VIETNAM'S SOCIO-ECONOMIC DEVELOPMENT No.1, SPRING 1995

VIETNAM'S POLICIES FOR DEVELOPMENT OF HEAVY INDUSTRY

TO CHINH THANG
Ph.D, Researcher
Economic Research Institute
Ministry for Heavy Industry.

At present, Vietnam is still a less developing agricultural country. The high proportion (40%) of agricultural and forest products in the GDP clearly contrasts with, say, the Republic of Korea's 8%. To become a rich and strong country, there is no other choice but implementing industrialisation and altering the economic structure.

The development of heavy industry is an important step; the main task during the transitional period to advance to socialism, thus building a rich and strong country and an equal and civilised society. The development of heavy industry not only makes great contributions to the economy by manufacturing important products such as machines, chemicals, means of transport and minerals, but also constitutes a prerequisite condition to ensure the country's relatively independent economy, to increase the general knowledge and to strengthen Vietnam's role in the international arena.

Industrialisation is a long and difficult process. Superpower countries such as the USA, Japan, Britain and France took hundreds of years to have their present advanced industry. A number of former socialist countries, including the Soviet Union and other European countries, also carried out industrialisation but the cost was very high as they conducted industrialisation in the conditions of the centrally-planned economy. Many of their industrial products were not accepted in the global market when they shifted to a market economy. However, other countries were lucky when they quickly and effectively implemented industrialisation such as the Republic of Korea, Taiwan and China. They are the bright examples for Vietnam to follow. Vietnam is an under-developing agricultural country and it has undergone many years of war. Industrialisation will be more difficult. Like many former socialist countries, Vietnam had to pay costly for undertaking industrialisation within a centrally-planned economy. Careless planning meant a number of enterprises were bankrupted or dissolved when the economy was shifted to a market-oriented economy with the removal of subsidies.

But Vietnam does have some difficulties there exists some necessary advantages for national industrialisation and modernisation as confirmed by the State's resolutions. First of all, general knowledge among Vietnamese people has developed with a group of trained technicians and managers who have to be organised to bring into full play their capacity. Vietnam's economy has also stabilised and developed; and international cooperation have created favourable conditions for industrialisation. Many international economists hold that Vietnam has enough conditions, and it was necessary, for Vietnam to implement industrialisation now. Nevertheless, the implementation of industrialisation should avoid the previous pitfalls of subjective feelings and voluntarism. It should be firmly carried out step by step in accordance with the country's contemporary ability and the market situation. Socio-economic efficiency tested by market conditions should be the fundamental criteria to identify the orientation, and to decide investment projects and technology.

Vietnam is not yet able to quickly develop all industrial sectors. Furthermore, by doing so, we would run counter to the rules of the market economy where there is an international rule for labour distribution. Industrial sectors which Vietnam is now very good at, should be developed. These include strategic heavy industries such as machinery, chemicals, electronics, mineral exploration and exploitation.

The development of heavy industry was an important economic policy in the previous centrally-planned economy, but because the implementation of industrialisation was made in the frame work of a planned socialist economy during the cold war, its results were limited and costly. In a market economy, industrialisation is still a correct path as the free market itself cannot create heavy industries. The key factors of State assistance and intervention are needed. However, the intervention of the State should not be in conformity with the rules of the market economy. It should bring about the efficiency and long-term benefits to the entire country.

Vietnam now pursues a policy to build a regulated market economy. This means the acceptance of the intervention of the Government in some necessary sectors, including heavy industry. The Government's intervention is necessary in order to adjust the shortcomings of the market, to ensure the quick and stable development of the economy which is balanced and oriented, and to set up an effective heavy industry. In countries where a market economy is developed, heavy industry is mainly conducted by private enterprises, and almost all State-owned enterprises are being privatised. In our country, the private sector is still very weak in term of experience, staff and economic management skills. Therefore, this sector cannot make any considerable contribution to the development of heavy industry. In long term, however, the role of the private sector will be increased in all fields, including heavy industry. State-owned enterprises are of a low standard at international levels, but play an important role in the heavy industry sector. In order to implement industrialisation, the State should strengthen State-owned enterprises and at the same time encourage the development of private enterprise. The State's economic role in industrialisation should be reflected in the following aspects:

- To maintain a low inflation rate and stabilise politics, thus creating favourable conditions for foreign investment and cooperation;
- To establish and issue policies which encourage the development of industry with priority given to the reasonable development of heavy industry, encourage the development of private sector, and attract foreign and domestic investment;
- To create material conditions for the industrial development by building an infrastructure, ensuring electricity and water supplies, training skillful workers, and setting up capital markets and a land market;
- To interfere in order to reduce inequality in the economy among different regions in the country;
- To reduce to a minimum the negative effects of industrialisation such as uncontrolled urbanisation, environment pollution, and the tendency to pay more at material life and less at cultural and spiritual life.

