VZCZCXRO6775
OO RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #1438/01 1650918
ZNR UUUUU ZZH
O 140918Z JUN 06
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2338
INFO RUEATRS/DEPTTREAS WASHDC
RUCPDOC/USDOC WASHDC
RUEKJCS/SECDEF WASHDC
RUEHHM/AMCONSUL HO CHI MINH CITY 1335
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 07 HANOI 001438 
 
SIPDIS 
 
STATE FOR E, EAP/MLS AND EB/TPP/BTA/ANA 
STATE PASS USTR DAVID BISBEE AND GREG HICKS 
STATE PASS USAID FOR ANE/AA KUNDER/KENNEDY/WARD 
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO 
TREASURY FOR OASIA 
 
SENSITIVE 
SIPDIS 
 
Ref: A) Hanoi 1240 and previous B) Hanoi 943 and 
previous 
 
E.O. 12958:  N/A 
TAGS: ECON ETRD EINV PREL PINR VM
SUBJECT: VIETNAM'S 20 YEARS OF DOI MOI: ECONOMIC REFORM 
PROGRESS ACCELERATED BY THE BTA 
 
 
HANOI 00001438  001.2 OF 007 
 
 
SENSITIVE - DO NOT POST ON THE INTERNET 
 
¶1. (SBU) Summary: This year marks the twentieth 
anniversary of Vietnam's adoption of its "doi moi" 
(renovation) policy aimed at transforming its command 
economy to a market economy.  While the momentum has 
not been smooth or steady, Vietnam has made significant 
progress since the policy's adoption in 1986. On a very 
basic level, Vietnam can feed itself and produce enough 
rice to be among the top three exporters worldwide as 
well as a leading exporter of coffee and marine 
products.  However, the debate over the pace and extent 
of reforms caused them to stall in the late 1990s. 
Reviewing highlights of economic reform over these two 
decades, with a focus on the last five years, 
illustrates that there has been much progress, but that 
the areas where reform is lagging have been the focus 
of discussion in the bilateral and multilateral WTO 
accession negotiations.  The U.S.-Vietnam Bilateral 
Trade Agreement revived economic reform efforts and, 
together with the changes required on the road to WTO 
accession, has maintained and accelerated it. 
Nevertheless, Vietnam's leaders still need to make some 
hard choices about the lagging areas of reform, 
especially financial sector and state-owned enterprise 
(SOE) reform.  That is where the reformers need to 
concentrate next.  End Summary. 
 
Why and What of Doi Moi? 
------------------------ 
 
¶2. (SBU) Despite whatever ideological commitment 
Vietnam's leadership may have had to its Marxist- 
Leninist system of collectivized agriculture, heavy 
industry and trade with other Council for Mutual 
Economic Assistance (COMECON) countries, they failed in 
their attempt to introduce a productive collective 
agricultural system on the reunited south in the decade 
after 1975.  The effort to impose the collective system 
in the South did not go far enough to make it succeed 
as in many other communist countries or in North 
Vietnam after 1954.  Long time resident economist Adam 
McCarty has attributed the reluctance to use force to 
impose this change because of a desire to end bloodshed 
after so many decades of war in Vietnam.  At the same 
time, the failed attempt to collectivize agriculture 
and the resulting deterioration of the sector turned 
what had been a productive market based system in the 
south into a partially collectivized unproductive 
system.  Declining agricultural output meant food 
production shrank, the GDP growth rate fell from 8.4 
percent in 1984 to three percent or less in 1985-1987, 
and annual inflation rose to 400 percent in 1985. 
Exports slowed especially to COMECON trading partners. 
In addition, a variety of external factors including 
declining Soviet assistance, isolation from ASEAN 
countries and others as a result of Vietnam's invasion 
of  Cambodia in 1978 and a short but bloody and 
destructive border war with China in 1979 weakened 
Vietnam's ability to cover external war debt repayment 
obligations and to meet basic domestic needs. 
 
