Foreign aid and investment plays an important role for developing countries. It includes the transfer and contribution of ideas about economic policy development, training of public policymakers, financial support to reforms, expansion of public services, and social sector transformation. There are some arguments that foreign aid does not contribute to the extent it should do to economic progress. In particular, the money is often diverted to non-productive activities, many developing countries do not have technical and administrative abilities to absorb and use the funds properly, and most of the foreign programs are poorly planned. In the middle 1980s, Vietnam has opened its borders to international investments with the hope to improve the economic condition in the country. The government has initiated the new program and passed new laws to encourage Foreign Direct Investment.
There are two types of aid provided to Vietnam: Official Development Assistance and Official Development Finance (Lancaster 2006). Development Assistance comprises grants, loans, and foreign aid to poor countries. Development Finance includes all financing, which flows from developed countries and multilateral organizations to the developing states, and provision of interest rates close to commercial rates. Since 1980s Vietnam experienced high annual growth (9 percent) and significantly lowered the level of poverty. Such developments are attributed to the increased development foreign aid.
Background of Foreign Aid in Vietnam: Doi Moi Initiative
Vietnam was isolated from global markets after the end of the Vietnam War in 1975. However, in 1980s, the borders of the country were opened to the world and the government initiated the new reform known as doi moi which was aimed at creating more investment opportunities. Doi moi has failed for the first decade of its existence because very few economic changes were implemented. The renewed doi moi had the objective to create the economic conditions that would attract more foreign aid in the form of direct investment to Vietnam. In particular, it was targeted at the private business enterprises purchasing capital assets, transferring capital and reinvesting profits into weak economies, such as Vietnamese. Vietnamese government realized that foreign aid was vital for the economic growth of the country because it lacked national funds and expertise to survive on its own. In order to attract more investors, it was necessary to create the sound economic and financial framework.
Government plays the important role in encouraging as well as discouraging the foreign aid. Unfortunately, Vietnamese government has done almost nothing to provide the clear way for foreign investment. For example, in 1996 the campaign prohibiting foreign investors from placing foreign names on their shops has much decreased the inflow of foreign aid. In addition, the excessive tariffs placed on production operations made it expensive for foreign companies to locate factories in Vietnam. Through these restrictions Vietnamese government was trying to get as many funds from foreign investors as possible, however, the effect was opposite and many foreign enterprises were forced to leave Vietnam. The changes were needed to retain the remaining companies and to encourage more investment into economy.
Seven years ago, in 1999, the new period of reforms was initiated in Vietnam. The government was feared of western influence and the stronger domestic economy was seen as the mean to protect the nation from globalization. The four major steps were taken: the law on foreign investment was amended, the new enterprise law was created, the Vietnam stock exchange was opened, and Vietnam has entered into Bilateral Investment Treaty with the United States of America. As the result of this initiative, the economic indicators in the country have much improved (Lancaster 2006).
Current Situation in Vietnam
Vietnam has rich natural resources and well-educated population (literacy rate is over 90%). Doi moi initiative was the move from centrally planned economy to the multi-sectoral open market (US-Vietnam Trade Council Press, from http://www.us-asean.org/vietnam.asp). The government has abolished the price control, devalued the national currency and legalized the private entrepreneurship. In addition, the support was withdrawn from the number of national loss-operating enterprises and more attention was paid to the foreign investors. These reforms were aimed at doubling the Vietnamese GDP and becoming the industrialized nation. Even though the reforms are still slow, the above table with economic indicators shows that the success is remarkable for the country that has opened its borders less than 20 years ago.
Vietnamese economy has survived the global economic slowdown of 2001 better than other Asian countries due to the fact that it was integrated less into the global economy and was not vulnerable to the decreased exports level. Foreign aid, as well as foreign investment, is increasing which is highly beneficial for the rapid economic development. Vietnamese leaders insist on not following the outside economic models and believe that the Soviet Union collapsed after the governmental control loosened and Asian economies were imploded because of their dependence on global markets (Mydans 2000). Dennis de Tray, the senior representative of International Monetary Fund in Vietnam, says that the nation has developed its own model for success – ending collective agriculture. As he noted, “Vietnam went from near starvation to the world’ second larger rice exported overnight” (Mydans 2000).
In the year 2000, the per capita income was just $360 a year. Vietnam was the poorest nation in the world with 75 percent of population living in the countryside on the edge of poverty. Attraction of the foreign aid and investment has helped the national government to raise the living standard through liberalization of the private enterprise sector. As one Vietnamese owning the small business noted the government regulations need to be changed: it has to be “do whatever is not forbidden” rather than “do only what is permitted” (Mydans 2000).
As the Planning and Investment Minister of Vietnam Tran Xuan Gia has noted, “Vietnam’s reform process is being backed to the hilt by international donors, and the onus is on the country to improve the disbursement of pledged loans” (Vietnam tackles disbursement of foreign aid, from http://www.atimes.com/se-asia/CH10Ae04.html). The government has tried to improve disbursement by making the process more systematic and monitoring the loan utilization regularly. One of the problems with foreign aid in the year 2001 was the improper and inefficient allocation of official foreign funds. As much as US$1.6 billion (the 20 percent increase compared to the year 2000) of disbursement was granted to Vietnamese economy in 2001.
