Overview of Vietnamese economy (Part 1)

The period before Western capitalists’ penetration

With the natural features as presented in the part “Nature”, cultivation was early developed. Tropical climate, which is perennially hot and wet with high rainfall and plenty of sunlight in many months of a year are favorable conditions for agricultural development. Crops and plants can be grown all the year round. According to archaeological materials, Vietnamese inhabitants were among the first people to grow wet rice.

Cooked rice has been the main and traditional dish of Vietnamese people for thousands of years.

A tropical agriculture has existed and developed since the early days of Vietnam. Counting from the time when the State was born, Vietnam’s history has covered a period of over 20 centuries, including over 10 centuries under the Chinese domination and another nearly 10 centuries under Vietnamese feudalism control (centralization or decentralization).

During those centuries, Vietnam’s production was feudal and agriculture-based. Lands and rice fields were possessed by the court, mandarins and landlords. They applied over rent and taxes over land contribution. The society sank into dark medieval nights, characterized by the typical stagnation of “the Asian Mode of Production”.

Before Western capitalists entered and colonized Vietnam, Vietnam’s economy was based on backward self-sufficient agriculture without the existence of goods production based on the capitalist mode of production, or just in its embryo stage. The major labor tools were ploughs with iron share and wooden handle (wagtail plough). The main traction was buffaloes and oxen.

Under the French rule (1884-1945)

In 1884, the French colonialists completely occupied Vietnam and imposed their colonial yoke on the whole of Indochina. From this moment, Vietnam became a semi-feudal colony.

Conventionally, when capitalism expands into a country with a feudal-based production like Vietnam, a “civilization process” is in order. That was what happened in Vietnam during the French domination. However, different policies adopted by different colonial countries would have different effects on the socio-economic development of their colonies.

In Indochina, in general, and in Vietnam in particular, French policies were mainly focused on the exploitation of natural resources and cheap indigenous labor. The French did not promote manufacturing industries. That is why Vietnam’s industry under French colonization was actually a small-scale extractive industry.

Perhaps, the only remarkable point, mentioned in the Action Plan Project by Governor-General to Indochina Paul Doumer sent to the French Minister of Colonial Affairs, March 1897, was “the great constructions for Indochina such as systems of railways, roads, rivers and ports which were necessary for the extractive operation”.

France carried out two great colonial exploitations in Vietnam, from 1897 to 1914 and from 1919 to 1929, focusing on exploiting resources, minerals and tropical agricultural products to be transported to France.

After these two large-scale exploitations, during the period from 1934 and 1943 which was seen as the golden age of the economy of the colony of Vietnam, industry took up only 10% of the total value of industrial and agricultural production and employed about 85,000 workers including 50,000 miners with the primitive techniques.

There was no workshop of metallurgy or chemical factory in the whole Indochina. In fact, French capitalists did build some thermoelectricity plants for lighting in cities, a cement factory in Hai Phong city, several fibre and textile facilities, and beer, wine and tobacco factories.

Agriculture, which attracted over 90% of the population, was the dominating sector in the national economy but still existed with backward cultivation measures, low intensive farming level and low productivity. Feudal despoilment, rent land and partly despoilment of surplus capital in some farms controlled by French people still dominated the whole agricultural economy and rural society of Vietnam for one century of French domination.

Although in 50 years (1890-1939) the colony of Vietnam did export some 57.8 million tons of rice, which, as minerals, was not regarded an export product that promoted economic development but rather the result of colonial exploitation policy, a policy of deprivation.

That exported rice was the overrent paid by products, which was equal to 50% of the output harvested via the system of feudal regulations still preserved in Vietnamese rural areas.

Rice was “exported” while the population suffered starvation and hunger. In 1945, when World War II was coming to an end, more than 2 million Vietnamese peasants died of hunger within 1 month (the third lunar month).

Many researchers believed that before 1945, Vietnam was the least developed region in the French colony system and compared to other countries in Asia.

Vietnam’s economy in the 30-year wars (1945-1975)

The wartime economy (1945-1954)

Just one day after the declaration of independence on September 2, 1945, the Provisional Revolutionary Government had its first session, chaired by President Ho Chi Minh at the Presidential Palace. On behalf of the Government, he pointed out “the urgent tasks for the State of the Democratic Republic of Vietnam” which was to eradicate starvation and illiteracy.

