Platt Perspective on Business and Technology

Vietnam, doi moi and the search for business and economic strength and global relevance 7: considering Vietnam in an interconnected global context 1

Posted in UN-GAID by Timothy Platt on April 13, 2015

This is my seventh installment to a series on Vietnam (see the UN-GAID directory, postings 34 and following for Parts 1-6.)

Up to here in this series, I have primarily focused on

• Vietnam’s growing role in international commerce and the business systems that make that possible, and
• Their active and still expanding programs of basic infrastructure development that would make this possible, and that would facilitate their country’s active participation in the global community as an equal and a peer.

In the course of that discussion I have at least touched upon the issues of how other countries relate to and interact with Vietnam, and how Vietnam is attempting to become a wealthier, more competitively significant member of the community of nation states. My goal for this posting is at least start to more fully examine those first two topic points but more specifically and explicitly through the lens of this international community perspective. And as one thread in that discussion I plan on at least selectively discussing what Vietnam produces and exports, and what it in turn imports (see Part 2 and Part 3.) And after that I will further discuss relevant infrastructure development issues and challenges as they impact upon and shape this (see Part 4, Part 5 and Part 6.) But I will also discuss tourism and as a special case of that, the purchasing power and enthusiasm of a growing number of now middle class Chinese tourists who constitute an increasingly significant proportion of the Vietnam tourism customer base, and certainly for higher end brand name retail outlets and more expensive tourist-oriented hotels and restaurants in Vietnam’s larger cities, and in its main tourism oriented communities such as Hội An. So I will add tourism to this discussion, and both by Vietnamese nationals and by foreign nationals as they travel to Vietnam.

One of the key factors that runs through all of these topics is economic impact, and as one particularly salient measure of that: overall cash flow and the balance of trade that Vietnam faces: the difference between the monetary value of their exports and imports over a certain defined period of time as measured in the currency of that country’s economy, and as the balance of overall import and export value traded.

• Ultimately, the single most significant overall criterion for determining the overall economic strength of a country can be measured in terms of this metric,
• And certainly where ongoing positive or negative trade imbalances occur as a structurally recurring pattern that tend to progressively expand or deplete its overall economic resource base.

I begin this with a reconsideration of the first of my three primary topics to address, and with Vietnam’s business and manufacturing sectors and international trade. And as a specific starting point for that, I pick up on a selected case in point example that I first raised in this series in its Part 2: crude oil petroleum and refined petrochemical products and distillation fractions that are produced from it as finished manufactured goods: the combined overall petroleum and petrochemicals industry.

• Vietnam is not one of the world’s major producers of crude oil or other raw petrochemical materials, but as noted in Part 2 it does produce and export what for it, is a significant volume of these unprocessed materials every year. Then it imports gasoline and I add a range of other value-added, higher cost products manufactured from this raw material export process.
• The combined result is that while in principle, petrochemicals could be a source of positive net revenue flow into Vietnam, petrochemicals in fact comprise a net drain on their overall economic strength, with more funds leaving the country than enter it through these transactions. I noted in Part 2 that only producing and selling raw materials tends to lead to balance of trade losses and to weaker and less capable economies, where producing and selling finished goods created from those raw materials, yields a more positive balance of revenue flow and a stronger national economy. This example exemplifies how that works.

Why doesn’t Vietnam simply start producing its own gasoline and diesel fuel and other necessary petrochemical products from its own raw petroleum itself and avoid this negative cash flow and the drain on their economy that this creates? Money: Vietnam is still a poor country by most standards and a single significantly scaled and diversely functional petrochemical refinery that would be needed for this type of work, would cost them billions of United States dollars or other foreign currency equivalents, and the equivalent of many trillions of their own Vietnamese new dong (with the official exchange rate as of this writing currently set at some 21,000 new dong equaling one US dollar in value.) So the threshold costs for eliminating or even just significantly reducing this source of trade imbalance cash flow loss would be prohibitively high and any attempt to strategically realistically address this challenge would have to be put aside for a long time, until their overall economy and their business and industrial bases were robust enough to be able to accept this type and scale of up-front capital development expenditure.

