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An analysis of the developmental state: The case of the Vietnamese textile and garment industries

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AN ANALYSIS OF THE DEVELOPMENTAL STATE:
THE CASE OF THE
VIETNAMESE TEXTILE AND GARMENT INDUSTRIES
by
Angie Ngoc Tran
A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(Political Economy and Public Policy)
August 1996
Copyright 1996, Angie Ngoc Tran
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UNIVERSITY OF SOUTHERN CALIFORNIA
THE GRADUATE SCHOOL
UNIVERSITY PARK
LOS ANGELES. CALIFORNIA 90007
This dissertation, written by
A JQOC A M j j e TKAfO
umter f/ie direction of h£JC . Dissertation
Committee, and approved by all its members,
has been presented to and accepted by The
Graduate School in partial fulfillment of re
quirements for the degree of
DOCTOR OF PHILOSOPHY
Hi ini 'of nmftnnfi Studies
Date ....A’r l ?...~ ....
DISSERTATION COMMITTEE
ft ' £- ^ c jl
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To My Parents and Nguyen Ky-Hung
for instilling the dream
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ACKNOWLEDGMENTS
My interest in the topic began in a fact-finding trip to Vietnam in 1992 with
a United States women’s delegation, leading to two subsequent field trips in 1994
and 1995 to further study this topic. During my visits to many factories throughout
Vietnam, I was intrigued by the coexistence of public and private firms in the
textile and garment industries within a changing environment. This study evolved
out of my efforts in trying to find an integrative framework that could transcend
the “state versus market” debates, and provide an analytical tool to explain the
Vietnamese case.
I would like to express my appreciation for the support of faculty, staff and
students of the Political Economy and Public Policy (PEPP) Program at the
University of Southern California; especially my heartfelt appreciation to Dr.
Farideh Motamedi, Associate Director of the PEPP program, for her invaluable
support and everlasting friendship from the very beginning of my graduate studies
at USC.
I owe deep gratitude to the following professors: my chair, Dr. Nora
Hamilton for her inspiration, thorough guidance and encouragement from the
beginning to the completion of this study; Dr. Vuong Quang for always providing
excellent guidance on the quantitative analysis and encouraging me to be clear
about my assumptions; Dr. Gary Gereffi for his insightful comments on earlier
versions of this study; Dr. Robert Kalaba and Dr. David Smith for their invaluable
suggestions on how to develop this study from here. I look forward to
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IV
collaborating with Dr. David Smith on our comparative projects in the near future.
Moreover, I would like to acknowledge the support of many colleagues inside and
outside of Vietnam who shared information and advice.
I cannot say enough to express my appreciation to my grandparents, my
parents and all other members of our extended family for instilling the dream of
higher education and creating a loving and supportive environment in which I
could successfully complete this long and enlightening undertaking. We now have
a “doctor” in the Tran and Nguyen families! Last, but not least, I owe a large debt
of gratitude to my husband, Nguyen Ky-Hung, who has been assisting me tirelessly
in making this dream a reality. His unfailing support has seen me through the ebb
and flow of this endeavor.
I have come a long way, from the day standing on the deck of a Danish
tanker as a boat person, to embarking on an academic career with teaching,
researching and contributing to the development of studies on the political
economy of Vietnam in relation to other countries. This study is just a beginning of
an exciting journey with challenging research projects in the years ahead!
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TABLE OF CONTENTS
ACKNOWLEDGMENTS......................................
LIST OF ILLUSTRATIONS..................................
LIST OF ABBREVIATIONS AND GLOSSARY
ABSTRACT............................................................. Xll
IX
1 1 1
X
PART L THE DEVELOPMENTAL STATE AND
THE TEXTILE AND GARMENT INDUSTRIES
INTRODUCTION.
Definitions
Research Question
Why Choose The VTGI To Study The Role of The State?
The East Asian NICs’ experience
Significance of the VTGI
Outline of Chapters
Chapter
l.THE DEVELOPMENTAL STATE IN THE GLOBAL ECONOMY 1 1
Theoretical Perspectives on The East Asian NICs’ Economic
Success
The Statist Perspective
State Capacity
State Autonomy
Critique of The Statist Perspective
Major Characteristics of The East Asian NICs’ Success
How Internal and External Factors Lead to Policy Changes
State Autonomy to Formulate Policy Changes
Decentralized Development Approach in Taiwan
Centralized Development Approach in South Korea
Flexible Implementation of New Strategies
Flexibility in the Upgrading Efforts
State Apparatus to Implement Policies
A Historical Perspective of Vietnam
Historical Legacy: Impacts on State Autonomy and Capacity
State Autonomy
Formation of State Apparatus and Bureaucracy
Why Is a Broader Framework Needed to Analyze Vietnam?
The Integrative Framework
Hypotheses
Methodology
Details of The Sample
How Firms Are Selected to Be Interviewed?
Statistical Analysis
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Caveats about Interpretation of Secondary Texts and Official
Statistics
Conclusion
PART H. THE CASE OF THE VIETNAMESE TEXTILE AND GARMENT
INDUSTRIES
2. VIETNAMESE ECONOMY IN TRANSITION (1975-1991 Period) 56
Restructuring Within A Command Economy (1975-late 1985)
Post-War Restructuring (1975-1979)
Partial Market-Oriented Reforms (1979-1981)
Reinstitution of Command Economy (1982-late 1985)
State Bureaucracy to Manage the VTGI (1975-1985)
VTGI Restructuring within a Command Economy (1975-late 1985)
The Beginning of Market Reforms (From Late 1985 to 1991)
Market-Oriented Policies
Labor Issues
State Response to International Changes
Policy Changes and the VTGI Development (1975-1991)
Conclusion
3. THE MARKET-REFORM PROCESS (1991-1995 Period).........................80
Trade Relations with the EU and the EE Markets
Evolution of Trade Policies in a Changing Environment
Evolution of Tax Policies
Export Taxes
Import Taxes
Subcontracting Tax
EU Quota Policies: Challenges in Non-Communist Markets
Export and Import Procedures
Export/import Licenses
Customs Procedures
Formation of Private and Para-Statist Associations
Responses of State and Firms in The Triangle EU Network
Flexible Production Organization
The Role of Vietnamese Producers
The Role of EU Buyers
The U.S. Market
The Role of East Asian NICs’ Firms
Direct Relations in The EE Network
Implications of Both Trade Networks
Integration Issue
Labor Issue
Textile and Garment Interests in Both Public and Private Sectors
Textile Interests
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vii
Garment Interests
Integration Within The State Sector
Diversification in State Textile Firms
Linkages Within State Garment Firms
Integration Within The Private Sector
New Issues Since 1995
Conclusion
4.THE EFFECTS OF TRADE-RELATED POLICIES ON THE VTGI 132
Variables: Expected Significance and Actual Effects
Variables That Represent Trade-Related Policies
Variables That Represent Internal Factors
Variable That Represents External Factors
The Model and Testing Procedure
The Basic Production Function
Tests To Select Significant Variables
Statistical Tests on a Model
Tests After Obtaining The Final Model
The Three Interim Models: Test Results and Significance
The Final Model
Test Results To Confirm The Final Model
Discussion of Empirical Findings
Explanation for The Effects of State Policies
Significance of Domestic Factors: Privileges and
Entrepreneurship
Constraints and Benefits of Exports
Conclusion
PART ffl. LOOKING AHEAD
5. IMPLICATIONS FOR THE VIETNAMESE STATE................................158
Evolution of Developmental Goals of the State
Summary of Findings
Implications For State Autonomy
Relationships Between The State and Domestic Groups
The State and the SOEs
The State and the Private Sector
State and Competing Interests of Textile and Garment Industries
The Effects of International Factors on Development Policies
Markets/Linkages
International Leverage
Implications For State Capacity
Evolution of Bureaucratic Structure
Issues of Implementation
Performance of SOEs in the VTGI
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viii
CONCLUSIONS......................................................................................................174
Policy Recommendations
The Vietnamese Developmental State: Challenges Ahead
Further Research
BIBLIOGRAPHY....................................................................................................180
APPENDICES......................................................................................................... 188
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ix
LIST OF ILLUSTRATIONS
Chart 1 Share of The VTGI Export in Total Vietnam Export 188
Appendix 1 Structure of The Vietnamese Communist Party 189
Chart 2.1 Labor in Textile and Garment Industries 190
Appendix 3.1 Estimates of Components of Retail Price of a Boy’s Dress Shirt
191
Chart 3.1 Share of The EU Textile and Garment Exports in The VTGI
Export 192
Chart 3.2 Components of The Retail Price of A Boy’s Dress Shirt
193
Figure 3.1 The Triangle Manufacturing System: The Case of The Vietnamese
Textile and Garment Industries 194
Figure 3.2 Vietnam-European Union Trade Network 195
Figure 3.3 Vietnam - East European Trade Network 196
Appendix 4.1 Instrumental Variables 197
Appendix 4.2 Binary Variables 198
Appendix 4.3 Continuous Variables 199
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LIST OF ABBREVIATIONS and GLOSSARY
AWCKE Association of Weaving, Clothing, Knitting and Embroidery
BDCC Buyer-Driven Commodity Chain
Central Garment Garment firms that are under the MOLI management
Manufacturers
Central State Firms Any state firms that are under the MOLI management
Central Textilers Textile firms that are under the MOLI management
CIEM Central Institute for Economic Management
CMEA Council for Mutual Economic Assistance
CONFECTIMEX Import and export of garment products
DFI Direct Foreign Investment
DRV Democratic Republic of Vietnam
EC European Community
EOI Export-Oriented Industrialization
EU European Union
FOB Free On Board: value of export products including all inputs
GCC Global Commodity Chain
HCMC Ho Chi Minh City
HS Harmonized System for clothing product classifications
IMEX State-owned import-export corporations in major cities
such as HCMC, Hanoi, Hai Phong and Da Nang
ISI Import-Substitution Industrialization
KMT Kuomingtang (mainland Taiwanese Party)
Local State Firms Any state firms that are under the management of
local/provincial people’s committees
MOE Ministry of Energy
MOF Ministry of Finance
MOHI Ministry of Heavy Industry
MOI Ministry of Industry (including the former MOLI, MOHI,
and MOE)
MOL Ministry of Labor
MOLI Ministry of Light Industry (consolidated into the present
Ministry of Industry since November 1995)
MOT Ministry of Trade
MPI Ministry of Planning and Investment (formed since
November 1995), which includes the former SCCI
NIC Newly-Industrialized Country
OBM Original Brandname Manufacturing whereby manufacturers
make goods for export and sale under their own label
OEM Original Equipment Manufacturing whereby contractors
make goods to be sold under another company’s brandname
SCCI State Committee on Cooperation and Investment
SOE State-Owned Enterprise (can be both central or local)
SRV Socialist Republic of Vietnam
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X I
TEXTIMEX
TPP
UNIDO
VCCI
VCP
VGIA
VINATEX
VTGI
Import and export of textile products
Trafic de Perfectionnement Passif: requiring that over 80%
of raw materials must come from the EU sources
United Nations Industrial Development Organization
Vietnamese Chamber of Commerce and Industry
Vietnamese Communist Party
Vietnamese Garment Industry Association
Vietnam Textile and Garment Corporation: the largest state
corporation, that was formed in April 1995 to replace both
CONFECTIMEX and TEXTIMEX
Vietnamese Textile and Garment Industries
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xii
ABSTRACT
AN ANALYSIS OF THE DEVELOPMENTAL STATE:
THE CASE OF THE VIETNAMESE TEXTILE AND GARMENT
INDUSTRIES
This study attempts to shed some light into the question about the extent to
which the Vietnamese state plays a developmental role in a transitional economy
through the case study of the Vietnamese textile and garment industries (VTGI).
This study delineates the dilemmas that Vietnam has been facing in the course of
economic transformation in a changing world-economy. In so doing, it explores
interesting insights into how an integrative framework can be applied to a Socialist
country such as Vietnam, and how the process of economic globalization affects
the developmental role of the state.
This study is organized into three parts. Part I reviews the literature on
contending perspectives on the economic success of the East Asian NICs, with a
focus on the developmental role of the state in the textile and garment industries.
This study proposes an integrative framework which transcends the “state versus
markets” debates, and analyzes the interactions between state policies and
(domestic and foreign) firms in the case of the VTGI. It introduces important
concepts such as state autonomy, state capacity, triangle manufacturing,
subcontracting, integration, backward and forward linkages, flexibility, and
reciprocity. It uses the Cobb-Douglas production function and econometrics
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xiii
method to explore the effects of state policies as well as other factors on the
performance of the sampled firms in the VTGI.
Part II analyzes the evolution of the Vietnamese textile and garment
industries from a command economy to a market-oriented system, and how the
state responds to a combination of internal and external factors. It presents
interesting findings about the significance of domestic integration and its
relationship with value-added, as well as identifying emerging issues that have
significant implications for future policy changes.
Pan m embarks on an assessment of the Vietnamese state with some
implications for its autonomy and capacity. It also presents some policy
recommendations to address the constraints and opportunities arising from a more
open economy, as well as suggesting further research.
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I
PART L THE DEVELOPMENTAL STATE AND
THE TEXTILE AND GARMENT INDUSTRIES
INTRODUCTION
The world has been witnessing unprecedented changes since the end of the
Cold War. Communist regimes in Eastern Europe and in the former Soviet Union
collapsed in the late 1980s. Economic globalization means that products are
manufactured in complex manufacturing and distribution networks linking many
countries together.
The Vietnamese state has been trying to respond to this changing global
environment during its own domestic economic transformation.1 Vietnam was
under the command economy before embarking on consistent market reform
process in the mid 1980s. During the 1990s, the state has been trying to formulate
and implement policies to maintain social justice (such as employment, decent
wages, working conditions), while not compromising economic efficiency (such as
production, export, labor productivity). The context of the 1990s with economic
globalization and extensive foreign influence provides both opportunities and
challenges to its effort to reconcile those developmental goals.
This study attempts to shed some light into the very important question
about the extent to which the Vietnamese state plays a developmental role in a
transitional economy with an emerging private sector through the case study of the
Vietnamese textile and garment industries (VTGI). This study delineates the
1 The sequence of reforms in Vietnam is more similar to that of China than that of Eastern
Europe (EE): Vietnam began first with economic reforms epitomized in a more market-oriented
system, instead of political reforms as in the EE countries.
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2
dilemmas that Vietnam has been facing in the course of economic transformation
embedded in a changing world-economy.
The case of Vietnam can provide interesting insights into how the developmental
state framework can be applied to a Socialist country, and how the process of
economic globalization affects the developmental role of the state.
Definitions
Economic development is defined as “the emergence and expansion of an
efficient, integrated productive structure characterized by increasing levels of
productivity, with the understanding that the primary goal of development is a
rising standard of living for the entire population” (Bonacich et.al. 1994, 365). In
other words, it is broadly defined as both economic growth (or efficiency as
manifested in an increase of production and exports) and welfare (or equity as
manifested in employment, wages and other labor-related issues such as working
conditions and employment stability).
Value-added refers to the addition to the value of the product at a
particular stage of production. Thus the value-added of the textile and garment
industries is equal to the payments to the factors of production in these industries:
wages paid to workers; profits, interest and depreciation paid to capitalists; rents
for buildings and land paid to their owners (Gillis, Perkins, Roemer, Snodgrass
1992, 37, 444).
