The economy of Vietnam has continued to transition over the last ten years since the U.S. lifted its trade Embargo in March 1993.  As can be seen from the chart below, industrial GDP grew by more than 10% annually during the past decade.  Industry and construction by 2002 contributed just less than 40% of GDP in 2002.  By this measure, Vietnam can now be classified as a highly industrialized country although if measured by employment, Vietnam is still an agrarian society as about 65% of the workforce is involved in agriculture, fisheries and forestry.  If the measure is percentage of GDP, however, industry is now the dominant sector of the economy as agriculture, fisheries and forestry's portion of GDP is now down to less than 25% of GDP.
Average Growth Rate for State Industry in Vietnam
2003 (Est.)

 Although much has been made of the changes in Vietnam's economy by both those in favor of a capitalist and/or those arguing for a more socialist system, the transition has been measured and not nearly as fast or as far reaching as the two factions might claim.  Despite this measured approach, certain trends are unmistakable and bear note as we look to the future and prospects for further change in the economy of Vietnam.

Below is a chart which lays out the GDP structure from 1994 to 2003, by economic Sectors. 
















State Economy







Collective Economy







Private Economy







Individual Economy







Mixed Economy







Foreign Invested Economy







Source: Statistical Yearbook

The 2003 figures are estimates by local sources and will probably be adjusted slightly.  From the above documents there are a number of points that we can and should note:

First, despite the increasing visibility of small shops, private restaurants, new factories, etc., the State Sector and State Owned Enterprises (SOE) have continued to be the biggest sector of the economy.  Although the total number of state owned business has declined markedly, their role in the economy has held steady.  According to analysts the peak year for the number of SOE’s was 1988 when there were 3,163 enterprises.  In 2002, this number had decreased by more than half to 1,500.  Despite the decrease in the total number of SOEs, the total workforce in industrial SOEs has actually increased slightly as can be seen below:

SOE Workforce

The reasons for SOEs still having a large role in the economy are many.  One factor is that SOEs controlled and continue to control the key industries in Vietnam.  A second reason, is that the SOEs both through their own funds and funds from the State have invested in new machinery to increase their competitiveness with both inter-Vietnam and external-Vietnam enterprises.   A third factor is that many State SOEs had a key core of well trained professionals who had gained experience in either the former Soviet Union or Eastern Europe and that the industries continued to assist in encouraging these individuals to update their skills.  Fourth, the State put major injections of cash into these state industries each year (some estimates are that over 40% of the state budget was going into SOEs).  Fifth, in order to prevent instability and promote social tranquility the government encouraged financially stronger and better managed SOEs to take over and merge other financially weaker SOEs into their organization.  

The reasons for the state policies in the past which obviously favored this sector in the past have many reasons.  However, many observers have noted that it was not only because or mostly because of ideological reasons but also because of self protection in that this sector was the prime source of state revenues through taxes and has proved an easier mechanism to catch tax revenue than some of the other sectors.  The utility of this from the standpoint of job protection, a logical state concern is mirrored somewhat by the statistics above.  It also had some minor support in developing growth rates for state industry although it should also be noted that the job growth in State industries still remains considerably below the private sector in Vietnam.

The above figures should not be over stated, however.  Change has occurred in many sectors.  Of particular note is the services sector where the role of SOEs in retail trade was cut from 30% in 1990 by nearly half to 17.2% in 2002.  SOEs continue to remain a highly controversial issue in Vietnam, especially to the Communist Party and government authorities and to International Banks and Lending Authorities.  In the most recent 2004 National Congress, party officials admitted that actual reforms away from support for SOEs had not moved at the rate hoped.  The Congress had a quite open discussion of the reasons for this.  As noted at the Congress, government policy of restructuring SOEs commenced in 1992 to raise their efficiency and reduce the State budget's burden and local banks' risk.  After more than a decade of operation, SOEs numbers were reduce according to the Congress but not nearly at the rate expected.  The Congress expressed its shared desire to solve the problems hindering this policy and to increase the pace of reform.  During 2004-4005, the government hopes to equitize more than two thirds of the remaining SOEs.  So far the results of equitization have vastly improved the enterprises.  According to reports made by 500 equitised SOEs, they have increased their turnover by up to 60% a year, gross profit by as much as 130% a year, and contribution to the State-budget by 45%.  Workers salaries have also risen by as much as 63%; labor, by 13% and dividends by 13%. 