Clothing manufacture and aquaculture represent business and industrial sectors that can thrive in Vietnam’s current economy where wages and other personnel costs are minimal and where up-front capital development costs are too, so finished product costs to produce and prepare products for shipping and international sale can leave them very competitive. Apparel manufacturing and fish farming and related aquaculture endeavors can be and in fact are early stage success stories where their businesses and industries can and do bring in positive revenue flows and actively contribute to their country’s import/export trade balance now.

Any attempt to turn any industrial sector such as petroleum production and petrochemicals into a positive cash flow import/export trade balance asset of that sort will have to wait until Vietnam’s business community and its banking system, its government, or more probably some combination thereof can realistically afford to make the necessary up-front investments. Pending that, and I add the emergence of greater venture capital interest in Vietnam, this type of development can perhaps best be seen as meriting a lower priority for completion even if it is viewed as a worthy longer range development goal.

• Overall strategy in this and for Vietnam’s businesses and industries as a whole, insofar as that is carried out governmentally, of necessity means knowing what types of businesses and industries to selectively encourage and help and when,
• With for example the development of urban enterprise zones (as supported in countries such as the United States and the United Kingdom) or special economic zones (as supported in China and India), and with selective business sector supportive tax breaks and other government incentives,
• Where in an international context, all of this has to be done in ways that do not trigger protectionism claims from other countries and the development of countering trade barriers in protective response.

That can only be achieved when government policy is shaped and informed by market driven economic understanding and according to a detailed understanding of supply and demand pressures and opportunities (see Part 4 and its discussion of centrally administratively planned economies and market economies and the challenges that Vietnam’s leadership still face in making the transitions from one to the other there, that they need to make if they and their country are to succeed.)

Up to here in this posting’s discussion I have focused on the more general issues of what types of business and industry it might be more effective for a country as a whole to focus on and with that couched essentially entirely in macroeconomic terms. And I have focused on two types of business and industry sectors: one that can be developed early as a source of positive cash flow with more revenue coming into the country then going out of it, and the other representing a challenge that cannot realistically be addressed now or in the short-term future. But in practice both of these example extremes and their development, and I add any industry sectors that would fit into a more middle timeline position and their development have to play out on the level of the individual businesses and the level of the individual entrepreneurs that collectively create those more-macroeconomic realities.

• This observation particularly holds true in an entrepreneur-driven economy, where a majority of all business enterprises are separately and privately owned and run
• And where those separate entrepreneurs have to individually decide what risks they are personally willing to accept for what potential benefits and whether to buy into any proffered larger, more centrally defined plan by accepting and capitalizing on any business development incentives that are centrally, governmentally offered.
• Effective governmental incentives help tip the risk/benefits equation for a significant enough proportion of the entrepreneurs who could contribute to overall positive economic change, to bring them into this business and industry development effort. And if these incentive programs are in fact long-term effective, increased productivity and resulting tax revenues from their business efforts would more than off-set government expenditures and investments in making this possible through supporting these incentive programs in the first place.

But let’s step back and reconsider the two economic models as discussed in Part 4 and how they would enable or thwart this type of development paradigm succeeding. And I begin here with consideration of the basic received-wisdom model that was fully in place in Vietnam at least until 1986 with the commencement of their đổi mới, or economic restructuring reforms. And as a structural case in point example for this, I consider the issues of primarily small-holdings approaches to business development where, for example, large numbers of individual entrepreneurs are encouraged to run their own business operations, and the encouragement of smaller numbers of larger operations that might offer economies of scale but at the cost of centralizing business sector ownership into a much smaller number of hands. And for this, I consider two examples of how this has played out historically under communist central planning approaches, where each of these two approaches were in fact attempted.

I begin with farming as it was centrally planned and administered in the Soviet Union under Joseph Stalin’s rule. The vast majority of all farming in Russia and throughout the region of the Soviet Union had traditionally always been carried out by individual farmers and their families, and even if they simply worked their land without themselves holding ownership title to it. Most of them did not, living and working on their land as serfs. And the people who lived and farmed in this way were often identified in an emerging Soviet context as Kulaks: a term that once simply referred to a group of relatively affluent farmers, but that came to mean essentially any small holding farmer, and to mean farmers that resisted socialism and communist principles by refusing to turn over their grain production, or other food production to Moscow and its detachments of agents.