The working definition of the state is essentially Weberian: “...a set of
organizations invested with the authority to make binding decisions for people and
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organizations juridically located in a particular territory and to implement these
decisions using, if necessary, force” (Dietrich Rueschmeyer and Peter Evans 1985,
47). Different aspects of the state role can be contradictory: “ ...to be an
expression of pacts of domination, to act coherently as a corporate unit, to become
an arena of social conflict, and to present itself as the guardian of universal
interests” (Rueschmeyer and Evans 1985, 48). Since this study is on effective state
intervention, attention will be focused on the state as “a corporate actor,” or the
state’s ability to act in a unified way, and how these contradictory tendencies are
combined in its internal structure and its relation to the social structure.
Conceptualization of the developmental state provides guidelines to
evaluate the developmental efficacy of government policies. A developmental state
is defined as a state that is actively involved in economic development policies,
beyond the normal functions such as providing public goods and protecting social
and national interests (Rueschmeyer and Evans 1985, 45, 48).
The followings are definitions of fundamental development strategies.
Primary Import-Substitution Industrialization (ISI) “...entails the shift
from imports to the local manufacture of basic consumer goods, and in almost all
countries the key industries during this phase are textiles, clothing, footwear, and
food-processing” (Gereffi 1990, 17). The primary phase normally deals with labor-
intensive industries.
Secondary ISI “...involves using domestic production to substitute for
imports of a variety of capital- and technology-intensive manufacturers: consumer
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4
durables (e.g., automobiles), intermediate goods (e.g., petrochemicals and steel),
and capital goods (e.g., heavy machinery)”. The second phase involves more
capital-intensive, skill-intensive, and higher value-added goods (Gereffi 1990, 17).
Both primary and secondary Export-Oriented Industrialization (EOI)
involve manufactured exports. Products produced in the primary EOI tend to be
labor-intensive; while products in the secondary EOI tend to be skill-intensive,
having higher value-added and requiring a more fully developed local industrial
base (Gereffi 1990, 17).
Research Question
Can the VTGI contribute to economic development in the context of a
transitional economy (characterized by a transition from a relatively closed
command economy to a more open market-oriented economy), and the rapid
changes within the global textile and garment industries? What has been the role of
the Vietnamese state in facilitating this process?
Why Choose The VTGI To Study The Role of The State?
The explanation for this research question is partly based on the experience
of the East Asian newly-industrializing countries (NICs), partly on the reality of
the Vietnamese situation. The East Asian NICs had used their textile and garment
industries as an impetus for their industrialization. Similarly, the VTGI is one of
the most important manufacturing sectors in economic development. While there
are fundamental differences between Vietnam and the East Asian NICs (to be
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5
discussed in subsequent chapters), the VTGI is an interesting case study to
examine the possibility of a developmental state in a transitional economy.
The East Asian NICs’ Experience
The textile and garment industries in South Korea and Taiwan have played
a key role in their economic development. Both Taiwan and South Korea prepared
the bases for their garment industries by promoting the textile industries in the
1950s and 1960s through ISI policies, then moved on to promoting garment
exports in the 1960s and 1970s through EOI policies (Gereffi 1990, 18, 20).
The general sequence of South Korean (reflected in its five-year plans) and
Taiwanese (in its four-year plans) overall development strategies is similar: (I)
commodity export in the pre-1950 period; (2) primary ISI in the 1950s; (3)
primary EOI in the 1960s; (4) a combination of both secondary EOI and ISI
beginning in the 1970s. In both countries, secondary ISI and secondary EOI were
fused to sustain national exports as the basis for growth. These secondary
strategies were developed with the existence of both domestic and foreign markets
to facilitate efficient economy-of-scale production (Gereffi 1990, 18, 20).
In the Taiwan case, the development of garment industry coincided with its
process of economic development since the Kuomintang (KMT) fled mainland
China to Taiwan (Gereffi and Pan 1994, 127-131). Their textile industry did not
start from scratch: the first textilers, or relocated mainlanders who fled China as
the Nationalist regime fell on the mainland, transported their machines aboard
ships and re-established them in Taiwan (Wade 1990, 79). In the primary ISI
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period (1949-1965), the KMT government prioritized the garment industry which
mostly served the domestic market: military and school uniforms for the
Taiwanese. The KMT state also developed the textile industry as a foundation for
future garment export. To establish the textile industry quickly, the state
implemented policies such as tariffs, quantitative restrictions on imports of yam
and finished products, restrictions on the entry of new producers to prevent
“excessive” competition, and controlled access to raw materials (Wade 1990, 79).
The KMT state supplied raw cotton, advanced all working capital, and bought all
production. It helped develop all stages of textile production: spinning, weaving,
dyeing, finishing, knitting, synthetic fibers, in order to supply high-quality inputs
for the production of garments to be exported in the primary EOI period (1966-
1973). The secondary EOI period (1974-1987) was partly triggered by the
implementation of the Multi-fiber Arrangement (MFA) which restricted imports of
man-made fibers (i.e., synthetic, rayon) and wool products to industrialized
countries.2 Chapter I will elaborate on how this regime of protected global trade in
textile and garment industries has stimulated flexible policy adjustment which led
to the process of industrial upgrading and export diversification in Japan and the
East Asian NICs to the United States and the EU.
2 MFA was first negotiated in 1974 with the US as the principal protagonist and renewed with
tighter protection in 1977 and again in 1981. when European countries were the driving force.
Cline argues that MFA breached GATT principles by imposing quantitative restrictions (quota
protection), rather than tariffs, against developing countries and not industrial countries. He
further argues that quota protection for textiles and apparel have been rising over time through
successive tightening of the MFA: for instance the tariff-equivalent of apparel quotas is in the
range of 25%. and that on textiles is about 15% (Cline. William R 1990. 145. 148. 150, 167). In
coping with the initial stage of Multi-Fiber Agreement (MFA) in the late 1950s which put a limit
on cotton exports, the East Asian NICs diversified production away from cotton textiles.
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In the case of South Korea, since the 1960s the garment industry has
played an important role in economic development, and has been the most
important source of foreign-exchange earnings. Its major exports from 1965 to
1975 were garments and cotton textiles (Amsden 1989, 20). The share of garment
exports in total export revenue was 18.5% in 1967, and 13.6% in 1990. The South
Korean state helped garment exporters diversify and specialize in high-quality
garment products. In the early 1990s, garments were the leading manufactured
export, mostly to the US and Japan.3 Moreover, through the late 1980s and early
1990s, South Korea was one of the top four suppliers for the international market
with a reputation for high-quality and on-time delivery (Smith 1994, 7). Similar to
Taiwan, the MFA arrangements forced the South Korean government to improve
the existing development strategy (Cheng 1990, 162). Aware of the fact that
textile exports were limited by quantity not value, the South Korean state focused
on industrial upgrading by engaging in backward linkages for the up-market
(producing high-quality inputs for high-grade garment exports, moving away from
cotton garments).
Significance of the VTGI
There is evidence that the VTGI has the potential to provide an impetus to
the whole economy, just as this sector led the way for the East Asian NICs in the
1960s and 1970s. The VTGI can contribute to economic development because it
can increase production and exports, and address the unemployment problem.
3 While South Korea suffered from general trade deficit of about US$ 10 billion, its garment
industry enjoyed a trade surplus (Lee and Song 1994. 147-8).
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8
Chart 1 demonstrates that the VTGI is a fast growing export sector. As a
share in total Vietnam export, textile and garment export increased from 8% in
1990 to about 16% in 1995. Among all sectors in the former Ministry of Light
Industry (MOLI),4 textile and garment exports are the only industrial
commodities on the top ten exports list, ranking third after oil, marine products,
and tied with rice in 1993. The rest were extractive and agricultural products
(Chamber o f Commerce and Industry o f Vietnam Newsletter 1994). Moreover, the
VTGI has the potential to tap into the domestic market of over 70 million people.
As the quality of Vietnamese textile and garment products has been improved
overtime, more Vietnamese consumers have begun to turn to domestic products.
The VTGI has also been an answer for the unemployment problem in
Vietnam, addressing the “welfare” aspect of development, although more efforts
need to be done in order to address problems in working conditions and wage
rates (to be discussed further in subsequent chapters). As of the early 1990s, the
VTGI has employed over 560,000 people, or 16% in total industry sector (at least
20% of total workers in manufacturing sector) (General Statistical Office 1994).
This does not even take into account thousands of household workers. Over 80%
of all textile and garment workers are women, working from ten to twelve hours
per day, six days per week.
4 Saigon Giai Phong, August 18, 1995. The latest development (as of November 1995) is that
MOLI, Ministry of Heavy Industry, and Ministry of Energy are consolidated into Ministry of
Industry.
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9
Outline of Chapters
While it is clear that the VTGI has the potential to contribute to economic
growth and to a certain extent, welfare, and that the East Asian NICs were
successful in facilitating the development of their textile and garment industries, it
is unclear whether the Vietnamese state can promote further contribution from the
VTGI. This research aims at providing a clear picture of the situation of the VTGI
in the global textile and garment industries, and how the state has been reacting to
a changing environment in facilitating development of the VTGI.
Chapter I presents major theoretical perspectives on the East Asian NICs’
economic success, and a historical perspective on the Vietnamese political
economy in comparison with the East Asian NICs’ states, leading to the integrative
theoretical framework to analyze role of the Vietnamese state in the VTGI. It also
discussed the research methodology and the sample. Chapter II focuses on the
partial reform in the command-economy and its impacts on the VTGI firms given
the changing international conditions (the 1975-1991 period). Chapter DI
presents the inter-relationships between changing state policies and the VTGI
development within the more market-oriented system (the 1991-1995 period).
Chapter IV presents a model to assess the impacts of some specific state policies
and other factors on the performance of the sampled VTGI firms, leading to
Chapter V which integrates quantitative and qualitative findings to provide a final
analysis of the role of the state in the VTGI. Finally, the Conclusion addresses the
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research question, provides some policy recommendations, as well as raising some
questions for further inquiries.
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LI
CHAPTER 1
THE DEVELOPMENTAL STATE IN THE GLOBAL ECONOMY
This Chapter presents major theoretical perspectives on the economic
success of the East Asian NICs, and a historical perspective of the Vietnamese
political economy in relation to the East Asian NICs’ states, leading to the
integrative theoretical framework to analyze the role of the state in the VTGI. I
will also present the hypotheses, the research methodology, the sample, and some
caveats when using Vietnamese sources (primary and secondary), as well as some
suggestions for overcoming these problems.
Theoretical Perspectives on The East Asian NICs’ Economic Success
Many scholars have written about different causes of economic success of
the East Asian NICs. I will summarize the four main perspectives explaining this
phenomenal success, and the critique of these perspectives. I will discuss, within
the statist framework, major elements of the developmental state in the East Asian
NICs.
First, the neo-classical (NEC) explanation attributes East Asian NICs’
success to the market economy, characterized by a free-trade policy and minimum
state intervention to enable the development of the unfettered enterprise (Helen
Hughes, ed. 1988, xv-xvi, 38, 84, 93; World Bank 1993, 6, 312). The state
intervenes only in cases of market failure such as monopoly, or to supply public
goods (public education, infrastructure).
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The free-market explanation has also been the main argument of some
indigenous neoclassical economists, such as in the works of John C. H. Fei on
Taiwan (1992, 3-4, 14), and Edward Chen on East Asia (1979, 41). Their general
argument is that the economic success in these East Asian NICs can be
characterized by a persistent trend of liberalization defined as a gradual decrease in
government interference in the market system. Moreover, they also argue that their
economic development was attributed to technologically-oriented and free trade
strategy.
A second explanation points to special and geopolitical circumstances in
the late 1950s and early 1960s. The initial industrialization of these countries
coincided with the expansion of world trade during this period which provided
markets for manufactured goods (Appelbaum 1992, 10; So et al. 1995, 193-4).
Moreover, the United States perceived most of Asia as being in danger of
communist expansion and hence had a motivation to support these East Asian
regimes. During the 1950s, American aid was the major element in the economies
of South Korea and Taiwan. Moreover, the sustained expansion in world trade
provided a “window of opportunity” which enabled both Taiwan and South Korea
to make the transition from one development strategy to another: from import-
subsitution to export-oriented strategies as will be further analyzed later.
The third explanation is cultural (Appelbaum 1992, 15-7; Peter Berger
et al. 1988, 7, 10). This perspective argues that cultural traditions, especially
Confucian ethics, are conducive to economic development. Some elements of this
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Confiician heritage are: putting a high value on education; respect for superiors; a
commitment to meritocratic forms of personal advancement; a capacity for hard
work; a commitment to frugality, hierarchy and harmony. In more contemporary
terms, these cultural elements have been transformed into deferential attitudes
toward managerial authority (hence reducing labor relations problems); high rates
of personal and corporate savings; a commitment to the firm as a collectivity; and a
willingness to forego leisure in favor of long hours of work.
However, all three perspectives are subject to criticism. The neo-classical
explanation is limited for three reasons (Gordon White 1988, 101-2). First, it
defines the concepts of both markets and states in a limited sense. Markets tend to
be analyzed as “economic processes” rather than as dynamic social systems; states
tend to be seen as relatively neutral, playing regulative role from “outside” the
economy. Second, it operates within an ideological framework which separates
states (politics) from markets (economics), and views the state as an entity alien to
the economy except in cases of market failure. Third, it fails to investigate the real-
world relationships between the three main actors in national development: the
state, domestic groups and foreign capital.
The “special circumstance” explanation identifies an important contributing
factor to East Asian NICs’ success, but not the main one. Given the stagnation and
constraints with greater regional protection on world trade since the 1970s, it is
debatable whether other “late industrializers” can duplicate the East Asian NICs’
experience. The world-economy in the 1990s is much more competitive with the
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existence of many developing countries such as Vietnam trying to engage in
export-oriented development.
The “cultural” explanation is also an important contributing factor.
However, we need to understand its significance in the context of concrete
historical and institutional elements of specific Asian societies. More empirical
work is needed to concretely identify the important cultural factors in particular
institutional and historical contexts.
The Statist Perspective
While the first three explanations can be considered as contributing factors,
the statist explanation is the most important and comprehensive one in explaining
the East Asian NICs’ success. In the East Asian NICs’ cases, the coexistence of
economic planning by a strong state with a market-driven and export-oriented
economy, as well as state flexibility in policy implementation, discipline and good
performance as conditions for state subsidies are their main reasons for economic
success.
There is a large literature on the developmental state framework: Peter
Evans, Dietrich Rueschemeyer and Theda Skocpol (1985); Gordon White (1988);
Richard Appelbaum (1992); Peter Evans (1995). There is also a large literature on
the statist tradition in the East Asian NICs: Leroy Jones and II Sakong on South
Korea (1980), Chalmers Johnson on Japan (1982), Thomas Gold on Taiwan
(1986), Alice Amsden on South Korea (1989), Tun-Jeng Cheng on Taiwan and
South Korea (1990); Gary Gereffi on developmental state in East Asian NICs
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(1990); Robert Wade on Taiwan and South Korea (1990); Alvin So et al. on East
Asian NICs (1995). These scholars and many others have argued that the state is
the primary factor for economic success in East Asian NICs.
