OVERVIEW OF INVESTMENT SITUATION AND POLICY IN VIETNAM IN THE 1990s (part 2)

Bài giải trình cũ:

OVERVIEW OF INVESTMENT SITUATION

AND POLICY IN VIETNAM IN THE 1990s

(reduced version in english)

Part 2: The effectiveness of investment capital

A/ Impact of policy and mechanism on the effective allocation of scare resources

I- Impact of policy and mechanism on the allocation of investment capital in early 1990s

In late 1980s and early 1990s, economic liberalization and the open door policy created a milestone in the national ideology: multi-sector economy is adopted in the reality, and the motive to enrich oneself is stimulated in all social groups. Investment policies are greatly eased to allow the participation of all economic components. Capital mobilized for investment in early 1990s has grown rapidly with increasingly higher effectiveness.

The liberalized economic mechanism in all industries, together with the devaluation of the Vietnamese currency in 1988-1992, is a decisive factor to the comprehensive reallocation of all development resources, including investment capital. In fact, thanks to the new economic mechanism, which includes the removal of obstacles to investment as mentioned above, exports and other industries- both labor intensive and capital saving- have made increased profits. This encourages investors to move their capital to agriculture, light industry which are labor intensive and export- oriented, and particularly small scale industry and handicraft, instead of heavy industry as the case was in 1985-1987.

During this time, there were unprecedented incidences after the unification of our country in 1975. Laborers moved from cities to the countryside to take part in agriculture production. Capital flows were transferred from heavy to light industries, from the State to non-State industries, especially to those industries that support agriculture, service industry and consumer good production. Thus, investment was restructured, and scarce resources such as capital, land, labor, material were reallocated among different economic sectors and among secondary industries in each sector in a way that could improve the effectiveness of trade, production, and of investment capital.

The ICOR index with the deviation of 1 year has decreased from above 3 (in 1986-1089) to less than 3 in 1990, 2.4 in 1991, 1.76 in 1992, and 2.2 in 1993. Therefore, it can be assured that economic and investment policies in late 1980s and early 1990s, has brought good results for the allocation of investment capital.

Despite the fact that exact statistics on investment by different economic components in different areas are not available, the overview of the national economy shows that investment structure in early 1990s was relatively rational. In 1990-1991, the average proportion of investment capital reserved for agriculture production (particularly for export) was up to 16.4%, while only 42.4% for service and 41.2 % for industrial production.

Table 3: Investment capital structure (%)

Industries	1990	1991	1992	1993	1994	1995	1996	1997	1998
Industrial production and construction	38.4	44.0	48.9	55.3	39.0	33.0	41.1	31.5
Agriculture, forestry and fishery	17.1	15.7	12.7	8.9	9.4	12.0	8.5	15.4
Service and social infrastructure	44.5	40.3	38.4	35.8	51.6	55.0	50.4	53.1

Source: Ministry of Planning and Investment

II- Impact of policy and mechanism on the allocation of investment capital in the period from 1993-1994

In this period, economic policies and mechanism became less responsive to the development of the production force than the case had been in 1992-1993. In some areas, such as encouragement of foreign direct investment or private investment, policies and mechanism even became more tightening. On the other hand, a great deal of foreign exchange was poured into Vietnam: more income from oil, the lifting of US financial embargo against Vietnam, the sharp increase in investment capital from FDI and from Vietnamese overseas, the return of international financial aid.

These sources of foreign capital made an important contribution to higher domestic saving and investment, fostering the economic growth in 1990-1995. However, excessive foreign capital led to the revaluation of Vietnamese currency, greatly reducing comparative advantage of sectors that produce internationally commercialized goods (tradable goods sector). The negative effect of this economic and investment mechanism was that both domestic and foreign investors did not dare to put their money to vital industries, high-tech industries, or capital intensive industries. Instead, they turned to invest in the production of goods that could only be domestically rather than internationally. Examples can be found in those areas as estate trading, sales, restaurant service and tourism… In 1996-1997, when those areas faced lower demand, investors again turned their money to industries or products still protected by the State. This process resulted in sharp increase in prices of land and other estates, labor, service, pushing up production cost.

Thus, investment and economic policies and mechanism after 1994 helped accelerate the process of automatic reallocation of resources in a less effective way. Ineffective use of investment capital was reflected not only at the national economy’s level, but also at industry and product levels. At the national economy’s level, our ICOR increased greatly in 1990s, from only 1.76 in 1992 to 5.3 in 1998, fastest growth in Asia. At industry level, the proportion of investment in agriculture fell deeply after 1991 while this industry had lowest ICOR and employed the most labors.