In the first seven months of 2001, the disbursement of foreign aid projects was $845 million while the signed agreements totaled about $1.47 billion out of which $97 million were nonrefundable aid. In addition, donors have pledged more than $17 billion while the national gross domestic product in 2000 was only $30 billion. Therefore, the foreign aid constituted more than a half of Vietnamese GDP. Foreign aid was provided by 20 bilateral and 15 multi-bilateral donors from Asia and Europe. Japanese aid accounted for more than 40 percent of total aid; World Band and Asian Development Bank provided 21 and 13 percent respectively. Out of this aid, 27 percent has been allocated to transportation and communication industries, 24 percent for power projects and 14 percent on healthcare, scientific research and social projects (Vietnam tackles disbursement of foreign aid, from http://www.atimes.com/se-asia/CH10Ae04.html).
Unfortunately, the number of the projects that have been completed is not very high even though many of them are major infrastructure projects targeted at economic development and improving the standard of living. Most of the non-refundable capital funds were spent on social projects dealing with agriculture and education. For example, residents of the rural areas benefited through safe water supply, hygienic development and construction of schools and healthcare institutions. Vietnamese students were given the opportunity to attend training programs and, as the result, were able to find the better employment.
Foreign aid totaled $4.4 billion in 2006, which is the significant increase compared to the previous years. Nevertheless, new concerns are raised – Vietnam has high level of corruption. For example, recently the news highlighted the aid money misuse by officials to buy the luxury cars. Japan granted $260,000 to the transportation ministry, however, these funds were not used appropriately (Steinglass 2006). Nevertheless, the Consultative Group on foreign aid coordination announced that donors would raise assistance to Vietnam. This initiative was supported by the World Bank and Japanese government with the belief that Vietnamese government is able to fight against corruption.
Vietnam is often referred to as “donor darling” because despite of high corruption level, the foreign aid is used more efficiently than in other developing countries. The income level rises at eight percent per year and the country has the potential to phase out development assistance within ten years. The aid is focused on infrastructure improvement and closing the gap between the poor and rich social groups (Steinglass 2006). Without foreign aid, Vietnamese government would be unable to support economic developments and the majority of population would still be living on the edge of poverty. The foreign aid inflows have increased four times since 2001 and economic progress is obvious.
It is not easy for developing countries to accept every foreign development assistance initiative, even if it is non-refundable aid, because the country has to meet certain requirements set by aid providers. Some of the requirements include good policy environment, low level of corruption, open economy, governmental efforts to improve economic institutions, and public services. It is expected that in the nearest future, the foreign aid will decrease and Vietnam will be in difficult position to access these funds. Vietnam has already entered into agreement with the key aid providers such as Asian Development Bank, Japan and World Bank to ensure the loans and technical assistance for the next two years.
It is worth to note that foreign aid is not always helpful for the developing regions. For example, the increased foreign donation to Africa has caused the decrease in savings ratio and failed to fill the gap between the poor and rich. Thus, there was the inverse relationship between aid and growth (Maren 2002). Even though the situation with Vietnam is different, the Vietnamese government should create more attractive atmosphere for foreign investment inflow into national economy to avoid the repetition of African experience.
The first change to be implemented in Vietnam is the deregulation of phone utility and banking system. While the changes seem simple, their effects might be very important. For example, the international phone charges currently contribute significantly to the business costs in comparison with other Asian countries. The decrease in phone call charges will minimize some of the costs, which foreign investors want to avoid. The low quality and weakness of banking regulations in Vietnam is the second obstacle for the foreign investors. In addition, the access to the capital sources is very limited. Vietnamese government should either encourage the international banking system implementation in the country or significantly strengthen the national banks.
Finally, the stock exchange has overall positive impact on Vietnamese economy and may eventually evolve into the source of capital for foreign donors. Nevertheless, the existing restrictions placed on foreign investors seeking to invest into Vietnamese economy are the burden, which limits both the foreign aid and foreign investment. Foreign aid, financial assistance and technical support are important for weak economies such as Vietnamese. Without foreign investment, Vietnam would not survive on the global market. Providing the attractive market conditions will encourage the foreign investment and further improve economic conditions.
Lancaster, C. (2006). Foreign Aid: Diplomacy, Development, Domestic Policies. University Of Chicago Press.
Maren, M. (2002). The Road to Hell: The Ravaging Effects of Foreign Aid and International Charity. Free Press Publishing.
Mydans, S. (2000, April 13). Vietnam Finds an Old Foe Has New Allure. New York Times International. Retrieved December 27, 2006, from http://www.nytimes.com/library/world/asia/041300vietnam-overview.html
Steinglass, M. (2006, December 15). Donors Raise Aid to Vietnam Despite Corruption Worries. Voice of America News Online. Retrieved December 27, 2006, from http://www.voanews.com/english/2006-12-15-voa20.cfm?rss=politics
Vietnam tackles disbursement of foreign aid. (2001, August 10). Asia Times Online. Retrieved December 27, 2006, from http://www.atimes.com/se-asia/CH10Ae04.html
Vietnam. US-Vietnam Trade Council Press. Retrieved December 27, 2006, from http://www.us-asean.org/vietnam.asp
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