¶3. (SBU) By 1986, Vietnam's weakening economic 
performance and a looming famine compelled the 
leadership to change course.  Drawing lessons from 
China's economic liberalization, but taking little 
input from the few foreign assistance donors, they 
crafted their own strategy.  Adopted at the Sixth Party 
Congress, doi moi ("renovation) acknowledged the need 
for a successful private sector (especially in 
agriculture), adopted a more outward oriented economic 
policy, gave greater autonomy to state owned 
enterprises and began to decentralize the State system. 
As National Assembly Chairman Nguyen Van An recently 
told visiting Speaker of the House Dennis Hastert, 
"Vietnam learned that [Communist elimination of private 
ownership] is an ineffective system because it deprives 
people of economic incentives to work."  Popular 
 
HANOI 00001438  002.2 OF 007 
 
 
confidence in Doi Moi and participation in the economy 
was hesitant at first, but began to show results in the 
lead up to the Seventh National Communist Party 
Congress in 1991, where Doi Moi was publicly validated. 
 
¶4. (SBU) Vietnam's continued economic liberalization 
was also necessitated by the rapid collapse of the 
Soviet Union's international subsidized economic 
system, which ended friendly credit terms, subsidized 
commodity sales and import quotas.  A popular joke at 
the time reflected Vietnam's economic desperation in 
the form of a telegram exchange between economic cadres 
in Hanoi and Moscow.  Hanoi: ECONOMIC CONDITIONS HERE 
GRAVE.  ASSISTANCE URGENTLY NEEDED.  Moscow:  THINGS 
ARE TOUGH ALL OVER.  YOU MUST TIGHTEN YOUR BELTS. 
Hanoi:  AGREED.  PLEASE SEND BELTS. 
 
¶5. (SBU) By 1990, inflation was less than 70 percent, 
food production was again rising and export performance 
was improving.  Continued improvements in agricultural 
production (especially rice), the shift away from trade 
with COMECON countries, expansion of exports of 
petroleum as well as new products like coffee, rice and 
seafood all fueled growth.  The nascent private sector 
began to contribute to economic activity.  Foreign 
investment began to flow, mainly to export oriented 
sectors.  In the early 1990s, Vietnam benefited from 
the international rush to invest in Southeast Asia and 
the beginning of trade relations with China, reopened 
in 1991.  In 1993, Vietnam began actively cooperating 
with ASEAN, and in 1995 joined ASEAN and normalized 
relations with the United States, increasing the flow 
of trade and investment that began with the end of the 
U.S. embargo in 1994.  By that time, Vietnam was 
growing well and moving towards a market economy with 
inflation under control and progress in poverty 
reduction.  New export sectors like garments expanded 
rapidly. 
 
¶6. (SBU) The reform measures implemented during 1989- 
1996 spanned a broad range.  The Government dismantled 
collective agriculture, replaced it with a system where 
the family was the basic unit, guaranteed land tenure 
to farmers, allowed them to sell produce on the market 
and liberalized the domestic rice trade.  Further 
reforms included removal of most administered prices, 
unifying the exchange rate and allowing it to be set by 
trading on the interbank market.  Two key interest rate 
reforms were raising interest rates to positive levels 
in real terms and switching from setting deposit rates 
to controlling interest rate spreads.  The size of the 
civil service shrank.  The Ministry of Trade eliminated 
many trade barriers (including most import quotas), 
allowed enterprises rather than the State to make 
foreign trade decisions, and allowed more enterprises 
to engage directly in trade.  The Government set up the 
State Bank of Vietnam as a central bank and opened the 
banking system to private and cooperative banks, joint 
stock banks, joint venture banks and foreign banks. 
The number of State-owned enterprises (SOEs) fell from 
12,000 to 6,000, though most eliminated were marginal 
and quite small.  Nearly all direct subsidies to state 
enterprises from the budget stopped, although other 
subsidies continued.  The National Assembly passed laws 
on the budget, foreign investment (later amended 
several times in response to investor concerns), 
companies and bankruptcy.  The tax system changed to 
include a three-tiered value added tax, a uniform tax 
on enterprises rather than on profits and equal tax 
rates between private and state enterprises.  This 
rapid progress earned Vietnam a reputation as an 
emerging "tiger" and led to greater FDI inflows. 
 
