. It became part of French Indochina in 1887. Vietnam declared independence after World War II, but France continued to rule until its 1954 defeat by Communist forces under Ho Chi MINH. Under the Geneva Accords of 1954, Vietnam was divided into the Communist North and anti-Communist South. US economic and military aid to South Vietnam grew through the 1960s in an attempt to bolster the government, but US armed forces were withdrawn following a cease-fire agreement in 1973. Two years later, North Vietnamese forces overran the South reuniting the country under Communist rule. Despite the return of peace, for over a decade the country experienced little economic growth because of conservative leadership policies, the persecution and mass exodus of individuals - many of them successful South Vietnamese merchants - and growing international isolation. However, since the enactment of Vietnam's "doi moi" (renovation) policy in 1986, Vietnamese authorities have committed to increased economic liberalization and enacted structural reforms needed to modernize the economy and to produce more competitive, export-driven industries. The Communist leaders, however, maintain control on political expression and have resisted outside calls to improve human rights. The country continues to experience small-scale protests from various groups - the vast majority connected to land-use issues, calls for increased political space, and the lack of equitable mechanisms for resolving disputes. Various ethnic minorities, such as the Montagnards of the Central Highlands and the Khmer Krom in the southern delta region, have also held protests.

Vietnam is a densely-populated developing country that in the last 30 years has had to recover from the ravages of war, the loss of financial support from the old Soviet Bloc, and the rigidities of a centrally-planned economy. While Vietnam's economy remains dominated by state-owned enterprises, which still produce about 40% of GDP, Vietnamese authorities have reaffirmed their commitment to economic liberalization and international integration. They have moved to implement the structural reforms needed to modernize the economy and to produce more competitive export-driven industries. Vietnam joined the World Trade Organization in January 2007 following more than a decade-long negotiation process. Vietnam became an official negotiating partner in the developing Trans-Pacific Partnership trade agreement in 2010. Agriculture's share of economic output has continued to shrink from about 25% in 2000 to about 22% in 2011, while industry's share increased from 36% to 40% in the same period. Deep poverty has declined significantly, and Vietnam is working to create jobs to meet the challenge of a labor force that is growing by more than one million people every year. The global recession has hurt Vietnam's export-oriented economy, with GDP in 2009-11 growing less than the 7% per annum average achieved during the last decade. In 2011, exports increased by more than 33%, year-on-year, and the trade deficit, while reduced from 2010, remained high, prompting the government to maintain administrative trade measures to limit the trade deficit. Vietnam's managed currency, the dong, continues to face downward pressure due to a persistent trade imbalance. Since 2008, the government devalued it in excess of 20% through a series of small devaluations. Foreign donors pledged nearly $8 billion in new development assistance for 2011. However, the government's strong growth-oriented economic policies have caused it to struggle to control one of the region's highest inflation rates, which reached as high as 23% in August 2011 and averaged 18% for the year. In February 2011, Vietnam shifted its focus away from economic growth to stabilizing its economy and tightened fiscal and monetary policies. In early 2012 Vietnam unveiled a broad "three pillar" economic reform program, proposing the restructuring of public investment, state-owned enterprises and the banking sector. Vietnam's economy continues to face challenges from low foreign exchange reserves, an undercapitalized banking sector, and high borrowing costs. The near-bankruptcy and subsequent default of the state-owned-enterprise Vinashin, a leading shipbuilder, led to a ratings downgrade of Vietnam's sovereign debt, exacerbating Vietnam's borrowing difficulties.

 Vietnam aims to speed up economic growth to 6-6.5 percent in 2013 from this year’s anticipated pace of 5.5-6.0 percent, the government said.In a statement on a government website late on Monday, Vietnam also said it plans to restructure the country’s financial markets and to keep consolidating state-owned businesses. No details about such restructuring were given, and officials weren’t available for comment on Tuesday.

In 2011, Vietnam’s gross domestic product (GDP) expanded by 5.89 percent.

