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

Sun, Oct 21, 2012 - Page 14

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.”

Even so, the country has come a long way since 1986, when the government swapped Soviet-style central planning for Doi Moi, or economic renovation — allowing private business and granting land to farmers to grow their own crops.

Do and other coffee growers were some of the first to gain.

Production of coffee, introduced in French colonial days, more than quadrupled in the five years following the start of Doi Moi, reaching 118,800 metric tonnes in 1991, according to the US Department of Agriculture’s Foreign Agricultural Service.

Vietnam is now the world’s largest coffee exporter after Brazil, shipping 1.6 million tonnes in the last crop year, according to the government. The 10 tonnes a year that Do harvests from her 2.5 hectare plot earned her enough to build a 160 million dong home, school her nine children and send two of them on to college.

Change spread as entrepreneurs started businesses in other industries, and the opening attracted overseas manufacturers.

“It was exciting,” said Le Quoc Vinh, 44, chief executive of publisher Le Media Joint-Stock Co in Hanoi, who was studying English at Hanoi University as Doi Moi began. “It was the first time we really felt we had to compete to improve our lives.”

Vinh publishes five consumer titles, including Vietnam’s best-selling fashion magazine, Dep, or “Beauty.” Like Do, he prospered during the boom and now drives a Mercedes, and his eldest son is studying in Australia. He said many clients have cash flow challenges and advertisers are struggling to sell their products.

“If you’re not inside the system, you don’t really have a chance,” Vinh said. “If you’re not friends with that bank, it’s almost impossible to borrow. If you’re not friends with that state-owned company, it’s difficult to win a contract.”

Even with the restraints on business, the commercial hub of Ho Chi Minh City shows the changes of the boom years. In the new terminal at Tan Son Nhat Airport, the scene of intense fighting in the last days of the Vietnam War, travelers eat at Burger King and Domino’s Pizza.

The carved images of gods of the 18th-century, incense-filled Giac Vien Pagoda rub shoulders with the water slides of Dam Sen water and amusement park, where the increasingly chubby children of the new middle class view the changing city from a Ferris wheel.

Intel Corp opened a US$1 billion assembly and testing plant in 2010 in Saigon Hi-Tech Park that Rick Howarth, general manager of Intel Products Vietnam, last month said was “ramping up smoothly.”

In Jabil Circuit Inc’s factory nearby, a young Vietnamese technician carefully solders parts for an electronic point-of-sale terminal, checking her work against a computer screen above her station. As many as 20 percent of Jabil’s 1,350 local workers had no previous computer experience, said Kesavan Swaminathan, general director of the Vietnam unit of US-based Jabil.

“We teach them here,” Swaminathan said at the plant, which operates 24 hours a day, seven days a week. “Some of them initially freaked out, but as they are being guided and coached, they realize it’s an additional skill they are learning.”

Symbols of Vietnam’s boom years in the capital Hanoi are juxtaposed with reminders of how far the country still has to go to even out the benefits of economic gain.

Between the Bentleys and Range Rovers in the square by Hanoi’s yellow-and-cream opera house, street vendors carry food and wares on bamboo poles on their shoulders. Across the square, burnished in gilt, a Gucci outlet sells handbags for twice the average annual wage, while a cleaner in a French maid’s pinafore mops the marble floor.

“Business has been very difficult this year,” said Nguyen Thi Nhung, 38, who sells lingerie and hair accessories from a metal cart.

In a conical hat and face mask to shield her from the traffic fumes, she pushes her cart for miles each day until after 10pm to pay for her children’s schooling.

“If it [Vietnam] wants a smooth transition to an upper-middle-income status, it will have to bite the bullet and credibly restructure its economy,” said Deepak Mishra, World Bank lead economist for Vietnam in Hanoi.

In her yellow house, Do retains the optimism that characterizes many Vietnamese who have seen their lives improve since 1986.

“The situation will gradually get better in the next few years when the global economies recover and the government sorts out problems like the bank lending,” she said. “I’ve seen so many things here improve in the past few decades.”

Additional reporting by K. Oanh Ha