Market Economy in Socialist System does spell M.E.S.S

The official trade deficit for 1996, announced by the Vietnamese government, was $4 billion, 17% of the country's GDP. Despite repeated warnings by international organizations on the adverse effects of an uncontrolled deficit on the economy, the government has not succeeded in preventing high-ranking Vietnamese Communist Party members throughout its echelon and military from arbitrary imports for their semi-official trading enterprises. To deal with this problem, the government repeated its 1996 measure of setting more limits on imported goods. The Ministry of Planning and Investment announced it would "limit, but not ban" products on a new list, ranging from electronic appliances, footwear, to cooking oil. To show the government's seriousness this year, the State Bank of Vietnam declared that it would control credit issuance for these products.

The foreign business community in Vietnam was recently warned of the circulation of at least three counterfeit letters of guarantee, purportedly by Vietnam's central bank. Each of the three letters, guaranteeing $100 million, bore the signatures of the Director of the State Bank, Head of the Credit department, and Deputy Director of the International Cooperation department and a date in 1996. The government did not, however, disclose how many foreign firms became victims to such scam or any measures to deal with this problem.

News of Vietnam's most prominent joint-stock bank being unable to make partial payment on its $2.9 million letter of credit earlier this month has shocked the foreign investment community here. Vietnam Joint-Stock Commercial Bank for Private Enterprises (VP) Bank is the largest of its kind in Vietnam and, up to recently, has been believed to be the best managed among its peers. In late 1996, the government's central bank started to disclose the tip of the iceberg: 49% of the loans made by VP Bank were overdue or appeared unlikely to be paid back; the President of another joint-bank received a death sentence for massive fraud; and two directors general of the largest state-owned bank (Vietcomb bank) received prison terms for embezzlement. The State Bank of Vietnam insisted, however, that the overall number of bad loans in the Vietnamese banking system is at 4% to 5%. Statistics of this type are still considered "state secrets" and not to be announced by individual banks.

The overall investment picture facing the six listed closed-end funds for Vietnam today is completely different from the that of just two years ago. Shares in these funds have recently traded at as much as 18% discount to their net asset value and still do not stir up much investor interest. At the start of 1994, they were traded at an average 75% premium. The major factor dampening enthusiasm so far has been the fund managers' inability to find projects and companies worth investing. After two years, the Lazard Vietnam Fund, typical of its kind, still has 88% of its assets in cash. For the portion of funds already gone into projects, now exists a great concern on how to convert investments back to cash if a decision is made to liquidate the fund.

Vietnam does not have a stock market, legal framework, nor even a credible and standardized accounting system. Despite the government's projection every year, many analysts now believe a workable securities market will not come into existence until the next century. Some of the funds have begun to accept the ultimate eventuality--liquidation, while others prepare to turn themselves into some sort of Southeast-Asian fund. The Templeton Vietnam Opportunities Fund has already set a deadline for liquidation or substantial alteration if 65% of assets cannot be invested by October 1, 1997. The Lazard Vietnam Fund plans to call a meeting of share holders to discuss whether to liquidate that fund. The manager of the $67.2 million Vietnam Frontier Fund lamented: "There are pitfalls. Lots of them. A major one is dealing with the government and related entities. They just don't understand what foreign investors expect. Corruption is an issue, too."

In March, state-owned Petro Vietnam notified its six foreign investors/partners of the Vietnamese government's decision to end their joint venture in building Vietnam's first oil refinery in Dung Quat, Quang Ngai province. In 1995, the first investment group, led by Total SA of France, withdrew from the project after the government abruptly changed the location of the facility to Dung Quat, more than 1,000 km from the country's main oil fields.

The selection of the location has long been attributed to the Vietnamese Communist Party's attempt to maintain the delicate political balance among its opposing factions. In 1996, the second consortium of six foreign companies thought they could do better by, instead, trying to convince the government for tax and other economic concessions if they were to build the refinery in Dung Quat. After the public break up of this consortium, the government of Vietnam has declared that it will carry out the $1.3 billion project by itself. Fund managers and bankers believe this decision will deter serious foreign companies from bidding on major infrastructure projects in other areas such as electricity, telecommunications and water filtering and distribution. A Citibank representative observed: "If they don't begin to come together, some people may begin to ask whether the private sector has a role to play."

While foreign investors are trying to suppress their doubts on the future of the private sector in the Vietnamese economy, Do Muoi, General Secretary of the Vietnamese Communist Party, left no doubt about his plan for the state sector. Solemnly, the top Party boss claimed in early March that "State Capitalism" was the national goal and the state sector must continue to occupy the leading position in the economy. "We must build a strong and efficient state-owned economy in both producing and distributing goods....We now resort to state capitalism to build the material and technological foundation for socialism."

Do Muoi leads the hard-line camp in regarding the market economy with the expanding private sector as a serious threat to the Party's role in traditional central planning. Private ownership of the means of production is taboo in Marxism-Leninism, which remains the Party's ideological foundation. After Prime Minister Vo Van Kiet's call in late 1995 for equal treatment of all economic sectors was branded "deviation from Socialism," no one has opposed Do Muoi's order to place Party cells in all joint-venture and foreign-owned companies.

The government's own statistics, however, indicate little support for Do Muoi's grand scheme. Within the same week of his proposals, the official Nhan Dan Daily revealed 17% of 6,250 major state-owned companies were operating in the red. Some owed as much as 2.5 times their value on paper. World Bank officials believe the number of loss-making companies is much higher since Vietnam has not adopted a standardized accounting system and the Party insists on maintaining these bases of political support. Consequently, the state-owned sector, including loss-making companies, continue to enjoy explicit and implicit subsidies from the government. The UN Development Program noted: "The advantages enjoyed by the state-owned enterprises, such as greater access to land, credit and other valuable resources....as well as monopoly powers in some cases, are probably crowding out the development of a dynamic, non-state sector."

A fund manager, involved in investing in Vietnam since the early years of Doi Moi (Economic Reform), sighed in resignation: "Market Economy in Socialist System does spell M.E.S.S." His office is in the process of moving out of Vietnam for another Southeast Asian country.

Ok folks, I shopped around for an article to fit my point and would appreciate some good discussion. I found a little history here and a model of our situation.

Like many people, I have been frustrated lately because I don't know what the rules of the game are. A game is fun when you know the rules. When you get a new game to play you have choices: 1) don't plan the game and sit in the corner 2) Go find the rules 3) Make up you own rules

I chose 2 and 3. Sometimes I don't like the rules but that is the way it is. One of the new rules is that WE ARE A SOCIALISTIC COUNTRY in my opinion. I don't like this, don't want to believe this but all the evidence is telling me it is true.

This article says very shortly and sweetly what happens to a market economy under a socialist system.

My questions is where do you store wealth in a socialistic system. The rules for storing wealth are different for capitalism, socialism and communism.

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