Tue, Jun 17, 2008 page10

• FEATURE: Vietnam gets brutal lesson on capitalism's downside

  • AP
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  How quickly Asia's newest "Tiger Economy" has stopped roaring.

  A year ago, Vietnam’s stock market was one of the hottest on earth, the real estate market was soaring and economic growth blazing at 8.5 percent. Exports were booming and foreign investment was flooding in, helped by the country’s admission to the WTO.

  Millions across the communist country celebrated the marvels of capitalism.

  

  A customer counts US dollar bills at an Asia Commercial Bank office in Hanoi, Vietnam, yesterday.

  PHOTO: AP

  Today, inflation has hit 25 percent, pinching incomes, and workers have been striking for higher wages. Property prices are falling and the stock market has plummeted to a two-year low, dashing the hopes of many people who expected to strike it rich.

  Like thousands of other first-time investors in China and India, where shares also have plunged, Vietnamese are getting brutal lessons in the down sides of capital markets.

  “My son and my husband are so angry at me,” said Doan Kim, a retired nurse who lost 70 percent of her US$20,000 nest egg in the stock market. “My life is not the same.”

  Many of the strengths that lured a record US$20 billion in foreign investment to Vietnam last year remain in place. The nation has a rapidly emerging middle class and has adopted many economic reforms in recent years. Half its 84 million citizens under age 30.

  Sealed off by years of war and economic isolation, the nation has a pent-up demand for consumer goods, making it an attractive destination for retailers.

  Leading Vietnam’s growth were the booming telecommunications, manufacturing and construction industries, as well as exports of clothing, shoes, rice and coffee.

  For now, foreign investment pledges are still rising, reaching US$5.1 billion in the first quarter, up 36 percent from the same period a year ago.

  But the government has slashed its growth target to 7 percent from as much as 9 percent, and the prevailing mood has soured dramatically.

  Like economies around the world, Vietnam has been buffeted by soaring food and oil prices, and authorities are trying to rein in surging inflation.

  Vietnam’s government, eager to modernize the country, has also been spending freely on big infrastructure projects, incurring a large fiscal deficit and injecting lots of money into the overheating economy.

  The nation’s state-owned banks have been extending easy credit to the massive state-owned companies that still dominate Vietnam’s economy. Credit growth last year exceeded 50 percent, said Jonathan Pincus, chief economist at the UN Development Program.

  The central bank has raised interest rates and authorities have taken other steps to slow inflation. But it has not been moving quickly enough, hindered by a collective decision-making style and well-connected pressure groups with an interest in the status quo, Pincus said.

  Pervasive corruption has also undermined economic efficiency.

  Vietnam’s economy has been among the world’s fastest growing since it began accelerating free-market reforms a decade ago. But like many developing countries, it has found it difficult to restrain inflation while capital has flowed in.

  “All of us gathered here today are only too aware of spiraling costs and the negative effect that inflation is having on the business environment in Vietnam,” Michael Pease, chairman of the American Chamber of Commerce in Hanoi, said at a forum last week.

  At the same meeting, the IMF’s country chief for Vietnam called on the government to curtail spending, raise interest rates and tighten credit to state-owned companies.

  Despite its short-term difficulties, Vietnam is likely to continue making significant economic progress, IMF’s Benedict Bingham said.

  “The longer-term economic reform story that made Vietnam such an attractive destination for foreign direct investment in recent years remains a compelling one,” he said.
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