At product level, on the one hand, irrational regulation and policy distortion led to excessive supply and low economic efficiency. On the other hand, this inefficiency was partly due to misleading decision in choosing key industries irrelevant to the present development level of the economy. Investment was concentrated on purchasing machines and equipment assembled in other countries, and on building up factories and workshops, which led to high production cost and inward development of the economy.

Effects of investment related policies in 1993-1994 period can be rephrased as 3 dangerous tendencies: increasing exhaustion of domestic capital sources due to the imbalance and ineffectiveness of investment structure, and slow improvement of people’s income (even decreased income and poorer life for people in rural areas); the recurrence of subsidized credit funds through ….  whereby all industries and branches, including private and foreign invested enterprises expect preferential capital from the Government; and lastly, foreign direct investment has seen continuous decreases every year since 1996.

III- Conclusion on the impact of policy and mechanism on investment capital allocation in 1990s

The fact was that Vietnam saw relatively high growth rates in 1990s and that huge development of investment capital was the most important factor to this achievement. However, it can be concluded that policies and mechanism in this period lessened the effectiveness of capital allocation as they turned investors to industries that met domestic demand or industries that were still under the protection of the State and reduced the competitiveness of the overall economy.

B- The role of capital mobilization through Vietnam Postal Savings Fund

I- The objective of mobilizing capital through Postal Savings Fund

1/The objective of postal savings service

Based on the need to thoroughly utilize all domestic sources for socio-economic development, the Government issued Decision 215/1998/QD-TTg dated 20/5/1998 allowing the General Corporation of Postal and Telecomminication to provide the postal savings service. In May 1999, the General Department of Postal and Telecomminication decided to establish a Postal Savings Fund.

The reality shows that Vietnamese people are hardworking and thrifty, but receive low income, and as a result, rarely keep their money as savings accounts in banks. Moreover, the banking network is not widespread, especially in mountainous, rural and remote areas. Forms of mobilizing capital are not diversified, and not suitable for low-income population. The mobilization of capital through the State Treasury is still limited and not on a regular basis.

However, the majority of households keep their money, from several hundred thousands to several millions VND, in their pockets. With a mobilization system convenient, flexible and suitable to the urgent need of people, these small sums of money can be utilized for the national economic development. This is the basis for the formulation of postal savings fund system. In the first 2-3 years, the post and telecommunication industry can make use of over 500 post offices to mobilize capital, more effectively than any banks. In the future, it can also extend its service to other post offices in the total of 2760 existing post offices all over the country.

The major objective of postal savings service is to attract and mobilize idle funds in all social groups to be contributed to the State Budget for investing in infrastructure and some key national economic projects, in accordance with the Government’s guidelines and Law on Domestic Investment Encouragement. Another objective is to motivate the saving movement in the society, in order to stabilize people’s income and lives, while making better use of the post and telecommunication system.

As decided by the Prime Minister, all capital sources mobilized through the postal savings system will be kept in forms of term savings or demand savings. Presently, the postal savings service includes 2 categories for Vietnamese currency: term savings (3 months, 6 months, 12 months) and installment savings (6 months, 12 months, 18 months and 24 months).

2/ State management mechanism for postal savings funds

-        The Ministry of Finance is responsible for instructing, supervising and examining the whole process: transferring, receiving, using and refunding between the General Corporation of Postal and Telecommunication and the Development Assistant Fund. The Ministry of Finance will: decide the interest rate that the Development Assistant Fund has to pay to General Corporation of Postal and Telecommunication for using funds; consider the guarantee rate for regular refunding; instruct, supervise and examine the implementation of accounting regulations provided for postal savings service; act as the State administration authority in financial issues for the postal savings service provided by the General Corporation of Postal and Telecommunication;

-        The Ministry of Finance shall cooperate with the Ministry of Planning and Investment to work out and submit to the Government the yearly plan for postal savings fund mobilized by the General Corporation of Postal and Telecommunication. The State Bank of Vietnam is responsible for supervising and controlling interest rate, the transfer of money, safeguarding the postal savings storage system.

-        The General Department of Post and Telecommunication shall carry out the role of State management for postal savings service by issuing service providing licenses, setting up rules, regulations, and service standards. The General Corporation of Postal and Telecommunication is responsible for organizing the provision of postal savings service and ensuring that mobilized capital is properly transferred to the Development Assistant Fund.