To be developmental, a state must possess two critical and interrelated
characteristics: state capacity which requires a well-developed and coherent state
apparatus and state-owned enterprises to implement state policies, and state
autonomy which has to do with the relationships between the state and societal as
well as extra-societal (or foreign) pressures. Each characteristic is a necessary but
not a sufficient condition for effective state intervention. Hence both state capacity
and state autonomy conditions will be examined to raise questions relevant to a
transitional Vietnam.
State Capacity
According to Evans et al., in order to understand specific state capacities
or incapacities, we need to analyze both historical and structural factors, because
the presence or absence of organizational structures is connected to past state
policies (Evans, Rueschmeyer and Skocpol 1985, 348, 351).
There is a need for a developed state apparatus and coordination among
state agencies. Three conditions of state capacity are as follows. First, the state
should have a well-developed bureaucratic apparatus with organizational capacity
to implement its policies and to undertake given tasks coherently. The state
apparatus structure is composed of formal organizations, informal networks, and
shared norms (Evans and Rueschmeyer 1985, 51, 53).
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The second and third conditions are intertwined. There is a link between
state-owned enterprises (SOEs) and decentralization. Normally, one would think
of SOEs as indicative of central state control. However, SOEs can be somewhat
autonomous relative to the state bureaucracy, as an incentive for their efficiency so
they can be useful for a developmental state. The second condition states that the
state should establish SOEs which can implement policies, and act as the initial
impetus in promoting certain industries or agents for capital accumulation. This
form of decentralization would enable the state to reach all levels of society (Evans
and Rueschmeyer 1985, 57-8). The third condition states that the state must
combine centralization and decentralization by having a coherent and united policy
implemented by its bureaucracy and SOEs, and at the same time, granting
autonomy (more than just simple geographic dispersion of state offices) to SOEs
to provide incentives for efficiency (Evans and Rueschmeyer 1985, 55-6).
A central state bureaucracy must be able to perform some key functions.
White posits that there are three dimensions which are interrelated and mutually
reinforcing (White 1988, 98-100). The first is its political capacity to define and
disseminate new ideology (i.e., market socialism), provide stable and dynamic
leadership, mobilize widespread support for new and/or reform programs. The
second requirement is the existence of efficient administrative institutions (such as
fiscal and administrative) responsive to policies and resistant to penetration by
special interests. Third, technical capacity is needed to analyze problems,
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formulate feasible solutions and implement them in technically competent ways.
This includes planning expertise and reliable statistical procedures.
State Autonomy
A certain degree of autonomy from the interests of different classes and
groups, especially the interests of the dominant class (normally the bourgeoisie in a
capitalist society), is needed to achieve societal interests or collective goods, and
to make coherent state action in implementing policies. A state is autonomous
when it is capable of independently formulating its own goals, apart from class
interests, and relying on its apparatus to implement these goals (Rueschemeyer and
Evans 1985, 60). State autonomy is not a fixed structural feature of any
governmental system. It can come and go since the organizations of coercion and
administration change both internally and in relation with society over time
(Skocpol 1985, 14).
Three conditions that enhance state autonomy vis-a-vis the society as a
whole are: an increase in the level of intra-class conflict; greater inter-class
conflict; and greater divisions in the social structure (Rueschemeyer and Evans
1985, 63-5).
First is the intra-class conflict of interests or divisions within the dominant
class. As a society becomes more complex due to economic development, new
segments of the “bourgeois class” (such as agricultural export elites, urban and
industrial businessmen) will emerge. The division among these different segments
within the dominant class offers the state space to expand its role. In an ideal
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situation, the state should be able to rise above the interests of these segments and
act in the interests of society as a whole.
Second is the inter-class conflict of interests, or divisions between the
dominant and dominated classes. While being called on by the dominant groups to
take a more active role in repressing subordinate groups, the state is also pressured
by the subordinate groups to move against the dominant groups. This gives the
state some leverage and could increase state autonomy vis-a-vis the dominant
groups.
Third is the divisions in social structure. This is a social issue, and may not
be based on conflict o f interests but on ethnic cleavages. "When ethnic cleavages
are hierchically ordered and when a single ethnic group manages to gain
continuous control over state apparatus, ethnic cleavages may enhance state
autonomy" (Rueschemeyer and Evans 1985, 65).1
Critique of the Statist Perspective
While the developmental state framework provides a useful analytical tool
to analyze the Vietnamese state, it is important to point out some of its
shortcomings. It does not provide guidelines to problems specific to a socialist
country in transition. One of those problems is the issue of privatization which
deals with thousands of SOEs (in production and exports). These are sources of
1 The most obvious example of ethnic cleavages is the relation between the mainlander-
dominated Kuomingtang (KMT) state and the Taiwanese civil society. It suggests an element of
loyalty within the KMT state, and this element would strengthen the KMT state cohesiveness in
its relation with the Taiwanese masses.
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income for thousands of state officials and state employees, and at the same time,
financial arms of the Vietnamese state budget.2
During this privatization process (equitization in the Vietnamese term), one
of the most prevalent problems is the diverting and draining of public resources
and capital to private businesses of state officials. Through privileges and personal
relationships among party members, public resources are transferred from public
property to “red capitalists” (state officials who become rich during this transition
period) (Fforde 1990, 30, 33). Conceivably, this leads to increasing inequality
between the minority rich (state officials, their friends and relatives), and the
majority poor (the rest of the society).
However, as will be presented later, the integrative framework which
incorporates theoretical aspects of both the statist and the global frameworks
provides an appropriate analytical tool to examine the case of the VTGI.
M ajor Characteristics of the East Asian NICs’ Economic Success
The major characteristics underlying the success of Taiwan and South
Korea can be summarized as follows. First, these states had the autonomy to
formulate policy changes in response to both internal and external motivations.
2 From the literature of transitional states. I find some relevant ideas regarding some specific
technical problems. Some of these ideas are: (1) how to establish objective, neutral, non-party
state agencies to monitor and regulate the transition and to stem the draining of public resources
and widespread corruption: (2) what would be the legal framework and the procedures to deal
with the SOEs that are to be privatized: how to evaluate or give a fair market value to these
SOEs: how to find market for loss-making SOEs: in the name of fairness, how to divide the
revenue obtained from the sales and/or whether to restore property to its former owners: how to
avoid massive unemployment: whether to restructure the usually monopolistic SOEs before or
after privatization: how to avoid “cheap sell-out” to foreigners taking advantage of some state
officials’ ignorance and lack of experience: (3) how much of the economy the state should still
own or at least control via regulatory agencies (Ian Jeffries 1993,341-6).
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Second is the importance of reciprocity and discipline: in exchange for state
subsidies, firms must have high performance standards (in areas such as export,
productivity, economies-of-scale). Third, they did learn from their past mistakes
and adjusted accordingly when the implementation of policy changes was not easy
or was even incorrect at the beginning. Fourth, these states utilized SOEs or
chaebol to implement their development policies. Finally, the cooperation and
partnerships between the states and firms are conducive to policy implementation
and industrial upgrading.
How Internal and External Factors Lead to Policy Changes
Taiwan and South Korea were motivated to make policy changes due to
the necessity arising from a combination of internal and external factors. The main
internal considerations for policy changes have been economic factors
(employment, industrial base) and security reasons. The most pressing reason
leading to the transition from primary ISI to primary EOI was job creation to meet
an increase in surplus labor (Tun-jen Cheng 1990, 154, 156). Second were security
considerations. Especially in the case of South Korea, security consideration
loomed large when it faced a military buildup in North Korea and the planned
retrenchment of US forces in South Korea. This motivated the South Korean state
to augment its defense capability through an industrial transformation. In the case
of Taiwan, political and military ties with the US and other Western nations were
weakened when these latter countries began to establish diplomatic ties with
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mainland China in the late 1970s. Thus defense considerations also led the KMT
state into heavy industries such as steel and heavy machinery.
External factors included a reduction in international assistance, and an
increase in export market restrictions. The transition from ISI to EOI in both
Taiwan and South Korea took place within a changing international context.
Geopolitical conditions during the Cold War brought the East Asian NICs,
especially South Korea and Taiwan, the instrumental U.S. aid to help their military
regimes stay in power and not be under the influence of Communist China (Alvin
So and Stephen Chiu 1995, 194). Most U.S. aid before 1964 was on a grant basis,
thus making it possible for Taiwan and South Korea to engage in their primary
EOI strategy in the 1960s without external debt (Bello and Rosenfeld 1990, 438;
Cumings 1987, 67). After 1964, US aid changed from grants to loans which were
eventually phased out altogether. During the last years of the 1960s, however,
during the Vietnam War, the US purchased a large amount of military supplies
from Taiwan. So in a sense, the Vietnam War was “beneficial” to Taiwanese
economy and compensated for the termination of US economic aid to Taiwan
(Wade 1990, 96).
Both Taiwan and South Korea realized that they had to change their
economic strategies to earn foreign currency for debt repayment. Positive
incentives from the Agency for International Development (ADD), which provided
bonus funds to smooth the transitional processes in these countries, reinforced
their move to the EOI strategy (Gereffi 1990, 154-6).
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An increase in export market restrictions led to the secondary stages of
EOI and ISI strategies. Both Taiwan and South Korea were required to sign the
Multifiber Arrangements in 1973 to limit the quantity of their textile exports such
as synthetic fibers. However, they flexibly adjusted and improved their existing
developmental strategies to go up-market since textile exports restriction is on
quantity rather than ad valorem.3 For instance, Hong Kong has engaged in
forward linkages such as diversifying production from cotton textiles to high-
grade garments (Cheng 1990, 162). South Korea and Taiwan, on the other hand,
engaged more in backward linkages (Cheng 1990, 162-3; Bonacich 1994, 128-9,
366). Since the late 1980s, Taiwan and South Korea have become an intermediate
goods exporters with an increase in export of raw materials such as yam and
fabrics, and a decrease in ready-made garment exports. It has been supplying
textile products (via subcontracting networks) to be assembled in China and in
some Southeast Asian low-wage countries such as Vietnam and Indonesia to
sustain profits.
State Autonomy to Formulate Policy Changes:
Two Development Approaches
Both South Korea and Taiwan followed the same economic development
sequence: beginning with the primary ISI, followed by the primary EOI strategies.
The industrial base established in the primary ISI period could eventually supply
3 This process was implemented by Japan back in the 1960s. To cope with increasing trade
barriers in Europe and the United States through the 1960s. Japan engaged in vertical
integration by upgrading and streamlining production: they invested abroad and moved fabric
and garment production to Korea. Taiwan. China and ASEAN countries while continuing to
supply these developing countries with their domestically produced fibers (Cline 1990. 136. 138).
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both domestic and foreign markets, permitting the East Asian NICs to earn foreign
exchange from exports (Gereffi 1990, 17-8).
Both countries, however, practiced discipline in providing state subsidies
to firms to promote export and to guide investment decisions. Firms are awarded
subsidies if they: (I) have high performance standards in areas such as exporting,
economies-of-scale, domestic content requirements, technology upgrading; (2) are
within a narrow range of strategic, export-oriented and/or technology-intensive
industries. These were the cases of textile and footwear industries in the 1960s;
intermediate and capital goods in the 1970s; and high-tech industries in the 1980s
and 1990s (Wade 1990, 183-185; Amsden 1989, 16-7, 63-4).
Decentralized Development Approach in Taiwan
The KMT state has used a decentralized and more equitable approach to
promote light industry consisting of new, small to medium industrial firms
scattered around the island (Gereffi 1990, 157-8). It also established linkages with
the masses and technocrats via hundreds of local state-formed associations with
farmers, youths, workers, local businessmen, technocrats, etc. These local
associations represent interests from all societal groups, which were gradually
allowed to limited political participation and competition (Cheng 1990, 164-5,
168; Gold 1986, 54).
The KMT state focused more on tax policies as opposed to the South
Korean state emphasis on credit policies (Wade 1990, 324). The KMT state used
flexible and adaptive tax policies. The commonly-used fiscal incentives for
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industrial promotion are: a tax holiday of five years for new projects, an additional
four-year tax holiday for subsequent increases in productive capacity, depreciation
allowance for established firms, investment tax credit, duty-free import of capital
goods, and reduced business tax rates.
The formulation of policies on fiscal incentives and tariff rates was handled
in high secrecy by a small set of state officials mostly from the Ministry of Finance
and the Ministry of Economic Affairs (Wade 1990, 278). The Statute for the
Encouragement of Investment, which was promulgated in I960, spells out specific
tax incentives (which make more sense at early stages of industrialization process),
specifying rules and criteria for implementation. Several fiscal incentive lists
specified eligible products and firms. As the economy expanded and in response to
changing circumstances, the KMT state frequently updated these criteria listings
(eleven times between 1960 and 1982). These incentives do make a difference in
costs of capital between sectors (Wade 1990, 184).
Centralized Development Approach in South Korea
The South Korean government adopted a centralized and less equitable
approach by forming an alliance between state bureaucracy and chaebol (highly
centralized business conglomerates). To the South Korean state, economic success
is crucial to its political legitimacy and stability. The underlying development
rationale is state discipline over private firms: state subsidies (including tariff
protection, financial incentives, further licenses to expand in lucrative sectors) are
based on firms’ performance (such as exports, R&D, new product introduction). In
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effect, the state concentrates resources on entrepreneurs with proven track
records, and to encourage development of diversified large business groups
(Amsden 1994, 14-5).
The South Korean state has relied on credit policies such as low interest
loans for existing large business firms, concentrated in metropolitan areas such as
Seoul and Pusan. The South Korean government has a more centralized
management structure than Taiwan with industrial policy being carried out by the
Ministry of Trade and Industry, and the Economic Planning Board. The Ministry
of Trade and Industry has more power than its Taiwanese counterparts (Taiwanese
Ministry of Economic Affairs) in terms of its responsibility for the budget and
influence over the monetary policy (Wade 1990, 322-3).
The government also had control over commercial banking. The Park
Chung Hee government nationalized the banking system five months after the coup
in 1961, reversing Rhee’s privatization a decade ealier (under heavy U.S. pressure
in the early 1950s to move toward a market economy, the Syngman Rhee
government denationalized all SOEs and state banks in order to receive U.S. aid
funds) (Cheng 1990, 147-8). Government bank officials could determine when,
where, and how much to invest in which industries. They controlled a range of key
credit instruments such as broad rules of lending, types of loans for different firms,
credit guarantees, foreign exchange and interest rates (Wade 1990, 307); they
allocated long-term capital at favorable interest rates to targeted firms and
industries (Amsden 1989, 73; Wade 1990, 323).
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Under U.S. pressure to liberalize the economy, the government
denationalized commercial banks during 1980-1983 by divesting its shares, but it
maintained administrative control over the banking system, and used it for
industrial targeting (Amsden 1989, 135; Wade 1990, 261, 264, 307). However, it
reduced regulation of nonbank financial intermediaries (NBFIs) such as insurance,
investment and finance companies. Hence, the chaebols succeeded in gaining more
control of these NBFIs; with these financial resources, they bought state
enterprises that were being privatized and financially troubled private firms
(Amsden 1989, 135).
An alliance between business and government was formed following the
1961 coup overthrowing the Rhee regime. One month after the coup, the Park
regime arrested profiteers but did not confiscate the property of most businessmen.