1997: Financial Crisis and Hardliner Resurgence 
--------------------------------------------- -- 
 
¶7. (SBU) Progress stopped abruptly in 1997 for several 
reasons.  First, the Asian financial crisis slowed 
 
HANOI 00001438  003.2 OF 007 
 
 
growth throughout the region, causing the decline and 
withdrawal of investment that had originated from other 
Asian countries.  In addition, many U.S. investors who 
had flocked to Vietnam in the euphoria following 
normalization in 1995 withdrew because of frustration 
with the poor business climate and corruption. 
Domestic discontent manifested itself in 1997 and early 
1998 in the form of large-scale rural protests against 
corruption and capricious local officials.  Protests 
and "instability," the rapid withdrawal of foreign 
capital and the general malaise (and accompanying 
political change) in the region in 1997 weakened the 
hands of the reformers and led to a resurgence in the 
power of so-called "hardliners," which peaked with the 
replacement of the relatively reformist Communist Party 
General Secretary Do Muoi by the apparatchik ideologue 
Le Ka Phieu. 
 
¶8. (SBU) Le Ka Phieu linked the pace of reforms to the 
question of the appropriate relationship with the West 
and the extent to which reforms were actually part of 
"peaceful evolution" that should be resisted.  This 
came to a head when Central Bank Governor Cao Sy Kiem, 
a key reformer, tried to move forward too fast for the 
newly nervous Politburo and was discredited allegedly 
for mismanaging loans.  According to one long-term 
observer of Vietnam, these charges were trumped up. 
The bad debts were there (and still are) regardless of 
who is the SBV governor.  The National Assembly, acting 
through its Party controlled Secretariat, refused to 
approve his reappointment after the 1997 Party Plenum. 
Thereafter, the National Assembly began taking a more 
active role in economic management, notably by setting 
the annual inflation target.  Several annual 
consultative group meetings of donors, as well as the 
World Bank and IMF, called for Vietnam to reinvigorate 
its reform process, but there was little progress. 
Reformers were stifled for several years until the 
recognition grew that Vietnam needed to trade with the 
United States in order to integrate more fully into the 
world economy.  Negotiated over five years, the 
Bilateral Trade Agreement (BTA) with the United States 
gave the reformers a means to push forward again.  The 
BTA was so controversial that it took over a year for 
the Party to decide to support signing the agreement; 
the decision to ratify and implement the BTA came 
simultaneously with the decision to eject Le Ka Phieu 
and his hardliner allies from the leadership, and 
represented a strong victory for reformers. 
 
The BTA: Reform Momentum Regained 
--------------------------------- 
 
¶9. (SBU) The BTA not only helped restore reform 
momentum, but accelerated it.  When it finally took 
effect in December 2001, 18 months after being signed, 
the BTA provided a road map with annual targets for 
reform that would bring the economy and legal system 
onto the path towards WTO accession.  Although often 
portrayed monolithically as the catalyst for a sharp 
rise in bilateral trade, the BTA has also had a 
profound impact on Vietnam's system of governance and 
leaders.  At its heart, the BTA's WTO standard reforms 
foster rules-based governance, greater transparency, 
protection of corporate rights and a level playing 
field for all participants, which by definition reduce 
the Party's power over the economy in general and over 
specific economic actors in particular.  The reform 
framework of the BTA had the additional benefit of 
eliminating ongoing case-by-case policy debate on 
reform; the BTA's prescription of necessary changes 
turned economic reform from a fundamental policy 
question into a bureaucratic implementation issue. 
 