II- Mechanism and policies to make effective use of capital mobilized through Postal Savings Fund

The mechanism of using mobilized capital: the General Corporation of Postal and Telecommunication retains part of the mobilized capital for regular repayment (the maximum proportion is 20% of the planned mobilized capital). The rest is transferred to Development Assistant Fund, which in turn extends loans to investment projects in accordance with the orientation of the Government and of the Law on Encouragement of Domestic Investment. The fact indicates that this mechanism has been applied flexibly in that the Postal Savings Fund usually retains only enough cash for repayment purpose.

Interest rate: Interest rate for postal savings is decided by the General Corporation of Postal and Telecommunication based on the average of the interest rate existing on the market, provided that the planned mobilized fund is ensured.

Interest rate at which the Development Assistant Fund has to pay for using mobilized capital is decided by the Ministry of Finance based on the State Treasury Bills of the same term. Ministry of Finance on the last day of every quarter (3 months) pays the General Corporation of Postal and Telecommunication the interest calculated on the net capital transferred to the Ministry of Finance.

Mechanism for transferring and refunding of mobilized capital: On the 10^th or 25^th of every month, based on the planned amount, the Development Assistant Fund receives the mobilized capital from the General Corporation of Postal and Telecommunication on terms of 1 year, 2 years, 3 years and 5 years. To ensure the security of the whole postal savings system, the Ministry of Finance, the State Bank of Vietnam, and the General Corporation of Postal and Telecommunication shall cooperate in supervising its operation.

 

From the beginning of its operation, May 1999, through August 2000, the Postal Savings Fund has mobilized VND 2211 million, of which VND 1315 million has been transferred to Development Assistant Fund. This Fund has been operating more and more effectively. However, it is currently difficult to evaluate how efficiently the mobilized capital has been used at the Development Assistant Fund. This is due to a number of reasons, particularly the following:

-        The Postal Savings Fund has only been in operation for 1 year; the mobilized capital is too small to evaluate its social and economic effects.

-        Furthermore, this small sum (estimated at VND 1200 million) will be transferred to the Development Assistant Fund and add to its own capital of VND 7000 million, which will be put to different purposes without separating mobilized capital and State Budget’s fund. It is therefore difficult to evaluate the mobilized capital a lone.

-        The Development Assistant Fund itself only started its operation at the beginning of 2000. Presently, it is carrying out feasibility study and some trial projects. As a result, it is difficult to evaluate the Fund’s operation.

However, from what the Postal Savings Fund has achieved, it can be asserted that this Fund is necessary and that its mobilized capital has made its contribution to the Government investment and to the implementation of Government’s guidelines on pushing up the demand. Hereby, we will discuss on the effectiveness of this policy and mechanism

C- evaluation of public investment policies and mechanism

Two major objectives of public investment are to develop infrastructure and to formulate a number of State-owned enterprises. To evaluate the effects of public investment policies and mechanism, it is impossible not to mention its important role to the national economy. The importance and constructive effects of public investment in Vietnam can be reflected by the following two points:

1/ Public investment is the most important for long-term development. To achieve fast and stable development, and to carry out long-term industrialization projects, it is clearly important to invest in infrastructure including roads, ports, energy, post and telecommunication, water-resource system, land reclamation … These projects require large initial investment, but have low profitability and late return. It is, therefore, impossible for other economic components especially private sector, to invest in these areas because they are neither interested in nor strong enough to take part in these projects. As a result, only State sector, with capital mobilized through the State Budget and from foreign assistant sources, can carry out these projects.

The practice in Vietnam shows that, infrastructure is one of the prime concerns for investors when they choose to invest in any area. Not only foreign investors but domestic investors also keep away from underdeveloped areas. Without investment to develop production and improve income, there will not be enough capital for infrastructure development as well. This vicious circle constitutes the fact that developed areas become increasingly developed while in areas with degraded infrastructure, economic development is more and more difficult and there is a danger of being lagged behind. Over the past years, public investment in our country has been reserved for the development of infrastructure, human resource, health care service and education. Therefore, public investment has played a vital role in creating pre-conditions for the development of other economic sectors.

2/ Public investment is the prime source of investment for the development of basic industries, capital-intensive industries, or those industries vital to national economic development

As analyzed above, industries that require large amount of capital but have low return on investment can not be developed without public sources. In fact, the government has mobilized the public investment sources to develop these industries through State-owned enterprises with a view to remove the “bottle-neck” in the economy, facilitating the development of other economic sectors.