In his letter to the people nationwide on the issue of anti-starvation, President Ho Chi Minh suggested that people give up “a meal every 10 days and 3 meals every month, giving the rice to the poor”. The whole country actively took part in the movements of “production promotion”, “a piece of soil is a bar of gold”, reclamation and recovery of mines and factories.

At the same time, the Provisional Government issued a series of decrees: the Decree on abolition of poll-tax on September 7th 1945, the Decree on Tax Reduction by 20% and Full Tax Exemption for people in flood-stricken zones on October 26, 1945, the Circular on temporary distribution of common fields for poor peasants on November 16, 1945. The starvation was in general addressed by early 1946.

Regarding finance, there were only 1,233,000 Indochinese piasters left in the national budget, over half of which was torn notes. Indochina Bank was still under the control of the French. On January 31, 1946, the Government launched a Decree on printing and issuing Vietnamese currency, which was firstly circulated in the central area and by the end of 1946 all over the country.

The nationwide resistance war broke out. The country was divided into two zones: the free zone and the occupied zone. In the latter, French colonists still maintained their economic policy as before, but it was more focused on serving the war.

In the free zone, the resistance-war government worked out the policy of “waging resistance war along with nation building” in line with the guideline of conducting a long and all-sided war, mobilizing the people, relying mainly on our own forces.

In February 1949, the Government issued a decree to confiscate lands from the colonialists and landlords and redistribute it to peasants. It also decreed that former debts be abolished and taxes reduced. Hydraulic works was promoted, land reclaimation boosted and collective farming encouraged in proper forms.As a result, foods for people and soldiers were ensured and military industries were developed.

Towards 1949, 130 arsenals, one engineering plant named after Tran Hung Dao and some workshops managed to produce printing, drilling, lathing and sewing devices. A number of coalmines in the free zones of Tan Trao (northern province of Tuyen Quang) and Quan Trieu (Thai Nguyen province) were restored. The productions of paper, textiles, salt, soap, cigarettes, sugar, drugs were developed in various localities. A series of military factories manufacturing and repairing weapons, ammunition and military equipment were built in the free zone and resistance base.

The resistance-war economy had been developed since 1951; The Vietnam State Bank was set up and the Vietnamese bank note introduced from June 10th, 1951, making an important point in the distribution of goods; trade and commercial activities started to develop.

 1954-1975 - Both at war and in peace

In the 1954-75 period, the people in North Việt Nam had undertaken two tasks: building socialism in the North and supporting the South in the fight against the U.S aggression for national reunifiction.

With the slogan “All for the front, all for defeating the U.S aggression”, this period economy was placed at the war footing.

The period could be divided into several stages:   

The 1954-64 period: the overall task was to complete the remaining duties of the national and democratic revolution; and to begin socialist construction.

From 1954 to 1957, a land reform was launched following the slogan “rice fields for tillers” and economic restoration after the war completed.

In agriculture, the food production value was achieved as high as in 1939, the golden year of Vietnamese agriculture at that time.

Industrially, in 1955, the North boasted only 19 workshops with 17,290 workers. Towards 1957, the number reached 78 with 46,430 workers, with a total industrial value making up 10% of the total agricultural-industrial value, and reached the 1939 industrial output. Handicrafts developed rapidly. By 1957 there were 150,000 manufacturing establishments, employing 430,000 workers, taking up 63.7% of industrial production.

Transportation was quickly restored. Railways linking Hanoi to other towns were completely restored. The Hanoi-Beijing-Moscow inter-transporting railway and Hanoi-Lào Cai-Kunming (China) railway were inaugurated on February 28th 1955.

From 1958 to 1960: The task of socialist transformation and economic development was focused. In the industry sector, reforms were carried out towards private capital commercial industry. Agriculture and handicrafts were organized into cooperatives.

In terms of the regime of possession, at the end of this period, only two main forms of possession existed in North Việt Nam, namely State ownership and collective ownership.

From 1961 to 1965: implementation of the first five-year plan on socio-economic development was carried out.

The 1965-1975 period: The war spread nationwide. The task for the North was to timely transform thoughts and organization to develop the economy and strengthen the armed forces to firmly defend the North, provide assistance for the struggle of people in the South.

Factories in urban areas were scattered and evacuated to areas away from the targets of American air strikes. Production was continued to facilitate transportation; agriculture was further developed to ensure the people’s lives and to assist the battlefield.