BTA Spurs Lawmaking Changes 
--------------------------- 
 
¶10. (SBU) The most profound change that the BTA set 
 
HANOI 00001438  004.2 OF 007 
 
 
into motion was establishing a process to make laws 
systematically, consistently and transparently. 
Requiring input from a variety of stakeholders, both 
foreign and domestic, through a public comment process 
contrasts starkly with the previous practice in which 
the Government made all decisions in isolation. 
Drafters of laws must consider not only what fits into 
Vietnam's existing legal system, but also how to comply 
with the BTA as well as other international 
obligations, including WTO rules.  The establishment of 
key standards and procedures for making laws in the so- 
called Law on Laws of 2002 energized the drafting 
ministries, greatly improving both quality and quantity 
of legislation.  The BTA also requires the publication 
of all laws in both English and Vietnamese in the 
Official Gazette (similar to the U.S. Federal 
Register).  Subsequent legislation has established a 
process to inform local governments of national policy 
and a system to handle complaints. 
 
The BTA Requires Trade Regime Changes 
------------------------------------- 
 
¶11. (SBU) The BTA provides both countries most favored 
nation trade status which must be renewed annually. 
Since some 60 other countries have MFN for trade in 
goods with Vietnam, tariff reductions and other 
privileges for trade in goods granted to the United 
States under the BTA must also be extended to these 
countries.  It also required Vietnam to shift to 
transaction valuation for customs duties which in turn 
meant that the GVN had to develop and publish a tariff 
schedule in late 2003.  This schedule also enabled the 
shift from quotas to tariffs and the reduction of 
unaccounted for "customs fee charges."  Tariff rates 
have gone down and Vietnam has removed quantitative 
restrictions on most imports.  State trading 
enterprises (i.e., Government and non-Government 
enterprises, including marketing boards, which deal 
with goods for export and/or import) must now act in 
accord with WTO standard rules.  Subsidies are being 
phased out.  Some U.S. firms have been gradually 
receiving trading rights that allow them to import and 
export goods directly without having to go through a 
State-owned or local trading company, but they still 
cannot distribute goods within Vietnam themselves.  The 
GVN is revising technical standards and sanitary and 
phytosanitary measures based on national treatment 
principles that do not create obstacles to trade. 
Vietnam has removed requirements on investors such as 
local content and export/import ratios in accord with 
requirements of the WTO TRIMS agreement. 
 
¶12. (SBU) The Government began creating a level playing 
field for domestic firms by giving equal status to the 
private and state sectors in 2001.  The BTA requirement 
to treat U.S. and domestic firms the same way (i.e., 
national treatment) expands this leveling in various 
ways including the provision of services.  Since the 
BTA entered into force, Vietnam has eliminated 
discriminatory prices (often two-tiered pricing 
structures) and fees for various goods and services 
such as telephone installation, telecommunications 
services, water, tourist services, motor vehicle 
registration, international port charges, electricity 
and air passenger transport.  Vietnam has also 
equalized various tax rates, including those on 
corporate income, special consumption tax and value 
added tax as well as abolished the withholding tax on 
foreign investors. 
 
The BTA: More Market Access, But Slowly 
--------------------------------------- 
 
¶13. (SBU) Vietnam has also taken a number of steps to 
improve market access in service sectors, though far 
more gradually than on goods and other commitments. 
Under the BTA, U.S. firms are slowly being allowed 
 
HANOI 00001438  005.2 OF 007 
 
 
limited access often only to provide foreign firms 
services in such sectors as accounting, architecture, 
engineering, computer services, market research, 
management consulting, construction, health, travel and 
travel services.  While there has been some progress in 
financial services, telecommunications and 
distribution, greater market access in these key areas 
was on the table at the WTO bilateral discussions.  The 
single biggest impediment to liberalization in these 
areas has been the continued dominance of State-owned 
enterprises (Sues) in key sectors which still account 
for 29 percent of GDP.  In 2005, Vietnam raised the cap 
on foreign investment in a Vietnamese non-financial 
firm that is listed on the stock market from 30 percent 
to 49 percent and abolished the equity limit imposed on 
a single foreign investor in a Vietnamese company. 
 