In exchange, these businessmen established new firms in basic industries according
to the state guidance. This alliance formed a basis for subsequent industrialization
(Amsden 1989, 72). In general, the founding patriarches and their heirs own and
control these chaebol through central holding companies. The top ten chaebol’s
sales accounted for two-thirds of Korea’s GNP in 1984. For instance, Hyundai, the
largest chaebol, has thirty different companies spanning over many industries
(Wade 1990, 309).
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Flexible Implementation of New Strategies
The most important commonality among these East Asian NICs is their
capacity to provide selective and flexible guidance to implement and sustain new
strategies, once economic policy changes have been promulgated.
However, the transition from primary ISI to primary EOI strategies was
not easy. The primary EOI strategy was implemented only after the primary ISI
policies became inappropriate and had negative effects on the economy. When it
was to be implemented, the states faced opposition from the state sector and other
interest groups at first, but with flexibility, they were able to implement these
policy changes.
In the early 1950s, the KMT state promoted the ISI strategy to protect
infant industries with policies such as multiple exchange rates (favorable to
import), tariffs, and import restrictions. However, by the mid 1950s, as industrial
production expanded, the domestic market for textiles and other consumer goods
became saturated and unable to absorb ISI production, culminating in price wars
and surplus labor. The ISI strategy became inappropriate and had negative effects
on the whole economy (Cheng 1990, 154; Gold 1986, 72).
This transition in Taiwan was initially opposed by different interests within
the KMT state, specifically, state firm managers, state bankers, local bureaucrats
and military officials, due to the fear of losing their privileges. The KMT state
resorted to both negative and positive incentives to carry out the transition. On the
one hand, the KMT state replaced conservative state bankers and recalcitrant
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bureaucrats, and monitored military spending. On the other hand, it engaged in
some policy compromises: maintaining SOEs, using foreign aid bonus funds to
silence dissenting voice within the state by incorporating Taiwan into U.S.
overseas investment insurance, and introducing Taiwan to international banking
(Cheng 1990, 155).
The South Korean government also faced some negative factors at the
beginning of the transition to the primary EOI strategy. The devaluation of the
won against foreign currencies (by about 50% in 1961: from 65 to 100 won per
dollar), aimed at increasing exports, had instead increased prices of imported
inputs and fueled inflation. The result was particularly disastrous for the textile
industry since 99% of the cotton textile industry was dependent on raw cotton
imports (Amsden 1989, 65). This compelled the state to give subsidies to
exporters in the form of favorable export exchange rates (Amsden 1989, 67).4
The change to the primary EOI strategy was implemented after the failure
of other policies. During its first five year plan (1962-1966), the military South
Korean state prematurely started a secondary ISI strategy which was unsuccessful
and eventually led to primary EOI strategy (Cheng 1990, 156; Amsden 1989,
8 l).s Although the military government launched the HCI strategy (secondary ISI)
with centralized state power (purging the former civil bureaucracy, recruiting well-
4 The amount of subsidy is normally equal to the gap between official and export-effective
exchange rates.
5 Secondary ISI strategy is characterized by the more capital-intensive heavy and chemical
industries (HCI) such as integrated iron- and steel-making industry as well as machinery
industry. HCI strategy was implemented prematurely in the 1960s. but more successfully in the
1970s.
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trained academics to the newly-created developmental institutions, and bypassing
doubtful technocrats), this strategy failed since the Korean state lacked necessary
technical skills, capital and raw materials (i.e., iron ores resources), as well as
foreign markets (Asmden 1989, 291). There was no opposition from society since
the private sector was either nonexistent or weak.
State Flexibility in the Upgrading Efforts
These states made another transition to the secondary stages of EOI and
ISI in the 1970s with greater forward and backages linkages in order to engage in
industrial upgrading activities. This transition was necessary and possible because
there was sufficient internal and external demand for both consumer and
intermediate goods to produce efficiently at scale-economy level (Cheng 1990,
162-3).
The upgrading efforts in the textile and garment industries normally take
the form of changing the composition of textiles exports from low to higher value-
added products. These efforts were also reinforced by changing international
conditions. In coping with the Multi-Fiber Agreement (MFA) limit on cotton
exports in the 1950s, the KMT state diversified production away from cotton
textiles. It pioneered new industries with SOEs and transferred them to the private
sector when these SOEs were well-established. In 1954, the KMT state pioneered
the artificial fibers industry by establishing a rayon plant to diversify production
away from cotton textiles. This original rayon plant was further diversified into a
polyester and nylon plant in the 1960s (Wade 1990, 90-1). Moreover, the KMT
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state improved the value-added of its primary EOI products by upgrading their
quality and producing high-grade garments (Cheng 1990, 162; Wade 1990, 241).
The KMT state also facilitated partnerships between foreign and Taiwan firms: it
arranged joint-ventures between U.S. artificial fiber companies and Taiwan public
and private textile firms.
The South Korean state offered generous subsidies to stimulate exports,
including subsidized long-term loans to targeted industries and firms (Amsden
1989, 143). Beginning in the 1960s, with an increase in export demand for
synthetic fabrics, the state supported and provided subsidies for the domestic
chemical fiber industry with foreign assistance funded by the United Nations. The
two leading textiles machinery manufacturers, British Platt and Japanese Howa,
helped modernize South Korean textiles machinery after the Korean War (Amsden
1989, 248). The state export incentives led to some major private textile firms’
development of polyester/cotton (P/C) blended fabrics. Throughout the 1960s and
1970s, these firms produced consistent and standardized P/C blends of carded and
combed yam, poplin, shirting, duck and gray fabrics (Amsden 1989, 247-8).
Foreign technical assistance and know-how (such as production methods, layout,
start-up and maintenance of equipment) were forthcoming from both independent
consultants and machinery suppliers, mainly from Japan. Since the early 1980s,
these firms have engaged in product development which included product
engineering and R&D efforts (Amsden 1989, 249). Their staff of engineers, with
over ten years of experience since the early 1980s, were either trained at home or
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abroad.6 These managers were deployed throughout the production process in
activities such as maintaining and repairing machinery, devising optimal machinery-
operating conditions, and mixing different types of cotton and synthetic fibers to
achieve an optimal blend (Amsden 1989, 253).
State Apparatus to Implement Policies
With unique historical legacies and favorable external circumstances,
Taiwan and South Korea started their capitalist industrialization process after
gaining independence from Japanese colonial rule. They have well-established state
bureaucratic apparatuses, disciplined state officials skilled in economic
development, as well as good physical infrastructure. From these preconditions,
their states have led the efforts to invest in education and training, to build a
transparent institutional framework and a modem infrastructure (in the areas of
finance, judicial systems, commerce, and transportation) in order to facilitate a
capitalist market system. Major investment in education and technological
upgrading brought a minimal level of literacy, skills and appreciation of modem
business practices to the masses (Amsden 1989, 10, 23, 32, 215; Gold 1986, 34,
44-6, 112-3).
The KMT state uses large capital-intensive SOEs (state-owned enterprises)
to have more control in the economy, especially in key sectors which would
otherwise be dominated by the MNCs. From the 1950s onward, Taiwan has had
6 Textiles engineering is one of the oldest engineering disciplines taught in Korean universities:
between 1963 and 1980, about 6.000 university graduates majored in textiles engineering
(Amsden 1989. 260).
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one of the biggest public enterprise sectors (bigger than that of South Korea)
outside the Communist bloc.
Most Taiwanese SOEs were in capital-intensive heavy industries (such as
petroleum refining, petrochemicals, steel and other basic metals, shipbuilding,
heavy machinery, fertilizer, railway), and utility industries (such as electricity, gas,
water, telephone).
These efficient, economies-of-scale, and capital-intensive Taiwanese
industries have linkages with downstream industries. For instance, petroleum
SOEs (upstream sectors) gave the KMT state influence over textiles SOEs
(downstream sectors). By the end of the 1960s, Taiwan’s petrochemical industry
(via a domestic joint-venture between the Chinese Petroleum Corporation, four
private producers and another SOE) produced all types of chemical products in
addition to artificial fibers (Wade 1990, 92, 180).
The KMT state had indirect leverage over synthetic fiber and textile
producers, including the largest private industrial groups. It employed the
“entrustment” scheme whereby the state supplied AID-financed imported cotton,
paid wages to workers, and purchased the yam. It also controlled cloth weaving.
Major corporations such as Tai-yuen Textile, Far Eastern Textile, and Chung-hsing
Textile were established in this environment and later expanded into man-made
fibers with additional assistance from the KMT state and the U.S. (Gold 1986, 70).
However, one of the drawbacks was that captive domestic consumers were
obliged to buy the then overpriced and poor-quality textile products.
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The South Korean state established close links with the chaebol groups
(large vertically-integrated industrial conglomerates) which play a crucial role in
implementing economic policies. The size of these groups and their broad
diversification into non-related products have allowed them to survive the
hardships of late industrialization, to be willing and able to undertake risk, and to
supplant the need for MNCs to invest in targeted industries (Amsden 1989, 9,
151). These groups had the full support of the government, mostly in terms of
state subsidies, which are awarded based on performance such as growth rate of
output and productivity (Amsden 1989, 40, 151-2).
For instance, in the late 1970s, during the state’s Big Push into heavy
machinery and chemicals industries (after the unfavorable start in the early 1960s),
these chaebol concentrated their capital to implement this approach in steel,
shipbuilding, automobile, petrochemical, and heavy machinery industries (Gereffi
1990, 97; Amsden 1989, 81, 293, 295). In the 1980s, the South Korean state also
relied on these chaebol to carry out its industrial upgrading strategy or high value-
added manufactured exports with aggressive marketing efforts and overseas
investments, mostly in North America, to obtain raw materials and parts for their
exports (as in the case of automobiles), and to tap into high technology (as in the
case of electronics) (Gereffi 1990, 91; Amsden 1989, 9).
Moreover, both countries have established some para-statist institutions to
assist with sectoral development and trade activities in general. The states formed
partnerships with firms in research and development (R&D) since most firms do
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not have the resources to do these by themselves. In Taiwan, many industrial
associations function as “arms” and “legs” of the KMT state (Wade 1990, 280-3).
They provide the state with collected data on the production capabilities of
member firms. For instance, the Taiwan Textile Federation is an important source
of policy ideas for the state. It was established in 1976 as an umbrella for eighteen
separate textile industry associations. In South Korea, institutions such as the
Korean Association of Textile Industries and the Korean Sewing Science Research
Institute also provide survey data on the industry for government use (Smith 1994,
8-9). In both countries, there are some para-statist institutions providing marketing
research on export products to assist with marketing efforts of both public and
private firms: the Korean Overseas Trade Agency (KOTRA), and the Taiwan
CETRA (China External Trade Organization) (Smith 1994, 13).
A Historical Perspective of Vietnam in Comparison with the East Asian NICs
The East Asian experience illuminates the importance of achieving a
balance between state planning and market processes. A combination of both
centralization (with the state as the executor of national economic interest through
guidance planning and industrial upgrading) and decentralization (which facilitates
a competitive market framework with the coexistence of public and private firms)
is desirable.
Specifically, the autonomy to formulate policy changes, the availability of
state apparatus (such as SOEs) to implement policies, the use of reciprocity and
performance criteria, flexibility in policy implementation, and the cooperation
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between the government and firms are the major factors that led to these East
Asian NICs’ economic success.
The next sections address these issues in the case of Vietnam, and how a
different set of external conditions leads to the need for a broader and more
integrative framework, followed by an explanation of the inter-relationships
between the changes in state policies and the development of VTGI within the
global-economy context.
Historical Legacy: Impacts on State Autonomy and Capacity
According to Evans et al. , historical and structural factors are very
important for understanding specific state capacities or incapacities. While some
similarities with respect to state autonomy to formulate economic plans can be
found between the capitalist East Asian NICs and the socialist Vietnam, their
different historical legacies led to different state structures, and hence different
capacities.
State Autonomy
First, the concentration o f political power permits long-term economic
planning. These regimes are politically authoritarian, although on a political
spectrum, Vietnam is to the left, and the East Asian NICs are to the right. They all
rely on successful economic performance for their legitimacy. The controlling
Vietnamese Communist Party (VCP), the Taiwanese KMT and the South Korean
military regime (although these East Asian NICs’ states have become more
democratic over time) have been dominant in their respective governments. The
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state roles extend far beyond economic policies to include pervasive political
controls and ideological mobilization.
The government of the Socialist Republic of Vietnam (SRV) is dominated
by the VCP, hence it is important to understand the direct connection between the
VCP Politburo, the most powerful organ within the political structure, and the
government structure. Officials in all seven key government posts are members of
the VCP Politburo (as outlined in Appendix 1). Moreover, the VCP Secretariat
(the second most powerful political organ) oversees the day-to-day policy
implementation, and directs the major organizations or departments under it. These
departments (economics and planning, foreign relations, ideology and culture,
organization, mass mobilization, internal affairs, science and education, overseas
Vietnamese, nationalities) directly oversee all sectors in Vietnamese society and
provide flexibility to deal with unexpected problems.
Second, similar to the two East Asian NICs, the Vietnamese state has the
autonomy to formulate long-term economic plans in the form of five-year plans,
although these plans have become more suggestive than mandatory since the mid
1980s. After 1986, these five-year economic development plans have provided the
overall development strategies, rather than dictating fixed numerical targets for
agricultural and industrial production as before. After 1991, the Vietnamese
overall development policies have become more suggestive of a combination of
primary EOI and ISI strategies, aimed at promoting export and attracting foreign
capital to develop its industrial base while striving to promote greater integration
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within Vietnam. Specific combinations of primary EOI and primary ISI strategies
applied to the VTGI will be discussed in Chapter 2 (the 1975-1991 period) and
Chapter 3 (the 1991-1995 period).
The transition from a command economy with a high level of state
autonomy to a more market-oriented system implemented consistently since the
mid 1980s led to a new ideology of managed socialism? This ideology is defined
as the combination of the monolithic VCP in political structure and economic
pragmatism in a more market-oriented economy with the coexistence of many
types of ownership (Duiker 1989, 118-9). However, this combination has
inherent contradictions and tends to lessen state autonomy. The Vietnamese state
has been trying to grapple with emerging conflicts between a market structure
(with a growing private sector) which requires more decentralized decision
making, and the dominant VCP which tries to centralize all major economic policy
making processes. Most VCP ideologues still uphold and continue to reaffirm the
importance of the VCP, hence justification for their own positions.8
These conflicts started to emerge as early as in the late 1970s after the fall
of South Vietnam in 1975. Compared with the central state control in South Korea
7 “Nen kirth te thi truong theo dinh huong xa hoi chu nghia ” in Vietnamese.
8 In April 1995, VCP ideologues such as Dao Duy Tung and Nguyen Due Binh organized a
seminar at the Marx-Lenin Institute, and argued that the Leninist doctrine led the way to
economic renovation, and to a more market-oriented economy with many types of ownership, etc.
In September 1995. they organized a two-week course for all high-ranking officials of the
Government and the VCP (from deputy-minister level and up). The objective was to reaffirm the
importance of the VCP, analyzing the peril of the so-called “peaceful evolution” by the US,
especially since the formal diplomatic relations between Vietnam and the US has been re
established. However, according to a former state official, most people are not much interested in
ideology but are more concerned about their economic well-being and the ability to catch up with
the rest of the world.