Although the excessive intervention of the Government in economic activities may, to some extent, pose negative effects to the development of private sector, public investment has basically been positive and supportive to the development of other economic sectors in Vietnam, even the foreign invested sector. For example, without investment in water system, electric supply, transportation, post and telecommunication (which goes beyond the ability and interest of private sector), private sector can not have survived nor carried out its business. Without primary industries and capital intensive industries, there would be a shortage of input, semi-products, machinery and equipment for the production of the private sector.

3/ Public investment in Vietnam also plays an important part in the development of agriculture sector. In fact, the stable and fast growth of economic development in 1990s was partly due to State’s public investment in agriculture.

4/ Public investment plays a pivotal role in the development of public services, health care service, culture, education, science and technology… It is decisive to enhancing the quality of human resource for long-term development. It is also important for the reallocation of social production force, reducing the gaps between the rich and the poor, removing the difference in the level of development.

5/ In difficult economic situation, as the case has been since 1977, public investment has accounted for an increasingly higher proportion and motivated other economic components to invest. In fact, public investment has gradually pushed up the investment demand of other economic components.

There are some worries that the increasing proportion of public investment over the past years may have negative impacts on the growth of private sector’s investment by reducing credit supply and raising the cost of capital mobilization by the private sector. However, practical and theoretical experience from many countries around the world has proved that it is not a cause-and-effect relation. The impact of public investment on private sector’s investment depends on whether they are supplements to or substitutes for each other. The impact would be positive if they are supplements.

The practice in Vietnam has proved that public investment has been reserved for developing infrastructure and some primary industries, both of which are necessary for the development of the national economy in general and for private sector in particular. Thus, public investment is supplement to private investment, reducing cost and improving capital efficiency. Generally, growth in public investment is positive to private sector’s investment in Vietnam as well as in other developing countries, especially those countries at the same level of development.

In brief, it can be concluded that the positive effects and importance of public investment, and of public investment mechanism are great to the national economy of Vietnam. It has been proven that:

1-    Public investment mechanism witnessed a great deal of improvement in 1990s and has become increasingly adaptive to the requirements of the national economy. Public investment mechanism was not in place until 1990 when the Government issued Decree 385/HDBT, the first government legal document regulating the management of investment and primary construction. Since then, a number of legal documents have come into effect. Up to now, Vietnam has a relatively complete and comprehensive policy and mechanism for the mobilization and management of public investment, which is up to international standards and ensuring the effectiveness of public investment.

2-    Many modern and scientific methods for the management of public investment have been in place to evaluate and select projects with a view to meeting the practical need, while ensuring the socio-economic effects. Public investment structure has been adjusted in a way that socio-economic effects are improved in the long-run and capital efficiency is enhanced through tendering regulations.

Recommendations

It is a visible potential that the domestic capital source will increase following the momentum of economic development. However, the problem of how to mobilize this potential for the course of economic development used to be relatively thorny. Therefore, in the next 5 years, it is necessary to conduct a comprehensive renovation of the mechanism for mobilizing investment capital from all sources. This renovation should be based on increased economic liberalization and reduction of obstacles caused by cumbersome and bureaucratic administration, and conducted in a way that participation of all economic sectors is encouraged. New policy and mechanism should attract capital from all sources, small and large, in order to carry out the industrialization and modernization policy set by the Communist Party.

In addition to full exploitation of capital sources, it is also urgent to renovate the management and personnel structure to improve the capital efficiency. We are making another step towards the knowledge-based economy and globalization. Therefore, efficiency and effectiveness should be top priorities, as well as basis for any development process. This is the biggest demand and challenge for Vietnam at the threshold of 21^st century.