The BTA Means Greater Competition 
--------------------------------- 
 
¶14. (SBU) The BTA called for the GVN to establish the 
legal framework so that new entrants foreign and 
domestic could compete on an equal footing with 
established and even dominant firms.  Effective in July 
2006, the new Investment and Enterprise Laws aim to 
create a more favorable business environment to promote 
the development of the rapidly expanding private sector 
and to provide more freedom to investors in doing 
business while improving corporate governance at the 
inefficient SOEs.  Evaluating the effectiveness of 
these laws must await the implementing regulations, due 
out in the summer.  With the establishment of the 
Competition Authority under the Competition Law which 
took effect in July 2005, Vietnam began laying the 
basis to spur competition by protecting new entrants 
against SOE monopolies in such fields as telecom and 
energy.  However, as in other countries, building an 
effective competition authority takes time, especially 
with no independent regulatory agencies in place and 
few competition policy experts.  Recent steps to 
encourage independent power producers into the market 
to boost generating capacity on a fairly urgent basis 
will not only help create competition, but also put 
pressure on the power monopoly, Electricity of Vietnam, 
to improve its own efficiency.  Other new laws such as 
the revised civil code, an e-transactions law and the 
intellectual property rights law are also aimed at 
protecting the rights of firms.  Judging the 
effectiveness of these and many other new laws will 
have to await the drafting and enforcement of 
implementing regulations. 
 
The BTA Changes Bureaucratic Culture 
------------------------------------ 
 
¶15. (SBU) In changing the way that laws are created and 
increasing transparency requirements, the BTA has also 
spurred a profound change in the bureaucratic culture. 
The GVN has moved from calling virtually all documents 
"State secrets" to launching a Government information 
portal, posting information on the internet and 
computerizing and modernizing State administrative 
management.  The BTA's legal drafting requirements, 
technical assistance and various cross cutting issues 
have fostered interagency coordination.  This 
coordination began at nearly zero, but BTA 
implementation and WTO negotiations and a variety of 
investment missions and study tours have advanced it. 
Being forced to deal with cross-cutting health issues 
such as SARS, HIV/AIDS and Avian Influenza have also 
fostered not only interagency cooperation and 
coordination but also transparency in sensitive 
subjects, some of which were previously treated as 
secret.  While far from perfect, especially on public 
 
SIPDIS 
health issues, coordination is improving and could 
improve markedly with the departure of some ineffective 
but influential players. 
 
 
HANOI 00001438  006.2 OF 007 
 
 
¶16. (SBU) The BTA has also spurred changes in the 
culture of the judicial and legislative systems.  The 
GVN now recognizes the need to train judges, most of 
whom were appointed for their revolutionary rather than 
their legal credentials.  The increased focus on 
lawmaking and the return of Vietnamese attorneys 
trained abroad have made lawyer organizations more 
active.  A meeting with U.S. Supreme Court officials 
led Vietnam's Supreme People's Procuracy to decide to 
publish past cases, which were previously not matters 
of public record.  Elected from among loyal Communist 
party members, National Assembly members have begun 
debating rather than just approving bills.  A better 
informed Assembly with a greater voice has even made 
some significant changes to Government-drafted laws, 
including having the State Audit report to the 
legislature rather than to the Prime Minister's office. 
 
Reform in Vietnam: What Has Not Yet Happened and Why 
--------------------------------------------- ------- 
 
¶17. (SBU) While there has been considerable progress in 
Vietnam in recent years, especially on trade reform, 
there is more to be done in that area, as well as in 
two other areas where reforms have lagged.  Although 
the GVN has long included among its goals reform of the 
financial sector and of SOEs, progress in these areas 
has been limited.  The number of SOEs has declined from 
around 12,000 in the early 1990s to below 3,200 by 
September 2005, but most of those eliminated have been 
quite small.  Another key issue is that State-owned 
commercial banks still dominate the credit market. 
Since they still lend to SOEs, even to non profitable 
ones, the amount of non-performing loans are considered 
high, but have not yet been clearly identified.  No 
doubt part of this is the importance of these areas to 
maintain economic growth in an economy where the State 
still intervenes regularly.  In addition, only in the 
past year has the World Bank begun to focus at a high 
level and with adequate staff on the key issue of 
financial sector reform. 
 