The centrally planned subsidized economy (1975-1986)

April 30, 1975 marked the end of the anti-American war and the complete liberation of South Vietnam.

The country would from now on live in peace and unification but was still faced with difficulties and challenges: 7,850,000 tons of bombs and shells were dropped onto its land (three times as many as those used in World War II, equal to 640 nuclear bombs of the same kind as those dropped by the U.S. on Hiroshima, Japan); leaving more than 20 million craters, millions of unexploded bombs and landmines under the ground; 451,260 tons of toxic chemicals were sprayed on the Southern forests, seriously destroying the Vietnamese ecology (50% of the 10-million-hectare forest was carpet-bombed by B52s) and people (2 million Vietnamese people intoxicated and 50,000 children deformed, the consequences are still felt today and will be so for many years to come); 9,000 out of 15,000 villages in South Vietnam were ruined.

In the North, almost all cities and towns were raided, in which 12 towns and 51 townships were completely ruined; 4,000 out of 5,788 communes were stricken, many areas were suffered exterminated.

All power plants and 5 million square meters of housing (excluding those in the countryside) were seriously destroyed. All the railway network, 100% of the bridges, the whole system of ports, sea-routes, river-ways and warehouses were raided.

American planes dropped bombs and fired rockets, causing damage to 1,600 irrigation constructions (including dykes), most of the farms and hundreds of thousands of hectares of fields and gardens, killing 40,000 buffaloes and oxen (the main traction in agriculture), destroying 3,000 schools, 350 hospitals. Then, from May 1975 to 1989, Vietnam had to fight two border wars in the Southwest and the North of the country.

At that time, Vietnam was still a poor, backward agricultural country, with 80% of the population and 70% of the labor force living in rural areas and subsiding on agriculture.

In the North, after 21 years of socialist construction, the economy was still based on small-scale production, poor technical infrastructure, weak management, and inefficient models of administrative subsidies.

The South, having just escaped from the yoke of neo-colonialism, was in the same situation, depending on foreign capital, technology, material, and merchandise (70% of the economy was dominated by foreign capitalists), though it had reached a certain level of development.

Towards 1979, Vietnam’s population rose by 5 million in comparison with 1975 but the increase of food was very slow (1976: 13,493,000 tons; 1979: 13,984,000 tons) with the amount per capita of less than 300kg (in paddy); inflation reached 3-digit numbers (1976: 128%, 1981: 313%).

During the war, Vietnam had imported 1 million tons of food each year, and at this time she had to import even more (1978: 1.9 million; 1979: 2.2 million). People’s lives became extremely hard. There was a critical shortage of food and basic necessities for the people, civil servants and armed forces; unemployment and social evils became burning problems.

The ailing of the economy was expressed in the very low production target per capita. Once can see a great distance between the main industrial produce per capita of Vietnam and those of some former Eastern European socialist countries several dozens of years before. (Table 1)

 Table 1. Comparison of Vietnam’s economic targets and those of former East European countries

Source: Building Economic Structure in the Transitional Period in Việt Nam, Vietnamese version, Social Science Publishing House, Hanoi, 1986, p. 65.

The economy’s production was not enough to meet the demand for food, thus no accumulation could be made for expansive reproduction. The consumption fund was much larger than the domestic national income, so the foreign national income had to be exploited to cover the consumption fund. (Table 2)

Table 2. Use of national income (current price, %)

Source: Building Economic Structure in the Transitional Period in Việt Nam, Vietnamese version, Social Science Publishing House, Hà Nội, 1986, p. 65.

Obviously, the whole accumulation fund, if available, had to completely rely on foreign aids in various forms, mainly loans and non-refundable aids.

Underdeveloped production and insufficiency of food surely led to weak commerce and constant deficit in trade balance. International trade relations were mainly established with socialist countries and fully run by the State through trade agreements, protocols on commodity exchanges and payments, and agreements on loans and aids. Commodity and services prices were fixed on the basis of agreements between governments. During 1976-1985, export turnover, though increasing faster than import turnover, could compensate only one-third of the latter and the total trade turnover remained very low. (Table 3)

 Table 3. Export-import during the pre-đổi mới period 3

Unit: million rubles-dollars 

Source: Vietnam’s Economy in 45 Years, Vietnamese version, Social Science Publishing House, Hanoi 1990, p. 218.

