Home Global Village Learning from Vietnam’s economic experience – II – Dr. Omer Javed

Learning from Vietnam’s economic experience – II – Dr. Omer Javed

Learning from Vietnam’s economic experience – II – Dr. Omer Javed

Dr. Omer Javed |

Pakistan has to move from efforts to obtain direct foreign assistance or foreign aid to attracting foreign capital — primarily in the form of foreign direct investment as it has far more to rigidity to speculative flights- just like Vietnam made the effort to do — and very successfully indeed over the years since 1991, when foreign assistance from Soviet Union ended.

Pakistan will have to self-impose that squeeze to push itself away from foreign assistance — that has served as an easy way out for successive incompetent and rather self-serving elitist controlled governments over the years — to creating an environment that enhances the current meagre level of foreign direct investment the country receives.

Vietnam made the effort to do — and very successfully indeed over the years since 1991, when foreign assistance from Soviet Union ended.

That transition needs to start on sound footing at the earliest possible to take the country on a self-sustaining path of economic growth, and away from the high levels of external debt situation it finds itself; not to point out the obvious that the foreign aid received could not be used properly by the ill-capacitated state sector, may that be in the shape of direct spending into social sectors like education or health, or in the manufacturing, energy or tech industries.

To give a rough comparison, during July 1997 to June 2018, the maximum amount of foreign direct investment (FDI) received by Pakistan stood at $1.2 billion in June 2008, while the minimum it received was in the negative at $53.9 million in June 2015. At the same time, in June 2018 it stood at only $291.5 million (only up a little from $237.9 million in May 2018).

Read more: Learning from Vietnam’s economic experience 

Now compare this to Vietnam. During March 1996 to March 2018 (similar time period of roughly two decades, as taken for Pakistan) the maximum FDI received by Vietnam was in December at $4.6 billion, while the lowest was $150 million in June 2002; in March 2018 it stood at $3.1 billion. Overall, the country’s FDI, which on average stood at an annual level of $6.3 billion during 1991-2018, increased to an all time high of $19.1 billion in 2018.

In fact, just looking at the monthly figures of FDI for 2018 are quite revealing of the impressive level of FDI inflows that Vietnam is receiving: in no month the inflow was less than a billion dollars, while cumulatively it was a steep upward trend — from $1.05 billion is January 2018 to $8.37 billion by June to $19.1 billion by year-end 2018. Compared this to Pakistan, FDI from abroad stood at a paltry $4 billion during July 2017-November 2018.

To give a rough comparison, during July 1997 to June 2018, the maximum amount of foreign direct investment received by Pakistan stood at $1.2 billion in June 2008.

Yet, the situation in terms of receiving FDI for Vietnam was not that attractive — and the country was deep in poverty — under the country’s first effort to attract foreign investment through promulgating foreign investment code regime in 1977; whereby the role of the state was over-emphasised, which mainly meant that a foreign party could only invest up to 49 percent of the joint venture’s capital. Moreover, this regime suffered from the vagueness that could be highlighted by one such analysis made by Tang Than Trai Le (1995), ‘The legal aspects of foreign investment in Vietnam’:

‘… [a]lmost every item in [the code] is vague. Virtually every statement is accompanied by reservations or qualifications. Concerning fiscal privileges, for example, the Code speaks of “exemptions or reduction” of income tax for “a number of years”, “depending on the branch of the economy”, “on the area of operation” and “on the amount of capital invested”. The same vagueness exists concerning customs duties, export tariffs and reinvestment treatment. On the crucial question of nationalisation, the Code mentions nationalisation from ten to fifteen years after the initial investment date, but hastens to add that “in particular cases this period may be longer”. There are no criteria for defining “particular cases”.’

Read more: Why Pakistan will go to the IMF again, and again and…

This foreign investment code regime could not bring much FDI inflow in Vietnam; where only a few countries invested in the economy, and the poor level of capacity of state enterprises meant little progress could be made indenting the high poverty incidence in Vietnam. Such vagueness points towards analysing and purging out similar policy from the current laws and procedures related with foreign inflows. After all just asking other countries to invest in the country alone will not do, if Pakistan’s own institutional setup is not supportive towards attracting foreign investment.

Overall, the country’s FDI, which on average stood at an annual level of $6.3 billion during 1991-2018, increased to an all time high of $19.1 billion in 2018.

This gave way to internal thinking in Vietnam, more so because almost the entire region around it was making quick strides to economic development — just like in Pakistan, where many countries in the region including India, and Bangladesh, all receiving, at the same time, much higher levels of FDI than Pakistan, with maximum FDI received by a) India at $14.7 billion in September 2017 (and more recently $ 6 billion in December 2017, and $8.6 billion in March 2018), and b) Bangladesh at $1.04 billion in December 2016 (although a little less than Pakistan’s all time high level of FDI inflows, yet it receives higher FDI inflows on monthly basis than Pakistan more consistently; and more recently $0.9 billion in December 2017).

This realisation in Vietnam of poor economic performance overall, and in particular FDI related inflows, led to the introduction of ‘doi moi’ (or renovation) reforms in 1986. The then Prime Minister of Vietnam highlighted attracting foreign investment as a main priority area in the strongest of intentions as indicated by his statement, ‘’mobilise every means and use every form to attract foreign capital…’. Under the doi moi reforms, it was decided that foreign investment laws would be liberalised, and in this spirit in 1987, ‘Law on Foreign Investment in Vietnam’ was passed.

Read more: What if the IMF says NO to Pakistan?

Further liberalisation — and with greater clarity — of this foreign investment regime came about in subsequent revisions of the law in 1990, 1992, and 1993, among others over the years, with major changes for foreign investors coming through the 2015 promulgated a) the new Law on Investment, and b) the new Law on Enterprise (both an improvement on their previous editions of 2005).

This entire journey from the first introduction of foreign investment law back in the late 1980s, has transitioned Vietnam all in the more in line with the free enterprise principle, by a) doing away with most of the restrictions on foreign ownership of companies in Vietnam, b) cutting down on red tape in the approval process of foreign investment, and c) bringing internal policy with regard to corporate governance, closer to international standards.

Dr. Omer Javed holds PhD in Economics from the University of Barcelona, Spain. A former economist at International Monetary Fund, he is the author of Springer published book (2016), ‘The economic impact of International Monetary Fund programmes: institutional quality, macroeconomic stabilization, and economic growth’. This article was originally appeared in Pakistan Today and has been republished with the author’s permission. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.

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