¶18. (SBU) On market access, what remains to be done is 
essentially what the WTO accession process needs to 
accomplish in terms of liberalizing some key services 
sectors, reducing the role of the State in economy and 
improving upon BTA implementation in IPR and 
distribution.  In evaluating this situation, one must 
recall that the BTA deliberately left the most 
difficult and intractable issues for WTO accession. 
This explains why the difficult sectors in our WTO 
bilateral accession negotiations have included 
restrictions on the activities of foreign firms in the 
areas of energy, telecom, finance and distribution.  It 
is not surprising that these areas generate a good deal 
of government revenues for SOEs.  Thus, the vested 
interests opposing liberalization of these sectors 
include not only the ministries controlling the SOEs 
and the SOEs themselves (who no doubt benefit 
financially from these firms), but those in the GVN 
responsible for maintaining a healthy revenue stream in 
the midst of tariffs declining due to cuts for the 
ASEAN Free Trade Agreement and WTO, as well as an 
inefficient tax collection system. 
 
¶19.  (SBU) On another level, one of the reasons for the 
success of the BTA was Vietnam's swift recognition that 
it would need technical assistance to accomplish these 
reforms.  The result was the USAID-funded Support for 
Trade AcceleRation (STAR) program which has provided 
nearly five years of independent assistance and advice 
to the GVN and helped revise the legal and regulatory 
framework.  In fact, at the 2005 Consultative Group of 
Donors which pledged USD 3.5 billion in ODA, Deputy 
Prime Minister Vu Khoan singled out the USD four 
million STAR project as the best of all and called on 
other donors to emulate it.  In areas where reform has 
lagged, such as financial sector or SOE reform, there 
 
HANOI 00001438  007.2 OF 007 
 
 
is no single blueprint like the BTA.  A range of 
multilateral and bilateral donors engage in various 
projects and spend much time coordinating to ensure 
they are not duplicating efforts.  But progress is 
slow. 
 
Corruption 
-------------- 
 
¶20. (SBU) Another key area where progress has been slow 
is in attacking corruption.  Although there have been 
more headlines about it in recent years, it continues 
virtually unabated.  The recent PMU-18 scandal has 
focused much attention on the broader issue of 
corruption in Vietnam and elicited statements from the 
highest levels in Vietnam in support of ending it. 
Proof of the GVN commitment, however, will have to 
emerge over time in concrete actions, not only on 
prosecuting the guilty in the PMU-18 scandal, but also 
in legal and administrative reforms to prevent and end 
corruption.   The extent to which the leaders are able 
to contain if not eliminate graft will be key to 
maintaining not only the reform momentum, but also 
their own hold on power. 
 
¶21. (SBU) Comment:  While the momentum has not been 
smooth or steady, Vietnam has made significant progress 
since it adopted doi moi in 1986.  On a very basic 
level, Vietnam can feed itself and produce enough rice 
to be among the top three exporters worldwide as well 
as a leading exporter of coffee and marine products. 
On this, and the other positive impacts of doi moi, the 
leadership has agreed for some time.  However, the 
debate continues over the pace and extent of reforms, 
which is linked to the question of the appropriate 
relationship with the West and the extent to which 
reforms were actually "peaceful evolution."  Concern 
about this issue led more conservative elements to beat 
back reformers bringing on the reform doldrums of the 
late 1990s.  Vietnam has a strong desire to climb the 
technological ladder.  This will be a strong incentive 
to continue down the path of economic liberalization. 
The BTA revived economic reform and the road toward WTO 
accession has maintained it.  However, for the next 
phase of doi moi, Vietnam's leaders need to make some 
hard choices about the lagging areas of reform, namely 
financial sector and SOE reform as well as how they 
handle corruption.  End comment. 
 
BOARDMAN