Table 1: Value, structure and growth rates of investment resources

Investment resources	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001
Total (bill ®ong, current prices)	6747	11526	19755	34167	43100	68048	79367	96870	96400	103900	124600	147480
Investment from State Budget	2237	2246	7045	12558	10300	13575	16544	20570	20700	26000	29700	34280
State Credit	300	1060	636	2391	3200	3064	8280	12700	14800	19000	21200	25000
Investment of SOEs	420	1300	574	2418	2000	9409	11070	13300	16100	19000	22300	25000
Investment of private sector	2800	5000	7000	8000	14400	20000	20773	20000	20500	21000	29000	35000
Foreign Domestic Investment	990	1920	4500	8800	13200	22000	22700	30300	24300	18900	22400	28200
Structure %	100	100	100	100	100	100	100	100	100	100	100	100
Investment from State Budget	33,16	19,49	35,66	36,75	23,90	19,95	20,84	21,23	21,47	25,02	23,84	23,24
State Credit	4,45	9,20	3,22	7,00	7,42	4,50	10,43	13,11	15,35	18,29	17,01	16,95
Investment of SOEs	6,22	11,28	2,91	7,08	4,64	13,83	13,95	13,73	16,70	18,29	17,90	16,95
Investment of private sector	41,50	43,38	35,43	23,41	33,41	29,39	26,17	20,65	21,27	20,21	23,27	23,73
Foreign Domestic Investment	14,67	16,66	22,78	25,76	30,63	32,33	28,60	31,28	25,21	18,19	17,98	19,12
Growth rates, prices of 1995
Total of investment		25,6	49,8	51,2	9,1	15,7	13,3	12,5	-3,4	1,9	14,8
Investment from State Budget	11,7	11,9	41,6	70,9	-13,8	11,8	31,2	24,8	5,2	18,7	9,35
State Credit		...	-50,0	200,0	21,0	-27,3	116,9	58,8	16,7	21,3	6,8
Investment of SOEs		60,6	-46,7	119,3	81,3	-9,7	25,1	46,3	15,6	11,6	12,35
Investment of private sector		20,5	42,0	7,1	17,7	4,6	-1,1	-4,4	-9,8	-3,2	32,2
Foreign Domestic Investment		-11,1	131,4	116,5	49,7	33,3	14,3	3,8	-23,0	-26,5	13,4

Source: Ministry of Planning and Investment (MPI)

Table 2: Role of Foreign Direct Investment in Total Investment

- Realized Foreign Direct Investment    (million USD)	214	394	1099	1946	2671	2646	3250	1956	1563	1600
- Exchange Rate (VND / USD)	7400	10000	11000	10980	11027	11300	12300	13900	14000	14200
- Total Inves. of whole society (mil usd)	1558	1976	3106	3925	6171	7024	7876	6935	7421	8775

Source: Ministry of Planning and Investment (MPI)

Table 3 : Foreign Direct Investment Incentives in Selected Asian Countries, Avril 1997

	Vietnam	China	Thailand	Philippines
Profit tax	10% 15%	15% 20%	20% 25%	20% 25%
Tax holidays	2-4 years	2 years	3-8 years	6-10 years
Import duty exemption	Equipment, Raw materials, Kits, Commodities	Equipment, Raw materials, Kits, Commodities	Equipment, Raw materials for construction	All kinds of Raw materials

Table 4: Evolution of FDI in Viet nam (number of projects and millions of USD)

Indicators	88-90	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000
Number of projects	213	153	195	273	371	412	368	331	275	230
Registred capital	1582	1294	2036	2652	4071	6616	8640	4654	3897	1567	1600
Legal capital	1272	859	1553	1728	2099	3311	3096	2221	1795
Contribution of ViÖt Nam to legal capital	265	212	215	367	551	878	695	321	626
Number of projects disolved	6	37	48	34	58	56	52	80	95
Capital value of project disovled	24	293	402	79	217	477	1023	352	2428	564
Expired projects	2	1	3	3	1	2	3	3	3	1
Expired capital	0,25	1,00	13,94	15,50	0,13	0,50	74,60	0,82	19,09	1,00
Number of projects supplemented capital	1	6	10	51	73	122	134	132	133
Capital value of projects supplemented capital	0,3	7,7	49	222	504	1247	684	1146	875	641	600
Projects in implementation	72	83	142	215	314	362	334	322	275
Effective investment capital	959	1468	2315	3671	4233	6570	7666	4397	3897
Disbursed investment capital		214	394	1099	1946	2671	2646	3250	2189	1933	2000
Disbursed legal capital		190	366	845	1297	1606	1489	1373	545	251
Legal capital disbursed by Vietnam		46	66	220	271	428	393	288	143	73
Legal capital disbursed by foreign partners		144	300	625	1026	1178	1096	1085	402	178
Foreign capital in Vietnam		168	328	879	1675	2243	2253	2962	2062	1758	1800
Turnover		151	224	485	1023	1852	2583	3851	3910	4600	5500
Budget contribution					128	195	263	315	317	271	260
Exports of foreign invested enterprises		52	112	257	352	440	786	1790	1983	2577	3250
Imports of foreign invested enterprises						1458	2043	3197	2668	3398	4000
Employment in foreign invested enterprises (by thousand people)									270	296	327

Source : Economy and forecast review, MPI, 10-11/20