The roles of the Ministry of Heavy Industry are:
+ To build an effective mechanism of State administration in service of industrialisation;
+ To form master plans for industrial distribution and projects for industrial development and submit them to the higher authorised agencies for approval;
+ To promote international cooperation and investment in heavy industry;
+ To work out plans for the development of manpower in order to ensure enough capable staff and workers for industrialisation;
+ To work out policies to encourage industrial development, to give priority to the development of some heavy industry sectors to submit to the higher authorised agencies for approval;
+ To exercise State management in heavy industries;
+ To manage funds to encourage industrial development, in areas like mechanical engineering and funds the encouragement of medium and small-size enterprises.

Effective heavy industry is not a burden on the state budget. On the contrary, it is an important income source. Two heavy industries in Vietnam which contribute much to the budget are oil and gas and the energy sector. In South Korea, exported heavy industrial products occupied 59.9% of the total export turnover in 1991. In Vietnam, heavy industries always enjoyed priority investment.

Table 1: Investment in industry (billion dong)

The State budget has increasingly spent major parts of its capital to invest in different industries. In 1985, investment in industry occupied 31 percent of total investment in the economy. In 1990, the proportion was 37.8 percent, in 1991 it was 40 percent and in 1992, 55.2 percent. The energy sector received more investment than others. In 1990, investment in the energy sector was 67 percent of the total investment in industry. In 1991, the proportion was 70 percent, in 1992 it was 82 percent, and in 1993 the proportion was very much higher. In absolute value, investment in the energy sector increased from 685 billion dong in 1990 to 2864 billion dong in 1992.

However, there remain urgent issues to be solved in industrial investment:
1- Vietnam is still a poor country and its capital investment in industrial development is limited. Therefore, it failed to meet demands to promote the economy. If heavy industry well serves light industry, agriculture and exports, it will increase the budget income, and in return the State investment in heavy industry will increase. The proportion of investment in heavy industry (including the energy sector) is high, but if we exclude investment in the energy sector, the proportion is low. In 1992, investment in other heavy industries represented about 7% of investment in the energy sector;
2- Investment efficiency is still very low due to investment in ineffective projects. Some projects had to suspend construction work such as the Thanh Tuy Ha oil refinery plant, the Cau Do Thermal Power Plant and the concrete slab manufacture of the Ministry of Construction. Some projects only operate to one third of their designed capacity, such as the Cam Pha mechanical factory. Losses in capital investment have been very high from 15 to 30%;
3- Investment from non-state economic sectors has not yet been mobilised.

The main reason that caused inefficient investment in industry was due to the centrally-planned economy which prevented accurate calculation of investment efficiency, and genuine appraisal by the market system. The shifting to the market economy deleted this problem, and as a result investment has become more reasonable. Policies for priority development in some heavy industries will be continued, but investment should be in conformity with the regulated market economy in order to meet the requirements of socio-economic efficiency. Investment policies from the budget to develop heavy industries should be as follows:
1- Priority should be given for the development of infrastructure for heavy industry including construction sites, ports, roads, electricity and water supply. Direct investment in production and business should be via loans, foreign investment or shares;
2- The reparation, appraisal and approval of projects in heavy industries should be of high quality;
3- Funds to encourage development of heavy industries should be set up.

Capital mobilisation should be sought from other economic sectors. This should come from the establishment of a capital market, the encouragement of non-state economic sectors to invest in industries, and the establishment of medium and small size enterprises.

Economic renovation, in which an open-door policy is an important factor, has created some difficulties in industrial development. However, in the long term, it positively influences Vietnam's industry and economy. The introduction of a market economy reflects the real situation of Vietnam's industry. It means correct solutions can easily be worked out. Reorganisation of production often failed during the centrally-planned economy, but this process was taken place very quickly when enterprises shifted to a market economy structure. Many enterprises became bankrupt and to dissolve. But the majority of industrial sectors have been able to maintain their development since 1991.

Table 2: The growth rate in comparison with previous years (%)

There are some general comments as follows:
- Almost all the industries were in unavoidable recession in 1989-1990 because of the abolition of subsidies. From 1991-1992, industries were restored and some industries developed quickly. A number of weak enterprises that failed to meet market demands had to dissolved. This process took place in the objective conditions of a market economy.
- Heavy industry still maintained its growth rate in the new stage. But mechanical manufacturing remained in recession for many years. It is an important issue, as machinery manufacture is one of the key industries in the economy. Efforts should be made to work out a solution to the situation.

