During the dramatic historical movement occurring in the Soviet Union and Eastern Europe in the late 1980s and early 1990s, Vietnam’s economic renovation programme may properly be viewed at that time. As they shared similar political and economic institutions, interlocked trade and financial networks, and major technical and information exchange programmes, momentous events in one part of the socialist bloc necessarily affected other parts. Moreover, the systemic and institutional legacy Vietnam inherited from its experience with socialist transformation includes a rather large number of features shared in varying degrees with socialist or centrally planned economies (CPEs). Both were typified by inefficient resource allocation, low mobility of factors, factor price rigidity and low productivity and income levels, all of which emanated from the economic-political-social logic of Soviet-style socialist development.
Vietnam began its transition to a market-oriented system, its domestic markets in both rural and urban areas. The importance of Vietnamese markets was a result of economic decentralization, particularly during the Vietnam-US war; the critical need to supplement its shortage economy; the problems of integrating North and South Vietnam after 1975; and shorter period of time in which Vietnam experience socialist transformation. Vietnam started its transformation process with a rural economy on which 80 percent of the population was dependent in result of high employment existed in Vietnam, which could only be absorbed through a massive transfer of labour in the traditional agricultural sector to a more productive industrial sector.
Vietnam’s spontaneous reform, 1981-8
Reform in Vietnam was initiated in 1981 to revitalize its traditional socialist model based on the strategic goals of rapid socialist transformation and high-speed growth centred around heavy industrialization and autarkic economic development. Throughout these 5 years, it aims to restore economic growth through various incentive and decentralization measures, to strengthen the state sector by increasing its efficiency, and to utilize resources outside the state sector more effectively. While the reforms enhanced short-term static efficiency in the agricultural and cooperatives sectors and spurred output in the economy, they were unable to achieve the major goal of creating a viable model for rapid socialist transformation.
MACROECONOMIC STABILIZATION, DECENTRALIZATION AND LIBERALIZATION
Throughout the 1980s, Vietnam’s policy-makers attempted to stabilize an economy which was incurring growing fiscal, financial and trade imbalances, which along with other features of its shortage economy, resulted in repressed and open inflation. A series of policies was implemented simultaneously or in rapid sequence to attack imbalances in the macroeconomy through stabilization, decentralization and liberalization measures. These policies focused primarily on establishing discipline and transparency in Vietnam’s financial and fiscal regime and on reforming its foreign trade system to promote exports and to relieve Vietnam’s current account and long term debt position.
MONETARY REFORM AND THE EXCHANGE REGIME
Vietnam’s leadership initiated two key policies in 1989 to reform the monetary system and to fight inflation: interest-rate restructuring and exchange devaluation. Interest rates were in March 1989 first by unifying the official and and parallel market rates; and second, official interest rates on savings were raised to positive levels for individuals and households in real terms-estimated at 100 per cent per annum in mid 1989.
Price controls on most goods and services in Vietnam were abolished in March 1989. However, there remained administrative regulation of the prices of electricity, water, transport fuels, and postage and telecommunication tariff. The establishment of a rationalized and realistic system of relative prices has also brought the improvement in the overall supply/demand structure of economy. Thus, the market price system improved relative prices for producers, goods and terms of trade for agricultural commodities.
Furthermore, the introduction of market-clearing prices has hit at the heart of Vietnam’s old bureaucratically managed economy by reducing the role of state in resource allocation and virtually eliminating CPE quantitative planning. Consequently, many characteristics of Vietnam’s shortage economy, which were pervasive only a few years ago, have disappeared. The price market system and mechanisms, however, are still underdeveloped in Vietnam where they display numerous distortions.