Getting the economy to grow by up to 6.5 percent next year “would be quite a jump,” said Alan Pham, chief economist of VinaCapital, a fund management firm in Vietnam.

This year, growth and industrial output have slowed from 2011.

For the first quarter of 2012, Vietnam reported that GDP grew 4 percent from a year earlier, the slowest pace in three years. It has projected expansion of 4.31 percent for the first half of this year.

Inflation, a serious economic problem, also slowed, falling below 10 percent a year in May for the first time since October 2010.

The government has been restructuring the banking system, state-run enterprises and investment this year, but analysts said so far its steps have been behind schedule.

On May 21, the Vietnam News Agency quoted Minister of Planning and Investment Bui Quang Vinh as saying Vietnam will consolidate its financial markets including the banking system and financial institutions in the next five years.

The State Securities Commission has been drafting a plan to restructure the securities market, including consolidating the stock and bond markets, a commission official said.

The State Bank of Vietnam has cut key policy rates four times this year, bringing the short-term deposit cap to 9 percent, in a move to boost lending and production.

The banking system’s credit growth shrank 0.2 percent in the first five months of this year from the end of 2011. Banks tightened lending on fears of bad debts and businesses have been reluctant to take loans due to high inventory, state media have reported.

Vietnam’s Prime Minister Nguyen Tan Dung has called for economic restructuring and change in its growth model. To move toward this goal, he emphasizes the need to improve market institutions, an aspiration that is easier said than done. For one thing, the state sector has a leading role in Vietnam’s “socialist-oriented market economy.” As Vietnam strives to become a modern industrialized country by 2020, it will continue to pour resources into state owned enterprises. This means picking winners and Hanoi has not been successful at that; examples are found in shipbuilding and steel, which have performed poorly.

Another issue is corruption. Although the leadership vows to fight this deep-seated problem, the result is not encouraging. According to the latest Corruption Perception Index by Transparency International, Vietnam ranked 112 out of 183 countries and territories surveyed in 2011, performing worse than many of its Southeast Asian peers.

Corruption has not only undermined its efforts to improve market institutions and the legal system, but also has eroded the public trust.

At a recent Communist Party conference, General Secretary Nguyen Phu Trong emphasized the need for party members to engage in serious “criticism and self-criticism” to help redress problems. Still, bold and fast-paced reforms are not expected anytime soon. The challenge in achieving more sustainable and inclusive growth requires greater government accountability and public participation.

Less politically sensitive is the task of raising Vietnam’s productivity growth rate. A recent report by McKinsey Global Institute estimates that Vietnam needs to raise its annual average labor productivity growth rate to 6.4 percent from 4.1 percent to achieve an annual average GDP growth rate of 7 percent.

Sustained productivity growth requires more investment in human capital through reprioritizing its resource allocation by diverting state investment, now going to inefficient industries, toward vocational training, health, and education.

Improving property rights in land is another area of opportunity. Vietnam’s current land law, which stipulates “land belongs to the entire people with the State as the representative owner,” has many loopholes and thus creates a fertile ground for corruption. Changing the law to provide more well-defined and well-protected rights will help reduce corruption and land disputes, and boost commercial agriculture.

As top-down reform has proved difficult in the face of well-entrenched interests, a bottom-up approach could provide momentum. Policymakers and advisors that favor reform, as well as international development institutions, should advocate for the adoption of grassroots politics. These have been shown to promote more market-based development and citizens’ participation in governance. The idea is to move political leadership toward consensus by presenting evidence of what works but does not unduly threaten the central government.

Relaxing media control is also vital to the reform process. Recent experiences show that the media plays an important role in exposing corruption and abuse-of-power cases. Benefits of a more independent media run both ways: it helps the central government monitor the activities of provincial and local governments, but it also effectively communicates the people’s concerns and desires directly to top leaders, putting them under more pressure to act.

Although the political will of the Hanoi leadership will largely determine Vietnam’s direction and pace of change, it can still be shaped by the country’s stakeholders through targeted and active advocacy and well-thought-out pressure.


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