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and especially Taiwan (back in the 1960s), the Vietnamese state control in a
unified Vietnam (or Socialist Republic of Vietnam) was not necessarily centralized
at least during the late 1970s and early 1980s. There was a certain amount of
autonomy which was manifested in the “bottom-up” reforms that were initiated by
SOEs and local government authorities wanting greater coordination for raw
material supplies, production and trading beyond regular state channels. These so-
called “fence-breaking” activities subsequently led to formal state approval. Major
policy changes relevant to these autonomous activities and how they have affected
state autonomy will be discussed fully in Chapter II (the 1975-1991 period) and
Chapter m (the 1991-1995 period).
Formation of State Apparatus and Bureaucracy
Extraordinary historical circumstances in Vietnam resulted in an inadequate
infrastructure and institutional framework which was not conducive to a more
market-oriented system as in the cases of the East Asian NICs. Vietnam inherited a
fragmented state apparatus and a deep-rooted regional cleavage (between the
North and the South regions) as a consequence of colonial rule (one thousand
years under the Chinese, and one hundred years under the French), and the 1954-
1975 conflict between the Democratic Republic of Vietnam (with the command-
economy in the North), and the Republic of Vietnam (with the free-market system
in the South).
After the country reunification in 1975, the Vietnamese state bureaucracy
was primarily staffed by elderly state officials from the North (most were in their
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late 60s or 70s) who had more experience with revolutionary efforts than with
economic development strategies. Moreover, most of these state officials were
trained to manage the command-economy rather than a more market-oriented
system. Major economic crises were partly caused by their unsuccessful attempts
to collectivize and socialize the South in the late 1970s (Melanie Beresford 1988,
151-3, 155; William Duiker 1989, 97, 101, 118). Regional cleavage arose from
decades of separation, and these economic crises continue to be a problem. As of
1996, the legal and institutional framework necessary for a more market-oriented
system are still in a formative stage in Vietnam.
Similar to Taiwan, the Vietnamese state continues to stress the leading role
of the state sector in the national industrialization process, especially the role of
SOEs as the driving force of a more market-oriented economy. The state has
particularly close linkages with central SOEs, or state firms that are under various
ministries. These central Vietnamese SOEs have been carrying out state policies,
and have become increasingly involved in policy formulation as will be
demonstrated in Chapter II and Chapter HI. In exchange for state subsidies (in the
forms of capital, land-use rights, export quotas), these SOEs constitute the main
source of tax revenue and employ hundreds of thousands of workers (although the
emerging private sector has been increasingly employing more workers, thereby
alleviating the unemployment problem).
However, not all Vietnamese SOEs have the capacity to promote key
industries as do Taiwanese SOEs. Under the command-economy, many
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Vietnamese SOEs were ineffective. At the beginning of 1991, Vietnam had about
12,000 SOEs of which nearly 80% faced serious financial difficulties and
ineffective management. Policy changes in the early 1990s led to hard-budget
constraint policies: most SOEs were re-registered by the end of 1992 and only
about 2,000 solvent SOEs were allowed to continue their operations while about
1,600 loss-making SOEs were closed. The rest have been undergoing
transformation to different forms of ownership (Fforde 1994, 25-28).
Subsequent chapters will analyze the transformation of the SOEs in this
transitional context. Some of the most recent developments will also be presented
in which the state has established new institutions and consolidated obsolete ones
that were formed under the command-economy. Many mid-level to high-ranking
state officials have been retrained abroad (with financial support from various
international agencies) in technical guidance planning and other skills necessary to
deal with a more market-oriented economy.9
Why Is a Broader Framework Needed to Analyze Vietnam?
There are two main reasons for a more integrative framework to analyze
the role of the state and the evolution of the VTGI within a global-economy. The
first reason is that the statist perspective by itself could not explain the extent to
which foreign capital has impacted the VTGI production and export structures.
The second reason has to do with a different set of external conditions which
9 For the past several years, I had the opportunity to meet with several of these state officials who
were trained in the US. Most of them are up-and-coming, younger, open-minded, and eager to
acquire new knowledge in tax administration, economics, international relations, and
international business.
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include greater economic interdependence and international leverage. These
important external factors contributed to fundamental policy changes in the early
1980s and more consistent reforms since the mid 1980s.
Vietnam faces a different set of external conditions with greater
competition and global interdependence than did the East Asian NICs. The global
conditions in the 1990s are more intensely competitive than in the 1960s. Not only
is Vietnam a latecomer in industrial development in the Pacific Rim region, it must
also compete with more advanced and well-integrated neighboring countries, as
well as a whole host of low-wage countries.
Economic dependence on China and the former Soviet Union had
significant impacts on domestic policy changes as will be analyzed in depth in
Chapter II and Chapter HI. Border wars with the Pol Pot regime in Cambodia and
with China resulted in the Vietnamese socio-economic crises during the late 1970s
which led to a partial reform period in the early 1980s. Moreover, the collapse of
the socialist regimes of Eastern Europe in the late 1980s also led to more open-
market policies to expand to non-Communist markets in order to survive.
External forces from non-Communist countries have had great influence on
economic and administrative reforms, as well as on the role of Vietnamese
government. These forces can be conflicting as in the case of advice from
international financial institutions and other industrialized countries. On the one
hand, the IMF and World Bank have advocated a laissez-faire approach with a
minimal role for the state and greater role for the market. They provide
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“blueprints” which attach aid or loan money with conditions such as stabilization
requirements (i.e., reducing inflation), and structural adjustment requirements
(liberalizing foreign trade or reducing trade barriers, and privatizing SOEs). On the
other hand, Japanese advisors with substantial financial power have advocated an
important government role in economic development through industrial policies.
The following example shows the high level of influence and leverage of
World Bank counsel on Vietnam (Far Eastern Economic Review issue on April 14,
1994). The World Bank was the most powerful international lender and would
meet about 80% of Vietnam’s budget deficit in 1994. It advised Hanoi to devalue
the dong (Vietnamese piaster) by 30% to, first, increase export competitiveness,
and second, help farmers who had been hard hit by domestic inflation (about 40%
in 1993), and by an influx of cheaper Chinese produce.
This World Bank counsel led to two opposing views from influential
Vietnamese officials. On the one hand, Mr. Le Dang Doanh (director of Central
Institute for Economic Management) strongly advocated the World Bank views.
On the other hand, Le Xuan Nghia (director of Price Commission, an East-German
trained economist) and Tran Due Nguyen (economist and advisor to Vice Premier
Phan Van Khai) argued that Vietnamese devaluation (to compete with Chinese
devaluation by 30% in 1994) would not solve the problem, nor enable Vietnam to
compete efficiently with China. Many currency conversions before 1990 had
already brought chaos to the Vietnamese economy. This devaluation would further
jeopardize people’s trust in the dong, hence adversely affecting domestic savings
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and investment. As a way to compete, Le and Tran suggested more investment in
technology and labor training to increase labor productivity. As an alternative to a
30% currency devaluation, they advocated a step-by-step, gradual currency
devaluation by market forces to stabilize the economy, strengthen people’s
confidence in the “ dong' value, and to encourage more domestic savings and
investment.
The Integrative Framework
The concept of the global restructuring process has been analyzed by
Jeffrey Henderson and Manuel Castells (editors, 1987) and Peter Dicken (1992),
among others. Henderson and Castells redefine capital-labor relationships, the state
role, technological revolution, and the interdependency of economic functions
across national boundaries as leading to the emergence of socio-political
processes. Peter Dicken provides a systematic analysis of the patterns and
processes of globalization which he argues as being a more advanced form of
internationalization with a high degree of functional integration between dispersed
economic activities. This broad concept is further developed by the global
commodity chains (GCC) framework by the works of Gereffi, Korzeniewicz,
Korzeniewicz (editors, 1994). This framework goes the furthest in capturing the
relationships that link the production and trade networks, as well as exploring the
emergence of a new international division of labor.
In the case of Vietnam, the integrative framework of the GCC and the
developmental state paradigm can best explain the interactions between domestic
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actors (the state and firms) and foreign actors in the world-economy. This
framework sets the global context, analyzing how the global garment industry
works and situating the VTGI within it, as well as analyzing the inter-relationships
between the state and domestic firms in coping with opportunities as well as
challenges arising from the world-economy.
The GCC framework takes into consideration the importance of state
policies, and crosses both national and industry boundaries in explaining the
production and trade networks. It gives more scope to the role of the state that
shapes the organization, production and export activities of domestic firms from
both public and private sectors. This framework is presented by the works of Gary
Gereffi and Miguel Korzeniewicz (editors, 1994), and Gary Gereffi (1990, 1995a,
1995b, 1996).
The GCC paradigm conceptualizes the organization of the world economy
in terms of commodity chains as the links between successive phases of raw
material supply, manufacturing, distribution, and marketing final products. A
commodity chain is defined as “a network o f labor and production processes
whose end result is a finished commodity” (Hopkins and Wallerstein 1986, 159).
In other words, a GCC consists of networks clustered around one product or an
industry, linking households, enterprises, and states to one another within the
world-economy. Each network within an industry has many nodes linked together.
These nodes, or processes within a GCC, involves the organization of inputs (such
as raw materials), labor power, transportation, distribution (via markets) and
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consumption (Gereffi, Korzeniewicz and Korzeniewicz 1994, 2). Within a
commodity chain, a relatively greater share of wealth generally accrues to core-like
(developed countries) nodes than to peripheral (developing countries) ones
(Hopkins and Wallerstein 1994, 18, 49).
The governance structure in the GCCs is defined as authority and power
relationships between firms that determine how financial, material and human
resources are allocated within a chain (Gary Gereffi 1995a, 43-4, 47). There are
two types of governance structure. The first type is producer-driven commodity
chains in capital and technological intensive industries such as cars, aircrafts, and
computers in which multinational corporations play the central role in controlling
the production system. The second type is buyer-driven commodity chains
(BDCCs) in labor-intensive industries such as garments, footwear, toys, consumer
electronics, in which commercial capitalists such as large buyers, retailers,
marketers, or trading companies play a dominant role. BDCCs put an emphasis on
both power and profits and suggest that countries (and firms) try to move where
value-added is the greatest (Gary Gereffi 1995b, 115-7). I will focus on the
BDCCs because this framework is relevant to the VTGI.
The concept of triangle manufacturing is central to the BDCCs (Gereffi
1995b, 118). The general pattern is that foreign buyers either set up offshore
production networks in developing countries directly, or place their orders via
middlemen who can assure competitive pricing, quality and delivery schedules.
Most middlemen in the global garment industry are from the East Asian NICs who
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can provide most necessary inputs (such as fabrics, machinery, accessories) and
subcontract to low-wage producers (compared with their rising labor costs) such
as in Vietnam or Indonesia. In addition to subcontracting to domestic producers,
these middlemen can also invest in 100%-owned subsidiaries or joint-ventures with
these local firms (Gereffi 1995b, 119).
There are several ways to increase the value-added in the process of
national development (Gary Gereffi 1996, 84-6). One way is to engage in industrial
upgrading, defined as moving up the ladder of different export roles such as
primary commodity exports; export-processing zones (assembly of traditional
manufactured goods such as garment and electronics items, using imported raw
materials/components); component-supply subcontracting (production of
components for export in relatively advanced industries such as cars and
computers, using substantial local inputs); original-equipment- manufacturing
(OEM, whereby contractors make goods to be sold under another company's
brandname), and original-brandname-manufacturing (OBM, whereby
manufacturers make goods to be sold under their own label). For instance, from
the perspective of the East Asian NICs, triangle manufacturing offers an
opportunity for them to move from their declining sectors, such as garment
manufacturing, to higher value-added activities such as becoming intermediaries
for foreign firms (Gereffi 1996, 97).
Other ways to increase the value-added are greater integration and product
upgrading. In the context of the textile and garment industries, garment producers
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can develop upstream (such as design and cutting), and downstream (marketing)
activities, and backward linkages with the textile industry (using domestic fabrics).
Product upgrading can be achieved by engaging in product diversification or new
product lines with higher quality (Bonacich et al. 1994, 56, 366).
Hypotheses
The overall hypothesis suggests a relationship between state ability (a
combination of both state capacity and autonomy) and developmental efficacy of
the Vietnamese state.
“ A developmental state is necessary to integrate the VTGI into the world
economy, and specifically into the global textile/garment industry, in a way that
will be beneficial to the economic development o f Vietnam, defined as both
economic growth and the distribution o f the benefits o f growth to the Vietnamese
population. The developmental state is conceptualized as a state that is actively
involved in economic development policies, beyond the normal functions such as
providing public goods, protecting social and national interests, and securing
macroeconomic stability. ”
The sub-hypothesis aims to reflect the more dynamic relationship between
state ability and developmental efficacy.
“ One woidd expect to see a positive relationship between state ability to
form ulate policy changes fo r societal interests and to implement these policies
on the one hand, and policy effectiveness on the other hand. In other words, the
greater the state ability, the greater the policy effectiveness. More dynamically, as
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the Vietnamese state bureaucracy improves over time, one would expect to see an
increase in the complexity andflexibility o f state policies. ”
Methodology
The case-study method is used to understand the development of the VTGI
in a global context, to evaluate the developmental efficacy of the Vietnamese state
in the VTGI, and to examine the inter-relationships between the state and domestic
and foreign firms in the VTGI. Field research was utilized to obtain a deeper and
fuller understanding of these complex relationships within their natural setting
(Babbie 1992, 285-6, 293). I went to where the process under study happens,
interviewed relevant people and observed the process to obtain both qualitative
data and quantitative data for subsequent analysis.
During the two field trips to Vietnam (the first was about 6 months in
1994; the second was one month in 1995), relevant government officials were
interviewed with the use of the list of prepared questions; whereas selected SOEs’
managers and private firm owners were both surveyed and interviewed with the
use of semi-structured questionnaires. The final analysis of this study is based on
the convergence of both quantitative and qualitative findings on the basis of
primary data (from interviews and surveys) and secondary sources (which include
official documents, journal and newspapers’ articles).
The field research process was at two levels in order to establish a
relationship between state ability and policy effectiveness, leading to an analysis of
the developmental efficacy of the Vietnamese state. At the state level, relevant
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government officials were interviewed to shed some light on the process of policy
formulation, the intended objectives and plan for policy implementation. At the
firm level, both SOEs’ managers and private firm owners were interviewed and
surveyed to reflect the real impacts of some relevant policies. Moreover,
Vietnamese scholars with knowledge about this topic were also interviewed to
provide more insights into the inner-workings of state bureaucracy and the policy
making and implementation processes, information which would not be available
otherwise.
There were two main advantages in interviewing people at these different
levels: (I) verifying the real impacts of government policies; (2) discovering some
new and relevant issues. In a transitional country such as Vietnam, one would
expect a big gap between policy promulgation/announcement and its
implementation. Moreover, new issues and questions arose (especially after the
interviews with firm managers) that were not discovered in interviews with state
officials nor presented in any secondary sources. Knowledge of these new issues
and problems enabled me to return to state officials who were interviewed earlier
to ask follow-up questions; surprisingly, some had not been aware of these
problems. This process provided a much better understanding of how policy
making and implementation work, and the relationships among the state, domestic
and foreign firms in the VTGI.
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Details of the Sample
The data was obtained from semi-structured interviews during two field
trips to Vietnam. Most interviews were done during the first field trip in 1994. The
second field trip in late 1995 was aimed at obtaining feedback from the Vietnamese
on the preliminary research findings and information on the relationship between
recent policy changes and VTGI development.