The mechanism of economic management

It can be said that the mechanism based on a highly central planned regime dominated the economy from 1954 till late 1990s. This mechanism has three features:

+ Based on the system of public ownership of means of production;

+ The State, instead of the market, decides the whole production process (What to produce? How to produce? And who to produce for?);

+ Distribution based on work.

This was the common economic model of the former socialist countries before reforms and renovation.

In Vietnam, those three features were expressed as followed:

Major means of production were nationalized. The State made efforts in prompting the nationalization process through “The revolution of production relationship.”

The basic contents of the revolution were firstly to nationalize all private enterprises (agriculture, handicraft and small business), bringing private economy into cooperatives in order to build a large-scale socialist economy with two forms of ownership: State economy and collective economy.

Accordingly, mass nationalization and collectivization campaigns were quickly carried out in different business and production fields in North Vietnam during the years between 1958 and 1960 and continued nationwide in the years following the liberation of South Vietnam and national reunification (1975-1979).

As a result, by 1974 state-owned industry accounted for 72.2%, private and individual enterprises possessed 2.3%; 25.5% belonged to the collective sector.

In South Vietnam, after four years (1975-1979), the “socialist transformation in industry and commerce and agriculture cooperatives” was basically achieved.

As a result, by 1984 socialist economic sectors and state-owned business accounted for an absolute percentage in the total social production. The mechanism based on public property dominated the whole production of society.

The management mechanism

The State controlled the economy through legal norms and commands.
The State set production norms for production and business units, concerning:

-          Total production outputs

-          Turnover value in reality

-          Total salary fund

-          Interests and amounts of money contributed to the national budget

-          Fund for capital construction pumped by the State

-          Some norms in science-technological advances

-          Labor productivity increase

-          Major materials and equipment provided by the State, and the worn-out volume of materials, fuels and means for some products

-          Production cost and retail price.

The relationship between the State and economic units was of allocation-delivery, on the basis of which products were delivered to people.

Therefore, the market was not recognized and the State, instead of the market, decided the whole production process.

The State held monopoly of foreign trade; of doing business with foreigners and of properties gained from foreign trade.

The distribution of income was based on the principle of egalitarianism. In state-owned and administrative sectors, salary was the most popular distribution way. The rate of pay was mainly defined on the following principles:

-          Qualification (expertise)

-          The difficulty of the work

-          Function

-          Service seniority.

Above are the main features of Việt Nam’s economic model during the pre-renovation and open-door period, which was based on a central planned subsidized economy.

Here are some major targets of the period. (Table 4)

Table 4. Average growth rate of some economic targets in the pre-renovation period 4

Source: Department of Statistic, Vietnam –  Facts and Figures 1945-1980, Vietnamese version, Su That Publishing House, Hanoi, 1990, p. 135.

Besides the salary, workers also enjoyed other allowances, most importantly the coupon-based system of distribution of basic necessities (grains, foodstuffs, fuels, materials) and of houses, health services and sanatorium services, all of which were carried out through the mode of “planning” that is, products were directly delivered to the people.

Salaries were not paid according to job efficiency but rather to working results which were measured by quantity and quality. This procedure, therefore, could not encourage talented laborers who worked most efficiently.

Searches and experiments for renovation

Faced with this situation, the Communist Party of Vietnam (4th tenure) held the sixth plenum of the Central Committee, which arrived at two decisions: Resolution 20–NQ/TW on the situation and urgent tasks and Resolution 21–NQ/TW on orientation and tasks for development of industrial consumption commodities and local industry.

The main content of these two resolutions was to promote the agriculture, forestry and fishery sectors to fulfill “the key task of food production in order to meet people’s demand of consumption”.

The government immediately issued the policy on agriculture encouragement. This stabilized the food procurement for 5 years (formerly, every year, at a price determined by the State.) Surplus was sold to the State at an agreed price or freely circulated (this practice had been forbidden previously).

Cooperatives and their members were encouraged to reclaim wasteland, increase the number of crops and work towards intensive cultivation. Again, surplus could be sold on the free market.

In December 1979, the 6th session of the 6th National Assembly pointed out that the economic management system was strongly characterized by administrative bureaucracy.

In some localities such as Vinh Phu, Hai Phong, and Nghe An, a new agricultural management method, in which production was based on a contractual system with a certain amount of work and products for cooperative members and groups of members, was “clandestinely” tested (at the time it was called the illicit contractual system). The system really made peasants connect themselves closely with their rice fields and be devoted to their job, thus positively promoting agricultural production.

