Sun, Oct 21, 2012 - Page 14 News List

Bust threatens middle class made by Vietnam’s boom

Inequality and corruption may unravel all the good from the country’s post-war economic rebirth

By Nick Heath, Jason Folkmanis and Nguyen Dieu Tu Uyen  /  BLOOMBERG

A farmer carries rice on a paddy field at Ngai Cau village, outside Hanoi, Vietnam, on Thursday.

Photo: Reuters

Vietnamese coffee farmer Le Thi Do looks up at the 5m high ceiling of her six-bedroom, yellow house and then points to a small building next door and says: “We used to live in that tiny one.”

Do, 71, has been a barometer of Vietnam’s fortunes since the French left in 1954. As the country divided, her family fled to the south, surviving the war and a decade of hardship that followed by growing vegetables. As the economy opened in 1986, she switched to coffee and prospered as the rate of economic growth tripled in five years.

Then, the boom that benefited Do and millions of others started to slow. Prices of fuel, raw materials and labor soared as the currency fell. Banks, tied to funding state monopolies, became reluctant to lend to small businesses. Bad debts rose. Growth fell below 7 percent in 2008 for the first time in seven years and could drop to 5.2 percent this year, the Vietnamese government estimates, the slowest since 1999.

“This year has been very difficult for everyone,” said Do, who had to raise pay for harvest pickers by 20 percent to 120,000 dong (US$5.75) a day. “We need funds for cultivation, but we have limited access to bank lending. You can get a loan if you have good connections. Otherwise, it’ll be little or no money.”

After two decades of development, Vietnam risks falling into the so-called middle-income trap, where rising earnings and costs outpace productivity. Government pledges to restructure banks, curb corruption and reorganize the public sector may take years, prompting investors to turn to faster-growing rivals.

Vietnamese Communist Party General Secretary Nguyen Phu Trong apologized on Monday in a televised address to the nation for “big mistakes” made by the ruling party, including corruption and lax oversight of state-owned conglomerates.

“We are trying to speed up the restructuring process of state companies, aiming to improve their operations and efficiency,” Deputy Finance Minister Vu Thi Mai said in an interview on Oct. 11.

The country faces a challenge that others have struggled to overcome: Of 101 middle-income economies in 1960, 13 attained the World Bank’s high-income bracket by 2008, including Japan, Hong Kong, Singapore, South Korea and Taiwan, according to a report this year from the Washington-based development lender.

Vietnam joined the World Bank’s lower-middle-income bracket in 2009, with gross national income (GNI) per capita rising to US$1,260 last year from US$110 two decades earlier, according to the bank’s Web site. The World Bank classifies lower-middle-income economies as those with GNI per capita of between US$1,026 and US$4,035, and upper-middle-income as those between US$4,036 and US$12,475.

Once Southeast Asia’s fastest-rising destination for foreign investment, Vietnam risks losing out as other nations become more attractive to investors.

Pledged foreign direct investment to Vietnam fell 28 percent in the first nine months of the year from a year earlier, officials say.

“The appetite that a lot of global investors have for Myanmar in particular now, but also countries like Indonesia and the Philippines, is based in part on disillusionment about Vietnam’s performance relative to its promise,” said Mark Gillin, a director of AIM Capital Management Ltd in Ho Chi Minh City. “Given the work ethic and the dynamism of the people here, Vietnam should be doing far better.”

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