People at both the state and firm levels were interviewed. Those
interviewed at the state level included government officials from important
ministries such as the Ministry of Trade, the former Ministry of Light Industry, and
the Ministry of Finance, from other state agencies that were relevant to the VTGI
such as the former State Committee on Cooperation and Investment (SCCI), the
Central Institute for Economic Management (CIEM), and from the two largest
state corporations in the VTGI (CONFECTIMEX and TEXTIMEX). At the firm
level, over 60 firm managers from both SOEs and private firms were interviewed.
Selection of Firms
In this study, firms were selected on the basis of ownership and regional
representation of the VTGI. Hence, with this intended representativeness in
observations, a quota sampling was used.1 0 The original list of specific firms to be
visited was constructed before the field research on the basis of several secondary
1 0 According to Babbie, three types of sampling methods are appropriate to field research: the
quota sample (if group or social process under study has defined categories of participants), the
snowball sample (the sample would “snowball” when the intended interviewees started to suggest
others), and deviant cases (when the understanding of fairly regular patterns of attitudes and
behaviors is further improved by examining cases that do not fit into the regular pattern) (Babbie
1992. 292-3).
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sources: Irene Norlund (1993), UNIDO (1990), and various Vietnamese
newspapers and journals in 1993 and 1994. Moreover, there was also an aspect of
a . snowball sample when the field research was conducted in Vietnam in 1994. The
original list of firms was updated and revised when state officials and some firm
managers interviewed initially recommended other firms that could provide
detailed response to the interview questions.
As a result, this sample did achieve the intended representativeness. After
the elimination of inconsistent data, the final sample has 58 public and private
firms. In terms of ownership representation, it has an equal number of state and
private firms: 29 state firms and 29 private firms. In terms of regional
representation, it consists of 41 firms in the South, and 17 in the North and Central
regions. More Southern firms were interviewed because most non-state firms are
concentrated in the South; this area is vital to understand how non-state firms
operate. Moreover, there was a “snowball” effect: quite a few firm owners and
managers, after learning about the types of issues and concerns asked in the
interviews, had suggested other private and public owners who had experienced
those problems and issues, and hence could address them in a more systematic and
detailed manner.
Statistical Analysis
Applied regression analyses were used to arrive at some fundamental
relationships between state policies and some other factors, and economic
performance of the VTGI.
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Total sales of textile and garment products turn out to be the best available and
consistent indicator of VTGI performance. Also, from these findings,
generalizations to similar industries in Vietnam can be made: more concrete
questions and hypotheses can be raised for future research which would further
assess the developmental efficacy of the Vietnamese state in labor-intensive
industries.
Caveats About Interpretation of Secondary Texts and Official Statistics
One must understand the nature of Vietnamese texts and documents in
order to find them useful. It is more of a rule than an exception that new and
reform ideas are always preceded by the VCP lines. The researchers/writers do not
state directly and clearly their main arguments for fear of being refuted or criticized
by higher-ups. They instead try to “bury” or intersperse their ideas among quotes
from well-recognized state decrees or directives as a legitimate source of
protection. Hence, one must sift through and transcend extraneous arguments
before getting to main ideas scattered throughout the texts.
Attention should be paid to the consistency of data over time, and data
from different secondary sources from both Vietnam and foreign countries. Data
from different Vietnamese official sources are different due to different objectives.
Normally, figures from the State Planning Committee, Statistical Year Book and
CONFECTIMEX tend to converge; whereas figures from the Vietnamese
Chamber of Commerce and Industry (VCCI) tend to be higher than those of other
official sources. It is possible that the VCCI attempts to create a positive and
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favorable image of successful export performance of the VTGI in an effort to
attract more foreign investment in these two industries.
There are also gaps between official and foreign statistics. According to
statistics from General Statistical Office, State Planning Committee, the 1993 total
export value was 316 million USD in which there werel58 million USD to the EU,
and 51 million USD to Japan. However, according to statistics from the EU and
Japan, the figures are much larger: 220 million USD to the EU; 168 million USD
to Japan.
Some possible explanations for these gaps can be found in the two most
important quota export markets of the VTGI: the EU and Japan. The first
explanation has to do with smuggling activities. The state acknowledges that this is
rampant in the case of the VTGI and other industries in general. I talked to many
officials but most could not give me any estimate. According to other sources, an
estimate of these smuggling activities is at least 25% of total textile and garment
trade (Irene Norlund 1995, 143).
The second are differences in the exchange rates. Since the late 1980s, the
Dong (Vietnamese currency) has been pegged to the US dollar. An important
export market for the VTGI such as Japan uses the Yen and then converts to US
dollars. Discrepancies in the value of exports to Japan occurred when the US
dollar plummeted with respect to the Yen, while having the same value with
respect to Vietnamese Dong (i.e., more USD to a Yen because of USD
depreciation, not because of more exports from Vietnam).
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The third stems from the predominant subcontracting nature of the VTGI.
Most raw materials are imported to Vietnam to be processed for export, hence
they are not consistently factored in total export value of the VTGI in official
statistics (and they are not included in the value of imports). However, on the
receiving end (the EU or Japan), their total import value does include values of
inputs in addition to manufacturing or processing expenses.
The fourth has to do with the intermediary roles of some East Asian
middlemen (i.e., from Taiwan, South Korea, Hong Kong). Official statistics may
show some textile and garment products exported to these East Asian countries,
but in fact, the textile and garment products may then be transhipped to other
markets (such as the US and Japan). So, while the export value to the US and
Japan may be underestimated from the Vietnamese perspective; the real value is
reflected in the importing countries. A case in point is a knitting firm that I visited
in the North. The owner told me that although the reported value of export
directly to Japan is only about I million USD in 1994, the total export value to
Japan is actually 3 million USD since his company also exported about 2 million
USD worth of raw knitting fabrics to Hong Kong (as an intermediary) who
ultimately exported to Japan.
Conclusion
This chapter presents major theoretical perspectives on the East Asian
NICs’ economic success, and a historical perspective on the Vietnamese political
economy in comparison with the East Asian NICs’ states, leading to the integrative
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theoretical framework to analyze the role of the Vietnamese state in the VTGI. It
also discusses the research methodology and the sample.
Chapter II focuses on Vietnamese partial reform in the command-economy
(the 1975-1991 period) and its impacts on the VTGI firms, given the changing
international conditions.
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PART n . THE CASE OF THE VIETNAMESE TEXTILE AND GARMENT
INDUSTRIES
CHAPTER H
VIETNAMESE ECONOMY IN TRANSITION
THE 1975-1991 PERIOD
This Chapter chronicles the transitional reform process up to the collapse
of the socialist regimes of the former Soviet Union and Eastern Europe in 1991.
This issue will be discussed within a three-tiered analysis: global conditions
(international level), state policies (national level), and VTGI development (firm
level).
The focus is on one of the major development issues: integration, defined
previously in terms of backward linkages, such as using Vietnamese inputs, and
forward linkages, such as access to foreign markets. This emphasis allows an
analysis of state ability to formulate and implement development policies, and their
impacts on the development of VTGI. It also sheds light on the constraints and
opportunities arising from a more open economy, and how the state responds to
both internal and external factors in promoting economic development.
This analysis focuses on two main relationships: (1) how policy changes
and global conditions affect the VTGI development (or domestic integration); (2)
how global changes and domestic challenges bring about changes in state policies.
Moreover, as Vietnam has been increasingly engaged in the market-oriented
system (since 1991), this Chapter ends with a discussion about the extent to which
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the level of VTGI development within the context of changing foreign markets has
affected Vietnamese position in global garment industry.
The reform process started from the “bottom-up” activities within the
context of economic difficulties arising from domestic changes (the reunification
process after the fall of Saigon in 1975) and external challenges (a change in
Communist alliances and border wars with Cambodia and China). The so-called
“fence-breaking” activities (part of the bottom-up reforms) were initiated at the
firm level, including the VTGI firms, and led to subsequent state approval via
policy changes. During the partial reform period (1979-1981), this legislation had
some initial positive impacts on the economy as a whole and VTGI development in
particular. However, the VCP leadership’s wariness about the re-emergence of
capitalism after the partial reforms led to the reinstitution of command-economy
measures (1983-mid 1985). The state resumed market reforms in the Eighth
Plenum of the Central Committee in late 1985, and more consistently since the
Party Congress in December 1986.
Restructuring Within A Command Economy (1975-late 1985)
Prior to the fall of Saigon in 1975, Vietnam was under two different
regimes: the Democratic Republic of Vietnam north of Parallel 17 (or the North),
and the Republic of Vietnam south of Parallel 17 (or the South). After 1975, the
whole country went through the arduous process of reunification, with the Soviet-
style command economy and complex state management systems being imposed
on all sectors of Vietnam.
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Post-War Restructuring (1975-1979)
The cause of Vietnam-China conflict has to do with the China-Soviet split
which had surfaced back in 1960 (Beresford 1988, 195). Tension with China from
the mid 1970s led to closer relations with the former Soviet Union and, in 1978,
Vietnam’s membership in the CMEA (Council for Mutual Economic Assistance,
which consisted of countries such as the former Soviet Union, East Germany,
Hungary, Bulgary, Czechoslovakia) in which it had had only observer status since
1961 (Beresford 1988, 197). In mid February 1978, the Politburo convened a
meeting to decide on the nationalization of Southern capitalist industry (in which
Chinese Vietnamese economic power played a key role) and trade in general, as
well as how to solve border disputes with the Pol Pot in Cambodia. In March
1978, the state abolished about 40,000 small merchants in the South (Vo Nhan Tri
1990, 89).
The change in alliances also changed the sources of external financial
assistance. Chinese aid, averaging about US$300 million per year before 1976, was
up and down during the 1975-78 period. At the end of May 1978, China
discontinued all aid to Vietnam. After the termination of Chinese aid and the U.S.
refusal to help in Vietnam’s rehabilitation effort, in June 1978, Vietnam joined the
CMEA countries, which then pledged to expand aid to Vietnam at the 33 rd CMEA
session in June 1979 (Vo Nhan Tri 1990, 98).
Relations with the USSR grew rapidly, leading to some crucial decisions.
The Vietnamese government signed the important “Friendship and Cooperation
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Treaty” in November 1978 with the USSR, entailing both military and economic
support, as well as scientific and technological co-operation between the two
countries (Vo Nhan Tri 1990, 99). For instance, the USSR provided Vietnam with
economic and technical assistance in many important economic projects (such as
electricity, coal, tin, chemicals, heavy machinery, agricultural mechanization),
amounting to over US$757 million per year (Vo Nhan Tri 1990, 101). After
signing the Vietnam-USSR treaty, Vietnam invaded Cambodia and toppled the Pol
Pot regime in late December 1978. This led to the Chinese attack of North
Vietnam in February 1979 which weakened the conservative Maoist faction in
Vietnamese political structure (the other faction was closer to the former USSR).
Military intervention in Cambodia led to political and economic isolation of
Vietnam from the outside world, except from the CMEA. These border wars
drained the national budget and led to the termination of economic assistance from
many industrialized countries such as France, Sweden, Denmark, Norway, Finland,
Japan, Australia and Canada, as well as the World Bank. The estimated loss was
about US$78.5 million in bilateral aid and US$99 million in multilateral aid (Vo
Nhan Tri 1990, 101-2) . This triggered a crisis: the state was unable to supply
inputs to the planned economy and food to people in 1978-1979.
Partial Market-Oriented Reforms (1979-1981)
The need to tackle the socio-economic crisis arising from these wars
culminated in the Sixth Central Committee Plenum (Fourth Party Congress).
Policy debates in 1980 revolved around two main high-ranking state officials: the
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pro-market Nguyen Lam who argued against planning and favored the use of
markets, and the conservative Nguyen Duy Trinh who argued against capitalist
expansion (Fforde 1996, 131, 162).1
This Plenum introduced some partial domestic reforms in 1979-81,
allowing a process of reform from below, which was banned previously. For
instance, the agricultural collectivization drive was temporarily abandoned and
replaced by an informal household subcontracting system (whereby each household
was allocated a certain amount of land for cultivation and was allowed to keep
extra output after government procurement); and firm-level “fence-breaking”
activities, begun in 1979,2 were legalized.
Many factories engaged in “fence-breaking” or autonomous activities
during this period with the elimination of aid-financed supplies through the state
system. For instance, SOEs interacted among themselves to allocate raw materials
which had previously been allocated by state channels. Buyers and suppliers had
direct relations in exchanging or selling goods on the free market in order to raise
cash to buy raw materials or pay bonuses to workers (Fforde 1996, 39, 138).
These autonomous activities from below led to some major state decrees in
the early 1980s, giving the SOEs’ managers more autonomy in production and
trade. Decree No. 40-CP, introduced in February 1980, permitted import-export
activities which were concentrated mostly in Ho Chi Minh City (HCMC). This
1 Nguyen Lam was, at that time, head of the important Industry Department of the Central
Committee. In 1982, he became the Chairman of the State Planning Committee. Nguyen Duy
Trinh was the Chairman of the State Planning Committee in the early days and foreign minister
in the late 1970s.
2 This Vietnamese concept, “ pha r a o was first used by Dam Van Nhue and Le Si Hiep in 1981.
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means that individual SOEs negotiated exports and imports directly with
customers from market economies (mostly from neighboring Southeast Asian
countries), instead of going through state agencies. Decree No. 25-CP, introduced
in January 1981, legalized greater autonomy in production and coordination
among state firms. Decree No. I46-CP (introduced in 1982) phased out state
subsidies and began to gear more towards piece-rates as opposed to fixed-rates for
state workers. Moreover, in 1981, the foreign trade sector was decentralized,
leading to the formation of hundreds of state-owned import-export (IMEX)
corporations in major cities such as HCMC, Hanoi, Hai Phong and Da Nang.
These local state corporations were allowed to retain 25% share of foreign
exchange earnings which they received in the form of imported raw materials and
spare parts (Beresford 1988, 163).
The Three-Plan system, introduced in 1981, established three regimens for
raw material supplies and outputs in all SOEs. The most important one was Plan
A, the state plan, under which factories used state-supplied inputs and delivered
the resulting output at low prices to the state. Under Plan B, factories could obtain
raw materials outside the state plan, although they had to produce goods on the
lists of goods subject to state monopoly. Under Plan C, factories could use all
additional means to create additional output which could be utilized at the
factories’ discretion (Norlund 1995, 133-4; Fforde 1996, 138-9).
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Reinstitution of Command Economy (1982-Late 1985)
The partial reforms (1979-1981) occured within the context of existing
imbalances of the command economy. There were continued shortages in the
sphere of production with state investment concentrated on heavy industries (such
as construction or other large-scale projects), rather than light industries and
agriculture (Beresford 1988, 164).
Within that context, partial reforms brought mixed results. The VCP
leadership was wary about the re-emergence of capitalism. The state wanted an
increase in production, not an increase in the number of private traders (in addition
to IMEX corporations), in order to solve the problems of unemployment and slow
growth. The initial reforms increased production but also led to a resurgence of
private trading (especially in luxury imports) as well as a renewal of inflation in
1984 (Beresford 1988, 162-3).