Against that background, on January 13, 1981, the Secretariat of the Central Committee of the Communist Party of Vietnam issued Instruction 100 CT-TW on reforming and extending the contractual system to replace the work-point regime in agricultural cooperatives (shortly called Instruction 100, or contractual system 100).

Instruction 100 had a great impact on agricultural development. The annual average growth of agricultural production in the 1981-1985 period was 4.9% (1.9% in the previous 5-year period 1976-1980), food production increased from 15 million tons in 1981 to 18.2 million tons in 1985; rice productivity rose by 23.8%, industrial crops by 51.1%, food mobilized by the State went up two times.

In the industrial sector, on February 21, 1981, the Government issued Decision 25-CP, indicating some policies and measures to further promote the initiative in production and business as well as financial self-control of State-owned factories.

The State also allowed factories to make their own production and business plans including three parts: the State’s assignments, usually called State-governed plans; the enterprise’s self-devised plans and auxiliary plans (usually called the third plan).

On the same day, the Government released Decision 26-CP on expanding the mode of contractual payment, product-based payment and introducing a salary payment into practice in state-owned economic units.

The two decisions made great contributions toward improving the sluggish production of State-owned enterprises. In 1981, for the first time in the post-war period, the industrial sector reached the set production target, especially the local industry scored 7.5% of productivity higher than planned.

In the delivery and circulation aspects, many complicated problems emerged. On June 23, 1980, the Politburo of the Communist Party of Vietnamissued Resolution 26 NQ-TW on the improvement of delivery and circulation work with three targets: production promotion, financial stability, increase of strategic products controlled by the State (food).

As a result, the coupon system (supply system) was abolished and instead a one-price system was implemented. At the same time, the government conducted a price reform that produced no positive results.

In sum, the “low level” adjustments served as the basis for the step-by-step adjustments through “high level” decisions such as Instruction 100 on agricultural production based on a contractual system, released by the Secretariat of the Party Central Committee; Decisions 25CP and 26CP by the Government and Resolution 26 on industrial production, delivery and circulation practice, issued by the Politburo.

Following the 5th Congress of the Communist Party of Vietnam (March 1982), for five years (1981-1985), the industry sector had a positive increase averaging 9.5%. However, accumulated difficulties still remained in the delivery and circulation front. The inflation rate went from 125% in 1980 up to 774% in 1986.

In December 1984, the 7th Plenum of the 5th Party Central Committee set up a sub-committee to assist the Politburo in research of the issues of price, salary and money. From June 1 to 7, 1985, the 5th Party Central Committee held its 8th Plenum on the issues of price-salary-money.

The Plenum concluded that it was impossible to stabilize the economy and society, to balance the budget and cash while still maintaining the price and salary subsidies. The Plenum decided to utterly abandon the model based on central planning, follow democratic centralism, economic accounting and socialist business.

The 8th Plenum of the 5th Party Central Committee marked a renewal of thinking in terms of delivery and circulation with the recognition of commodity production and its rules. This also served as the preparatory meeting for the 6th National Party Congress to renovate and open the country.

From September 14, 1985 onwards, with the price-salary-money adjustment (second time) kicked off by the practices of exchanging money, a new price was set up and a new payment system was adopted. A one-price system was implemented, the price subsidy and the coupon system completely abolished. Only the rice allocation regime for the salaried people was maintained.

It is therefore obvious that at the 8th Plenum of the 5th Party Central Committee, the basic line was determined, which was “to make production burst out”, utterly abolish subsidies and to turn to an economic accounting system and socialist business.

By the 6th Congress, Việt Nam had not, however, completely abandoned the model based on a centrally planned economy since own knowledge of socialism and its transitional period was still very superficial.

Despite the fact that many solutions had been put forward from the 6th Plenum (4th Tenure) to the 8th Plenum (5th Tenure), and that the socio-economic situation had showed some progress, Vietnam’s economy was still in a serious crisis due to the poor, incomprehensive and half-hearted measures. 

The annual average growth of industrial productivity

Source: Statistics of the Socialist Republic of Vietnam, 1976-1989, Hanoi, 1990.

 To sum up, at the decisive moment for the economic renovation policy, Vietnam’s economy was recovering thanks to the innovation policies characterized by exploration and experimentation.

 Vietnam’s economy in the renovation and open-door period from 1986 – an oriented market economy