The "open-door" policy has positively influenced industrial development. In Vietnam, though the industrial sector remains young, it has reflected its international competitive capacity. With assistance from the State and international cooperation, the industry will gradually develop. Open-door policies in foreign trade has been reflected through the following aspects:
+ Foreign investment encouragement,
+ Export and import liberalisation,
+ Import and export taxation reduction,
+ Export strategy implementation.

Open-door policies in foreign trade threw attention on how to protect domestic goods. Many people feel Vietnamese domestic goods are not competitive. As we have mentioned above, the open-door policies have objectively effected industrial development in Vietnam. It's impossible to protect domestic goods by prohibiting the import of foreign-made goods and by increasing taxation because it runs counter to the interests of consumers, the economy as well as the open-door policies of the State. Domestic goods should be protected by the following measures:
1- We should encourage enterprises to enter into international competition. Only through competition, they will be able to develop;
2- We should increase investment in new technology, select good projects and equitise the enterprises to increase their competitive capacity;
3- We should develop international cooperation and joint ventures with foreign companies.

Vietnam is rich in natural resources and has a cheap but qualified labour force. Vietnam's open-door Law on Foreign Investment and stable political situation attracts a lot of foreign investment, thus paving the way for consolidation and development. Foreign investment plays an important role, and without it, the country's economy would develop slowly. The Law on Foreign Investment also respects the interests of the foreign investors by ensuring: non-nationalisation, stable politics, low inflation, consistent policies, and anti-monopoly policies and the application of market competition.

The Law encourages diversified forms of investment and no limitation of the proportion of foreign investment. There are three main forms of foreign investment. They are: Cooperation contracts, Joint venture enterprises and Enterprises with 100% of foreign investment capital.

The Foreign Investment Law also encourages capital contributions to be valued internationally. Other features include: the operation duration of a joint venture can be 50 years; enterprises with foreign capital can open their bank account in foreign banks; Vietnamese private enterprises can directly cooperate with foreigners; profit tax is from 15 to 25 percent; tax exemption within the first two years and in the following two years (the tax will be reduced 50% of the profit tax); in exceptional cases, the profit tax can be reduced to 10 percent of the profit; taxation for the remittance of the profit to other countries is from 5 to 10 percent; the land prices are different in 5 regions and are fixed at the reasonable low price.

By now, the State Committee for Cooperation and Investment has approved 1000 projects with foreign investment worth more than US$10 billion. The prescribed capital is over US$5 billion. However, foreign investment in heavy industries remains very small, except in the oil and gas industry.

National investment in heavy industries is still limited. Therefore, in order to maintain the growth rate of heavy industry, it is necessary to encourage foreign investment. Domestic investment plays a decisive role while foreign investment plays an important role in national economic development. Vietnam has issued a law on domestic investment to encourage domestic investment, including allocation or lease of land, funds for investment encouragement, guarantees for investment credits, and tax incentives for priority fields.

The private sector in Vietnam is still very young, and investment from this sector in the heavy industries is still very small. It is necessary to encourage the development of the private sector so that it will be able to invest more in economic development, including heavy industries.

The free market economy develops spontaneously. It only serves the short-term benefits and ignores the long-term benefits as well as environmental criteria, and as a result, some serious shortcomings occur. These include: a) pollution in the atmosphere and water; b) formation of large urban areas with too many people causing a decrease in infrastructure and living standards; c) differences in the socio-economic development among various regions.

Because of the over crowded cities and the high degree of pollution, European countries and the USA have had to carried out a strategy of reducing the population in big cities. Vietnam should avoid the mistakes committed by those who have already developed. It means that the distribution of industry should be made reasonably, and should respect environment protection, the architecture and equality among different regions.

Economic development in Vietnam is still very low. Industry in Vietnam is still very small. Nevertheless, there have appeared some negative trends in industrial distribution. Development in the south is quicker than the north. Development in Ho Chi Minh City and Hanoi is very high, but the environment is polluted and the infrastructure is overloaded. Least developing areas are in the mountainous areas. Heavy industries have been relatively balanced in the two parts of the country but light industries have developed more in the south. Ho Chi Minh City occupies 41 percent of the total output of light industry.

Table 4: The allocation of output and employment in heavy industry and light industry among state-owned enterprises in 1989

Reasonable allocation of industry will create favourable conditions for effective economic development and at the same time protect the environment and natural landscapes. Therefore, there should be a strategy of industrial allocation. The outlines for such a master plan include: to put an end to the construction of polluting enterprises in cities; to create favourable conditions by building infrastructure; to build developing triangle areas and new economic centres; to develop rural industry and increase living standards of the peasants.

The implementation of the master plan in industrial allocation needs initial investment but the cost will be much smaller than future costs if they aren't done. Only reasonable industrial allocation can ensure durable socio-economic development in service of a better life for people.