These policies had both positive and negative effects. The positive effects
were that SOEs freely sourced inputs from outside the state sources; ordinary
people imported consumer goods such as motorcycles, cigarettes and home
appliances. But these policies also entailed some negative effects. The VCP leaders
became worried about out-of-control trading activities in major cities. A large
number o f trading firms sprung up in major cities such as HCMC and Hai Phong (a
port city in the North) and exported agricultural products (such as coffee, coconut)
and marine products (such as shrimp, fish, crab) to Japan, Hong Kong, and
Singapore. With high demand for those products, many farmers abandoned their
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rice fields and engaged in raising those cash crops and marine products. This led to
a scarcity of basic agricultural staples and an increase in imports of rice and sugar,
mostly from Thailand (Interview with Dang Phong, December 1995). To an
agricultural country like Vietnam, imports of those basic agricultural staples had
negative impacts on Vietnamese economy.
These mixed effects led to some policy adjustments in early 1983. The state
issued new directives to slow down the rate of inflation and private trading, and to
re-establish state control on food supply: checkpoints between provinces were re
established to block private commercial activities; and the agricultural
collectivization drive was reactivated in the South. Decision J/BCT, introduced in
1983 by the Politburo, can be seen as a policy adjustment to slow down
uncontrolled growth of local SOEs specializing in trading (or state trading firms) in
all sectors, especially in large cities such as HCMC and Hai Phong. At that point,
all those local state trading firms were put under the management of the state
trading corporations of local people’s committees. SOEs were not allowed to buy
and sell outside of the state channels (Beresford 1988, 165).
The situation worsened with the poorly-planned price and wage reforms in
1985 which caused further economic crisis.3 To start with, the government
subsidized food prices to urban state workers in a situation of food shortages
(agricultural disasters and low rice productivity as a result of the re-collectivization
3 The wage reform was a twenty-fold increase of urban workers’ salary to take into account non
rationed rice prices. In terms of 'currency reform’, the state introduced the new Vietnamese
currency and anempted to wipe out large holdings of private wealth. This disrupted the
circulation of goods and exacerbated existing shortages in the economy.
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process in late 1982) and the rapid price inflation resulting from the more market-
oriented system. This subsidy was the major factor in the growing budget deficits,
financed by inflationary methods. The wage and currency reforms worsened the
inflation problem: the 1986 inflation spiraled from 50% to 1,000% (Beresford
1988, 168-9).
The economic crisis caused by the failed price and wage reforms led to
dramatic personnel changes in the VCP leadership as an effort to pacify people’s
resentment. A number of ministers were dismissed in early 1986, including Mr.
Trcm Pfmong, the Vice-Premier in charge of the economy (Beresford 1988, 171-
2).4
State Bureaucracy to Manage the VTGI (1975-1985)
Prior to 1991, state bureaucracy and management in the VTGI were
cumbersome and multi-layered. Three main ministries directly oversaw all
production and export activities of large, central state firms (SOEs). Local firms
were under the people’s committees in their provinces. The Ministry of Trade
(MOT) granted export licenses and allocated CMEA export quotas (and later EU
quotas) to central SOEs (still true as of 1996). The Ministry of Finance (MOF)
invested money in state firms and set exchange rates. The former Ministry of Light
Industry (MOLI) set prices and guidelines for fabric and garment production.
Central textile firms were also under the control of Ministry of Agriculture since
they needed raw materials such as cotton. All ministries have their main offices in
4 According to a state official (Interview in December 1994), Mr. Tran Phuong truly had
progressive economic reform ideas and was demoted as a “sacrificial lamb.” Other VCP leaders
later on did follow his reform measures.
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Hanoi, and branch offices in HCMC. As of 1996, the function of the MOT is still
the same. While local SOEs are still under local people’s committees, central
textile firms are no longer under the control o f Ministry of Agriculture. The roles
of the MOF and MOLI are not as pervasive as before; more will be discussed in
the section on VINATEX. Headquarters of all ministries remain to be in Hanoi;
their branches are in HCMC.
The MOT and the former MOLI formed another bureaucratic layer
between themselves and central state firms. For instance, the Ministry of Trade
founded GENERALIMEX in 1981; its main function has been to trade consumer
goods, including textile and garment products. The former MOLI founded three
organizations: CONFECTIMEX (for garment products), TEXTIMEX (for textile
products), and TEXGAMEX (this is smaller than the first two and was founded in
Ho Chi Minh City in the early 1980s).
CONFECTIMEX is an acronym for the “Vietnam Garment Manufacture
and Import-Export Corporation”, Tong Cong Ty May Viet Nam or Lien Hiep San
Xnat - Xuat Nhap Khau May. It was established in May 1958, with the main
function being reinforced by the former MOLI in the early 1980s (Interview with
Mr. Tran Due Thinh, former Vice President of CONFECTIMEX December
1994). Before the consolidation in 1995, it controlled 20 central garment firms, as
well as producing and trading all types of garment products, and sourcing raw
materials for state garment firms (Nguyen Xuan Hoa 1995, 65).
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TEXTIMEX is an acronym for the Vietnam National Textile Corporation,
Tong Cong Ty Det Viet Nam, or Lien Hiep San Xuat-Xuat Nhap Khan Hang Del
(Irene Norlund 1995, 140). Its function was also reinforced by the former MOLI in
the early 1980s. Similar to CONFECTIMEX, before the consolidation in 1995, it
controlled 31 central textile firms, as well as producing all types of textile
products, and sourcing raw materials for state textile firms (Nguyen Xuan Hoa
1995, 65).
Before 1991, CONFECTIMEX and TEXTIMEX served as sectoral leaders
(dau moi) for garment and textile firms respectively.5 Both had the prerogative to
organize production, including decisions on input supply and machinery, as well as
all import and export activities of central state firms (Nguyen Cao Binh 1994, 1-2).
These sectoral leaders received a substantial number of CMEA export quotas.
Normally, they utilize only portions of these quotas, and subcontract the rest to
other SOEs and private firms. These intermediaries, in turn, have subcontracted to
smaller local state firms, cooperatives and household production units.
Restructuring of the VTGI within a Command Economy (1975-Late 1985)
The VTGI underwent many changes within the command economy after
the re-unification of the country at the end of the war in 1975: including
participation in “fence-breaking” activities in the late 1970s, and some initial
development during the 1979-1981 period with partial economic reforms. During
the 1975-1981 period, there was some industry integration. Garments for exports
5 According to Norlund, these two state corporations as sector organizations had stronger and
more direct enforcement powers on the firms than did the ministries (Norlund 1995. 139).
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to EE countries used Vietnamese fabrics and accessories. Generally, they consisted
of clothes of low-quality and limited variety such as working clothes, uniforms,
blouses for medical personnel, etc. Before 1991, most raw cotton and cotton yam
were imported from the former Soviet Union for fabric production. Moreover,
with Plan C in the Three-Plan system (introduced in 1981), textile firms used left
overs (after state procurement) from the spinning and weaving processes to create
more work and extra income for workers (Norlund 1995, 134). Most of these
“left-over” products were sold locally.
Before 1975, the VTGI depended on external assistance and lacked a
comprehensive strategy to facilitate industry integration. For instance, the textile
and garment industries in the North operated with the assistance and technology
from the former USSR, other EE countries and China. The South, on the other
hand, obtained US assistance and technology (Beresford 1988, 155). Relatively
speaking, there was more industry integration in the North than in the South.
Textile and garment firms in the North used domestic fabrics in garment
production for barter trading with the CMEA countries, as well as providing
uniforms for their Vietnamese army. The South, in contrast, exported very little, if
any, to the US or other Western countries. The garment industry was small in the
South: the majority of Southern population preferred tailored clothes from small
shops to ready-made clothes.
When the two regions were unified in 1975, the VTGI was restructured
within a command-economy framework. All private textile and garment firms in
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the South were nationalized. At that point, all VTGI firms were state-owned and
became dependent on the CMEA export markets, especially to the former Soviet
Union and East Germany. Before the collapse of the socialist regimes o f the former
Soviet Union and other EE countries in 1991, over 90% of all Vietnamese textile
and garment products were exported to these markets under inter-governmental
agreements to pay back foreign debts or to barter for machinery. Long-term textile
agreements between Vietnam and the former Soviet Union in 1987 led to the
development of a large number of textile and garment firms throughout Vietnam
(Vo Nhan Tri 1990, 224).
The partial opening of the economy (1979-1981) legitimized some
autonomous activities in the VTGI. Most textile and garment factories participated
in the so-called “fence-breaking” activities to obtain raw materials and coordinate
production activities with other firms. These early “fence-breaking” activities
increased production and saved thousands of state workers. For instance, in 1978,
Thcmh Cong Textile in the South was on the brink of collapse: it had no sources
of raw cotton and began to clean up its machines in order to shelve them away.
Fortunately, during that critical time, they were able to convince and obtain
permission from the People’s Committee of HCMC to source raw materials from
the free markets (in both Vietnam and non-Communist countries), to supply fabrics
to Vietnamese consumers, and to export their products directly to some
neighboring non-Communist markets (i.e., Thailand) in addition to Communist
markets (including Laos and Cambodia).
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The three-year partial reform period led to some initial contacts with non-
CMEA markets. Textile and garment firms imported necessary raw materials and
machinery from non-CMEA countries. For instance, most cotton yam was
imported from Taiwan and Hong Kong (in addition to imports from the former
Soviet Union); polyester yam from Japan, South Korea, Hong Kong and France;
machine parts from West Germany, Japan and France. A few Southern firms
imported modem textile machinery. For instance, Long An Textile was able to
modernize its finishing activities by importing Japanese dyeing machinery in 1980,
and became one of the most modem textile factories in Vietnam. With this new
machinery, Long An Textile dyed not only its own fabrics but also fabrics from big
cities such as HCMC and Hanoi. It supplied fabrics to the Vietnamese market and
some neighboring markets such as Cambodia, Laos and Thailand (Interview with
Dang Phong, December 1995).
The reinstitution of command-economy measures, albeit not aimed
specifically at the manufacturing sector, had some unintended negative effects on
the VTGI in particular. It discontinued new commercial relations just then
established between VTGI firms and non-CMEA countries: many trading firms in
Hanoi and Ho Chi Minh City were closed down, or changed to other economic
sectors. It also prevented the VTGI firms from sourcing necessary raw materials
and machinery from non-CMEA markets, leading to many difficulties in VTGI
production in 1983 (Interview with Tai Nguyen, March 1996).
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The Beginning of Market-Oriented Reforms
(Late 1985 to 1991)
After the failed wage and price reforms and the change in personnel in the
VCP, the government resumed the market reform process in the Eighth Plenum of
the Central Committee in late 1985. At the Party Congress held in December 1986,
the majority of the VCP favored the continuation and extension of the market
reform process, and fundamental reforms in state management and institutions
(Beresford 1988, 172).
The major questions of concern will revolve around the relationships
between the development of VTGI and changes in state policies within the context
of changing global conditions. In effect, this Chapter explains the conditions of
domestic integration of the VTGI as Vietnam began to engage more into the
world-economy after the collapse of the CMEA countries in 1991.
Market-Oriented Policies
From late 1985 to 1991, sweeping policy changes impacted all sectors of
Vietnamese economy, including the VTGI. They put SOEs under harder budget
constraint but gave them more autonomy. They helped develop the private sector
by establishing detailed guidelines for private firms (which emerged, albeit illegally,
during the “fence-breaking” period), and encouraging DFI. For instance, the very
important Decree 217 introduced in 1987 gave SOEs’managers the autonomy in
management and production decisions, and permitted direct contacts with foreign
firms instead of going through many ministers and state officials. This autonomy
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led to Resolution No. 388, introduced at the end of 1991, which subjected most
central SOEs to more rigorous budget constraints. The state has been closing
down loss-making SOEs and has discontinued subsidies to profit-making ones.
The state agency to oversee foreign capital was the former State
Committee on Cooperation and Investment (SCCI) from 1987 to 1995. SCCI
administered and approved licenses for all three types of DFI. It had a lot of
prerogatives, and approved applications on a case-by-case basis, theoretically
within three months upon receipt of the application. For instance, the former SCCI
could grant tax exemptions or tax reduction if it wanted to encourage more
investment in some strategic areas. It could exempt a joint-venture from paying
corporate income tax (which is 10-25% of the earned profits) from one to two
years (starting from the year a joint-venture starts to make some profits), or could
reduce 50% of corporate income tax for two succeeding years. The SCCI could
also exempt or reduce profit tax (5-10% of repatriated profits). Moreover, it can
exempt some export and import duties that all DFI types must observe (Phap Ly
Publishing House 1991, 84-7; Financial Law On Firms With Foreign Invested
Capitals in Vietnam 1993, 90-94).
State policies helped develop the private sector. First, three important
Prime Minister’s Decisions: 27-CP, 28-CP and 29-CP were introduced in 1988.
These three important decrees further implemented the vision of the Sixth Party
Congress, allowing activities of private enterprises in all economic sectors (i.e.,
manufacturing, commerce, services, finance). Then, laws on private enterprises
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(introduced in April 1991 and further revised in July 1991) provided further
guidelines for different types of private ownership such as limited companies and
joint-stocks firms.
The law on direct foreign investment (DFI) was approved in December
1987 and amended in June 1990 to attract more foreign capital into Vietnam. At
the beginning, it focused only on wholly-owned foreign projects. After the
amendment in June 1990, the state added two more forms of foreign investment:
business cooperation contracts and joint-ventures {Phap Luat Xuat Nhap Khan
1994, 8-9, 11, 12). The business co-operation contract does not create a separate
legal entity, but rather a contract of joint production and distribution of some final
products. All terms such as objectives, scopes, rights, obligations and liabilities of
all parties are stated in the contract (Phap Ly Publishing House 1991, 77). Parties
in this type of partnership enjoy some special tax incentives, not available in
regular business contracts. Both sides can maintain their own accounting systems.
In a joint-venture, all partners form a new entity in Vietnam. There is no ceiling on
the legal capital contribution by foreign partners which normally includes foreign
currency, equipment, machinery, and technical know-how. Most Vietnamese
partners contribute Iand-use rights, facilities and export quotas (Phap Ly
Publishing House 1991, 77-9). In 100% foreign-owned firms, foreign investors
assume full management of the enterprise, and are subject to all rights and
obligations as stated in the investment license. Although the normal duration of
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this type of license is twenty years, the former SCCI could extend it for a longer
period of time (Phap Ly Publishing House 1991, 80-1).
From the perspective of smaller (mostly private) firms, business contractual
agreements are preferable since they can be obtained easier than joint-venture
licenses. Domestic firm owners need about four months to get government
approval for these business contracts, as opposed to two to three years for a joint-
venture license (Interview with the manager at Ha Noi Knitting Company, August
1994). However, the state wants to phase out this type since it is very difficult to
monitor it due to a lack of a central accounting system (Interview with Cu D.
Nguyen, November 7, 1995).