 A second major point to note is that the collective economy is still a major factor in overall economic activity in the economy.   However, it also must be noted that this collective economy is not synonymous with collectivization but more a form of voluntary linkage among working people to better husband their resources and skills.  Collective economic units go over a fairly wide range of legal vehicles in Vietnam including mutual-work teams, farm co-ops, etc. Agricultural, forest and aquatic cooperatives is a very major portion of these collectives as local families voluntarily cooperate to jointly produce and harvest agricultural and aquatic products.  Fabrication and marketing of handicrafts, a growing Vietnamese export, are also a major sector in which collectives have played a major role.

, the individual, small-owner, and private economy has continued to grow and mature, particularly in Ho Chi Minh City and Hanoi.  This growth  really accelerated from passage of the Company Law in 2001 which many observers have praised as having resulted in a major breakthrough in helping to create a more level playing field for private business.  The growth of private business is particularly seen in the trade and services sector where the ratio of the private sector’s total turnover of retail trade in the whole country grew from 41.39% in 1986 to 80.4% in 2002.  By September 1, 2002, Vietnam as a whole had 26,421 non-state trade and service establishments, predominantly private enterprises, and 2,381,300 persons engaged in individual business activities. Although these figures can be overstated, Vietnam retail business is becoming predominantly run by small private entities and is a stable growing force in the economy.  The private manufacturing sector, despite its smaller contribution to industrial GDP than State Industries employs four times as many workers as the state sector.  As in China, private firms of all kinds have emerged as the fastest growing part of the manufacturing sector.  

Fourth, Foreign Direct Investment – FDI showed much promise in the early years.  Historically, the growth is considerable – from less than 8.5% ten years ago to nearly 14% of GDP today.  The problem is that FDI is for various reasons slowing and this decrease is a matter of concern to the Government and to International Development groups.  The chart below shows some of the matters for concern.

FDI Graph

Newly committed foreign-direct investment capital decreased dramatically by 60 per cent from 1996 to $3.1 billion in 2003.  Why this is occurring is not hard to put a finger on with specificity.  Certainly part of the problem is that China is soaking up so much FDI that a portion (probably a fairly large portion) of the FDI that would have gone to Vietnam is going North into China as U.S., European and others build factories and invest there in preference to other locations.  Other problems are undeveloped infrastructure, the incomplete legal system, need for increased professionalism and training of civil servants and problems with slow land clearance that have hounded many high profile projects.  A further problem is that Vietnam was so “over-hyped” in the late 90s that some investors got burned by their own exuberance and are now more conservative and less pro-active in placing investments in Vietnam. 

Does this mean that Vietnam is hitting the wall and is less attractive as a site for FDI?  We doubt this assessment.  Does it mean that in the current environment that Vietnamese authorities are going to have to try harder, be more creative in marketing Vietnam’s potential and listen more closely to investors needs and desires, certainly.  All nations compete internationally for investment and Vietnam is no different than others, the slump in FDI can be addressed successfully and Vietnam’s leaders are already asking the right questions according to press reports of statements of Vietnam Deputy Prime Minister Vu Khoan made in April 2004.

As can therefore be seen above, Vietnam has undergone a steady change in the mix of its economy.  Private, Individual and FDI investment portions of national GDP are increasing and the State economy portion is decreasing although not as quickly as might at first appear on city streets or through reading local news media.  Although the change amounts are significant, the overall direction is probably more important.  Vietnam in 2004 is an economy with a strong state sector and with a growing private and individual sector that has become increasingly significant in the retail sector and is growing in the services sector.  Collective associations, particularly in forestry, agriculture and aquaculture remain a relatively large portion of National GDP.  All of these changes will continue in the years ahead as Vietnam’s economy continues to redefine and adjust to more and more market based structures.

Reported by:  

Christopher W. Runckel, a former senior US diplomat who served in many counties in Asia, is a graduate of the University of Oregon and Lewis and Clark Law School. He served as Deputy General Counsel of President Gerald Ford’s Presidential Clemency Board. Mr. Runckel is the principal and founder of Runckel & Associates, a Portland, Oregon based consulting company that assists businesses expand business opportunities in Asia. (

Until April of 1999, Mr. Runckel was Minister-Counselor of the US Embassy in Beijing, China. Mr. Runckel lived and worked in Thailand for over six years. He was the first permanently assigned U.S. diplomat to return to Vietnam after the Vietnam War. In 1997, he was awarded the U.S. Department of States highest award for service, the Distinguished Honor Award, for his contribution to improving U.S.-Vietnam relations. Mr. Runckel is one of only two non-Ambassadors to receive this award in the 200-year history of the U.S. diplomatic service.


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