Stalin met this challenge with a massive program of farm collectivization and with the incorporation of large tracts of what had been smaller farms into single vast state owned and run collective farms. And millions of these kulak farmers were driven from their land and killed in the course of this transformation and their knowledge of this land and of what would and would not grow on it and on when crops would best be planted and harvested was lost. Decisions on what to plant and when to do so and when to harvest and how to farm were made by politically connected Party apparatchiks and in large part from Moscow offices, far from where these decisions would be carried out. And the result was a disaster with up to ten million people starving from the collapse in food production that this caused in the Soviet Union in the years leading up to Nazi Germany’s invasion and World War II. Actually, that ten million figure is now considered a lower-end estimate with some analyses of Stalin’s policies of this type and their collective impact, leading to as many as 20 million lives lost.

As long as the Soviet Union lasted, their collective farms never became efficiently productive when centrally administrated planning held sway over them. Food that was grown successfully, too often rotted in the fields or while waiting shipment from these farms, and Russia had to allow small land holders to grow and sell produce on small privately worked plots of land: gardens again if that country was to meet its basic food production needs.

Economies of scale should in principle have led to greater capacity to utilize more modern farming equipment and methodologies that work best if at all, only on larger fields under cultivation. But centralized planning and the denial of local farmers in place to make any of the crucial decisions that governed what they did made any success there impossible.

Now let’s consider how centrally administratively planned localization has played out under communism, and once again where local decision making was not allowed. And I turn in this example to consider the Peoples Republic of China as ruled by Mao Zedong and one of his initiatives imposed from the Communist Party’s center in his country during his Great Leap Forward.

Mao decided to break the hold that steel foundries held in his country over that crucial resource. And at the same time he sought to make his China a major producer of steel and other metal goods. So he instituted a program that was intended to bring metal processing and metal goods production to the people and to smaller, community-based operations – that were centrally managed and that were hands-on worked by peasants with no metallurgical training or experience. They did, however, have centrally imposed and enforced quotas that they were required to meet for the number of metal items that they produced. So it is said that they stripped essentially every kitchen across much of China of every metal pot or pan they had, to melt them down and produce new items out of the results.

The problem was that virtually no one who took part in this “reprocessing” effort knew anything about metals or alloys or about the physical sciences in general. So when everything was melted together and re-forged, different and even fundamentally incompatible types of metals were blended together in ways that often – that usually did not make useful alloys with useful properties. The vast majority of all of these new pots and pans and other quota-meeting products that were manufactured from this had structural flaws such as cracks and micro-cracks in their manufacturing as well and few of them worked, at least with anything like the quality or durability of the items that were lost in all of this production effort. This centrally administered plan set China back for over a decade in its metal production and with ripple effects that went much farther than just that alone. Centrally administratively run programs and I add the centrally administratively run ideologically driven economic models that inform them do not work in industrial or other productive contexts.

And this is a lesson that helped shape đổi mới as it is being pursued in Vietnam now, where entrepreneurial skills and expertise in the businesses so pursued and entrepreneurial drive to succeed are recognized for their essential importance and rewarded and where supply and demand forces govern what is produced, and where and how and by whom – and under who’s direct hands-on managerial authority. And this market-driven change in turn is shaping and will continue to shape Vietnam’s competitive capability in the global community of nations as it moves forward. What they can and do produce and in larger quantities than are needed within the country and in high enough quality to meet larger international needs and at attractive price points, they can and will export, bringing in needed revenue to their country’s economy. What they cannot produce and even just to meet their own needs and what they cannot do without of that, they will have to import with the negative cash flow and diminution of their overall economic strength that that leads too as well, and certainly when any such importation requirement becomes a standard ongoing necessity as is currently the case, for example for products like refined and processed gasoline.

I am going to pick up on this discussion in a next series installment where I will revisit farming in Vietnam as initially touched upon here in Part 2 of this series. And then I will turn to reconsider infrastructure development per se as it would or would not effectively support Vietnam’s business and industrial growth and its overall economic strength. And as noted above I will also discuss Vietnam’s tourism industry in this context as well. Meanwhile, you can find this and related postings and series at the UN-GAID directory.

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