The Hindu : Experiencing volatility of global market

Online edition of India's National Newspaper
Monday, Sep 30, 2002

Opinion

Opinion - News Analysis

Experiencing volatility of global market

By C. Rammanohar Reddy

The flight from Singapore to Ho Chi Minh City is full. Two flights a day and seats are hard to come by. Tourists and returning Vietnamese are the largest number. But most conspicuous are the occupants of the Business Class. Foreign consultants in economic policy, investment bankers, prospective investors, and development consultants.

A less than charitable remark is that "Vietnam is now run by consultants''. But it is true, the consultants seem to be everywhere and full of advice about everything. Vietnam has been under IMF-World Bank programmes during much of the 1990s.

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Advice and aid, however, come at a price. Some western countries insist that the production from any programme that they fund in Vietnam cannot be exported to their markets. This is the Vietnamese introduction to western-style protectionism. Until now, the Government has turned down aid with such strings.

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After the East Asian financial crisis broke in 1997, the country is learning the hard way that there is a downside to engagement with the world market. Export growth which was 25 per cent in 2000, plummeted to 4 per cent in 2001 and is under 3 per cent so far in 2002. Meanwhile, imports have boomed, growing by 16 per cent in 2002 and widening the trade deficit. Annual economic growth is now under 5 per cent.

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Over 90 per cent of exports are primary commodities such as crude oil (the country is a small oil exporter), rice, marine products, coffee, rubber, pepper and tea. Falling commodity prices and export competition (India is squeezing Vietnam in rice with its exports sold at BPL prices!) have brought the country's export sector down with a thud.

Unfortunately, novices that the Vietnamese are in the world market, they do not know how to cope. When global coffee prices were very high in the mid-1990s, there was a wild expansion of area under coffee. Now prices have slumped by 30 per cent and more. So senior officials have been advising the hapless small farmers to destroy their coffee plants.

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The Vietnamese are also learning the hard way about the dirty practices in world trade. Cat fish is an example. Some 400,000 people in the Mekong Delta are dependent on cat fish farming. Yet, cat fish farmers in southern U.S. first raised the unreasonable complaint that the Vietnamese product could not carry the same name. The Vietnamese were forced by law not to use the name "cat fish". But when that did not slow imports, U.S. farmers raised the dumping flag. Anti-dumping investigations are now on with demands to impose 190 per cent customs duty! This is a bitter pill for Vietnam which thought that the 1994 bilateral trade agreement with the U.S. would bring it equal, if not favoured, treatment.

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Foreign Direct Investment in Vietnam boomed during the 1990s. From under $400 million in 1992, it rose to $2.6 billion in 1997. Funds have been concentrated in oil exploration, creation of Vietnam's first refinery, heavy and light industry (automobile assembly). Hotels and real estate too have received fairly large amounts.

But the FDI boom has ended. Inflows are now only around $1.3 billion a year. In this small country, FDI earlier played a major role in fresh domestic investment. At its peak, FDI accounted for as much as a third of total investment. Today the share is only 15 per cent.

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Investment in the auto sector is a reflection on a larger scale of the Indian experience. There are as many as 11 automobile joint ventures (only seven in motorcycles where there are more than 40 local manufacturers). All the big names are there: Mercedes, Ford, Toyota... But many have read the market wrong. Ford, which has an installed capacity of 25,000 vehicles, last year sold less than 2,000.

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A visitor to Vietnam will leave as much troubled as optimistic about the future of the economy. It has embarked on an ambitious but also very risky engagement with the world market. An export basket loaded with primary products is tossing the Vietnamese around. Diversification into manufactures (textiles and footwear) is not proving easy. And FDI has turned fickle.

A country at war for more than half a century during the 20th century — with the French, Japanese, then again French, the U.S. and even China — needs some respite and a measure of prosperity.

(Concluded)

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