Laws on the private sector and DFI led to the establishment of major
private enterprises in the VTGI. Most small and medium sized private firms in the
VTGI were formed as a result of these laws. As of 1992, over 3,200 small private
textile and garment firms had been formed mostly in the South (compared to 1,284
in 1989 and 318 in 1988) (Vietnamese Textile and Garment Industries 1993,
27,45; Norlund 1995, 136). Moreover, the two largest private garment firms in
Vietnam were formed in the early 1990s. Huy Hoang started in 1979 as a
cooperative and became a small private garment firm in 1990, currently employing
over 3000 people working two shifts in two garment factories. Minh Phung begun
in 1981 as a cooperative, became a private enterprise in 1993, and employs about
9,000 people working in 15 garment factories and 12 technical support workshops
(Interviews with both owners in 1994). Moreover, foreign investment started to
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come in: about ten firms were formed with DFI by 1991 (Vietnamese Chamber o f
Commerce and Industry 1995).
Labor Issues (1975-1991)
Employment in both textile and garment industries reflects changes in
external conditions. While labor in the textile industry has been declining since
1987, labor in the garment industry increased with the beginning of more
consistent market reform policies in mid 1980s, levelling off in the early 1990s
(Chart 2.1). Textile workers had been, in a sense, “protected” by the Communist
export markets. The heyday of the textile industry was in the late 1980s,
particularly in 1987 (the peak in Chart 2.1) with the beginning of textile
agreements with the Soviet Union and contracts with the CMEA. As discussed
earlier, the disintegration of these guaranteed markets for Vietnamese textile
products had a negative effect on the size of the textile workforce. Fortunately, the
garment industry developed as clothing exports to non-Communist countries rose
in the late 1980s, hence increasing the garment workforce.
The role of labor unions did not change during this period. The Vietnam
General Confederation of Labor with 4.2 million members is still the only trade
union in Vietnam and under government control. Workers were forbidden to strike
until the promulgation of the new Labor Code, effective in January 1, 1995.
Changes in state policies have affected labor markets. For instance,
Decision I46-CP. introduced in 1982, phased out subsidies for state workers. The
labor contract ordinance, introduced in 1990, changed the basis of employment
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from life-time with food and wage subsidies (as discussed earlier) to a contract
basis with piece-rates (the more one makes, the more one earns) prevalent in the
VTGI. Most employment is now negotiated between owners and employees,
including salary, work duration, working conditions, responsibilities of both
employees and employers, and conditions of termination.
The shift to a market-oriented system has been particularly difficult for
state workers. At present, many of them have been dismissed, but there is no
established state agency to provide guidance and unemployment benefits for the
laid-off workers.
State Response to International Changes
This period was characterized by major international changes. There was
increasing influence from several external factors: counsel from the IMF, World
Bank, Japan; the disintegration of CMEA countries; and subcontracting and
investment from the East Asian NICs’ firms in Vietnam.
The state led the effort to maintain relations with the former Soviet Union.
In 1987, Vietnam signed ten agreements with the former Soviet Union, one of
which was the “May 19 Agreement” (named after the birthdate of Ho Chi Minh).
This focused on textile and garment production and guaranteed over 150 million
garment products to be exported to the Soviet Union within three years. In
response to this agreement, numerous state firms were established in cities and
provinces throughout Vietnam (such as Hanoi, Hai Phong, Da Nang, Nha Trang,
Ho Chi Minh City).
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However, the disintegration of Socialist regimes of the former Soviet
Union and EE in 1991 created many problems for the VTGI. It terminated many
textile contracts and wrecked havoc in the textile industry (Norlund 1995, 130). In
effect, it created excess capacity and the overproduction of textile products.
Moreover, the availability of cheap smuggled fabrics from both China and
Thailand has been a constant problem to Vietnamese producers since the late
1980s (Thanh Nien Chu Nhat September 10, 1995; Vietnam News August 1995).
However, most interviewees told me in late 1994 and 1995 that the smuggling
problem mainly affects lower-end fabrics, since Vietnamese producers can
increasingly compete with these countries on medium to higher-end fabrics and
garment products.
These factors forced both state and private firms to find new export
markets in order to survive. Since 1991, most Vietnamese textile and garment
firms have expanded to non-CMEA markets such as quota markets (the largest
being the EU market, then Canada and Norway), or non-quota markets (such as
Japan, Taiwan, South Korea, Hong Kong and Russia). This corresponded with the
beginning of East Asian NICs’ production sourcing in lower-income Pacific Rim
countries in the late 1980s (especially after the foreign investment law in 1987).
These issues will be discussed more fully in Chapter HI.
Relationships between Policy Changes and VTGI Development (1975-1991)
The so-called “fence-breaking” activities led to the short partial reform
period which in turn led to a low-level of integration within the VTGI. There was
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better coordination between textile and garment firms in the state sector
throughout Vietnam. For instance, raw materials such as fabrics, cotton yam and
fiber were allocated among SOEs themselves based on their needs and
specialization. Inter-governmental agreements with the Soviet Union and the
CMEA (1978) and the beginning of access to non-Communist markets (during the
partial reform period) facilitated forward linkages. Backward linkage in terms of
inputs into the garment industry was also developed: garment producers used low-
quality domestic fabrics and accessories in garment exports to these countries. The
domestic textile industry, however, relied upon imported raw cotton mostly from
the Soviet Union.
The temporary reinstitution of command-economy measures (1982-1985)
eliminated the fledgling VTGI forward linkages, such as the initial marketing
channels to some neighboring Asian countries. With more consistent market
reforms after 1986, however, the state bureaucracy was simplified to facilitate
greater coordination between SOEs and emerging private firms. Although all
central SOEs in the VTGI still had to report to the three main ministries (the
former MOLI, MOT and MOF), they could directly contact foreign firms and take
orders from them without having to go through the two large state trading
corporations (CONFECTIMEX and TEXTIMEX).
By 1990, the new structure of the VTGI emerged with a fledgling private
sector. Most state textile factories diversified production into garments using their
own fabrics, produced in their existing plants, albeit only for the EE markets.
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Moreover, coordination within the private sector started to develop. Most private
garment producers use fabrics made from private weavers who are concentrated in
the Nga Tu Bay Hien center in Ho Chi Minh City. Most private (and Chinese-
smuggled) fabrics are sold in the largest fabric market in Vietnam: the Soai Kinh
Lam market (also in HCMC), serving both consumers and garment producers.
Conclusion
This Chapter points out the flexible nature of the Vietnamese state in being
able to respond to societal pressures after ironing out differences within the VCP
leadership. As discussed, state policy shifted several times in the 1975-1991 period
in response to a combination of internal and external factors, among the former,
power relations within the state and the VCP bureaucracy. Policy changes that
were introduced by reform-minded leaders during the partial reform period (1979-
1981) started some partial integration within the VTGI. Policy adjustment (during
1982-1984), however, temporarily thwarted emerging marketing channels to non-
CMEA countries just established by the VTGI. The market-reform period (starting
from late 1985) had strong positive impacts on the restructuring of the VTGI,
although up to 1991 domestic integration within the VTGI was quite limited.
Chapter HI attempts to situate the VTGI in the global garment industry by
analyzing the two trade networks: the EU and the EE networks, with implications
for the integration issue. In effect, Chapter m further examines the issue of state
flexibility in terms of trade-related policies in the 1991-1995 period which allowed
Vietnamese producers to expand their export markets to non-CMEA markets, with
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the EU as the major export market, as well as continuing commercial relations
with the EE markets.
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CHAPTER m
THE MARKET-REFORM PROCESS
THE 1991-1995 PERIOD
This Chapter will show how the challenges from the world-economy led to
further economic reforms in Vietnam with specific implications for the VTGI. It
will analyze how the state has proposed to deal with these issues through
examination of debates and competing interests within the state bureaucracy. This,
in turn, helps explain why the government undertook further reforms in late 1995
and early 1996, and what they expect to accomplish.
This Chapter begins with a discussion of the evolution of major policies
promoting primary export-oriented industrialization during this market reform
period to examine how the state responded to a new set of requirements in order
to export to non-Communist markets. In particular, this Chapter analyzes how that
general policy affected the VTGI by examining the two main trade networks (the
EU and the EE), the different levels of domestic integration in each network, as
well specific responses of the government and representative firms in both public
and private sectors. It concludes with the identification of important new issues
that emerge from these two networks.
Trade Relations With the EU and the EE Markets
The CMEA disintegration created many problems for the VTGI, leading to
state efforts to initiate and establish commercial relations with non-Communist
markets. Recent commercial relations with the European Union (EU) markets
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presented the VTGI with both opportunities and challenges. All these external
changes led the state to push for more consistent export-oriented reforms.
During this critical transitional period, the textile agreement between
Vietnam and the former European Community (EC), signed on December 15,
1992, represented a turning point and expanded Vietnamese garment export to
these non-Communist markets (Dao interview, December 1994). This agreement is
effective for five years, from the beginning of 1993 to the end of 1997. In this
agreement, the former EC places the imports of Vietnamese textile and garment
products in the context of a consistent commercial policy which is renewable at the
end of the term and allows for an annual growth rate of between 1.5% and 2.5%
for each of 151 garment categories. These categories are under two types of
constraints, and both have export value limits. The first constraint concerns
quantity. 106 categories have numerical quotas with a total export value of 450
million USD for all 106 categories; the remaining 45 categories have unlimited
quotas. The second constraint concerns input requirements: the “Trafic de
Perfectionnement Passif’ (TPP) quota type. These TPP quotas had the total export
value of two million USD with the requirement that over 80% of raw materials
must come from the EU sources (Inter-ministerial Newsletter December 3, 1993;
Bulletin o f the EC July and August 1992, 101).
Moreover, the Vietnamese state made a strong effort to maintain the
Eastern Europe (EE) markets by resuming trade activities with them following the
tumultuous late 1980s. In 1993, the Deputy Minister of the former Ministry of
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Light Industry (MOLI) led a delegation to these EE countries and re-established
commercial relationships with them after a lull of several years (Ministry o f Light
Industry Journal July 1993, 13). Vietnam was able to barter with Russia and some
EE countries, exchanging textile and garment products for machinery and technical
assistance. Up to 1995, inter-governmental contracts still dominate this direct
relationship ( Vietnam Courier October 22-28, 1995).
Evolution of Trade-Related Policies in A Changing Environment
The overall state policy has been to promote primary export-oriented
industrialization since 1986. As discussed in the Introduction, the VTGI plays an
instrumental role in carrying out this developmental goal.
While most trade-related policies have been adjusted and liberalized over
time to meet the conditions of exporting to non-CMEA markets, a few
protectionist policies were proposed but not implemented. The main reason is
perhaps due to the lack of concerted effort and support from the state bureaucracy.
These policies were originally aimed at protecting domestic firms in the VTGI
from fierce foreign competition. For instance, SCCI Decision 2427, proposed in
November 24, 1994, was aimed at discouraging DFI in garment subcontracting,
and ensuring that 90% of all garment products in these 100% foreign firms be
exported (Indochina December 1994). However, it was never implemented
without any clear explanation. All state officials (that I interviewed) claimed that
they were not aware of this protectionist policy. This indicates that this type of
policy may have been proposed by some state officials concerned with various
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constraints from foreign investment but they did not win the support of the
majority in the VCP leadership at that time.
This Chapter focuses on the evolution of three relevant trade policies,
including tax policies, EU quota policies and export/import procedure. Except for
the tax policies, the implementation of EU quota policies and customs procedure
still favors large (mostly state-owned) firms.
Evolution of Tax Policies in A Changing Environment
The three most relevant tax policies that demonstrate how the state adapts
to a changing environment are export duties, import duties and subcontracting tax.
These policy changes were introduced between 1991 and 1995 following the
collapse of the Communist regimes in the former Soviet Union and the EE
countries, when Vietnam engaged in consistent economic reforms and expanded to
non-Communist markets.
In general, tax policies have been adjusted over time to facilitate more
exports to non-CMEA markets. While implementation of subcontracting tax
favored large (mostly state) firms, implementation of the other taxes has been the
same for both public and private sectors. After several years of exporting to non-
Communist markets, the Vietnamese state readjusted some of its taxes to correct
past mistakes and increase VTGI exports. For instance, in late 1995, there were a
reduction of import duties and elimination of the subcontracting tax. It is too early,
however, to evaluate the impacts of these changes.
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Export Taxes
According to the export and import tax laws introduced in April 1992, the
state has been consciously trying to promote export of manufacturing products
(such as processed foods, garments, shoes, toys) by exempting them from export
taxes. In the case of the VTGI, the export tax on most manufacturing products
such as ready-made garments is zero (Thue 1995, 112). At the same time, the state
expects to collect tax revenue from export of agricultural, marine and other
extractive products (oil, minerals) with most export taxes up to 50%.
Import Taxes
The state was quite flexible proposing measures to protect domestic
products. In 1992, it imposed a ban on import of 17 light industrial goods,
including textile and garment products (Hy Luong 1996, 8). This ban was aimed
specifically at Chinese smuggled products that reached fabrics markets throughout
Vietnam, mostly concentrated in the South. However, this protectionist measure
was ineffective for light industry products since these goods could be easily
smuggled across porous Vietnamese-Chinese borders with cooperation of corrupt
customs and security officials. The state lifted this ban in May 1992 and replaced it
with heavy tariff rates of between 40-70%.
The state has been quite receptive to adjusting the terms of payment of
import taxes in the course of dealing with non-Communist markets. This gradual
response addresses the difficulties that Vietnamese producers face when exporting
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to the EU markets, beginning in the early 1990s. The implementation of these
policies has been, by and large, the same for both public and private firms.
In general, according to the 1992 laws, import taxes are more complicated
than export taxes. The state’s intention was to discourage importation of textile
and garment products in order to protect domestic inputs (fabrics and accessories)
and ready-made clothes. Import tax rates range from 0% to 150% on many
different product types. They can be between 1-30% for textile products and raw
materials, and between 40% and 70% for ready-made garments {Phap Ly
Publishing House 1992, 136-41).
In order to facilitate VTGI export to the EU, from which most inputs are
imported, there are import tax exemptions for all imported inputs to be assembled
for re-exportation, and time extension to use up imported inputs. Under the 1992
law, firms must use up all imported inputs for garment exports within only thirty
days in order to not pay import duties. However, most firms complained that it is
virtually impossible to use up all inputs since they often come in bulk amounts for
economic purposes. The state then expanded the time duration to use up all
imported inputs from 30 days (the 1992 law) to 90 days (the 1993 revision). If all
imported inputs are still not used up in garment exports within 90 days, then the
Vietnamese producers must deposit import taxes, and then get reimbursement after
using all these inputs (Phap Luat Xuat Nhap Khau 1994, 241, 247; Thue 1995,
114-5).
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There was a further adjustment of import tax rates after Vietnam became a
member of ASEAN in July 1995. Since November 1995, the MOF Decision No.
1188 reduced import taxes on all types of textile fiber imports to zero or 5% of
imported value, instead of 30% previously (Doanh Nghiep March 1996). It is not
clear, however, how this policy will impact the domestic textile industry, which
now has less protection from foreign competition, and how it fits in the broader
industrial policy to promote greater integration within the VTGI.
Subcontracting Tax
This tax demonstrates a big gap between policy intention and
implementation which indirectly penalized small (mostly private) firms. It was
introduced in 1990 and further revised in 1993 to specify tax rates for different
economic sectors in Vietnam and conditions for tax exemption {Thue 1995, 80,
87). The original intention was to promote export: taxing only subcontracting
activities for the domestic market, and exempting subcontracting for export. Firms
subcontracting for the domestic market (in a manufacturing sector) must pay 6%
of their subcontracting fees to the MOF ( Thue 1995, 90). Under the 1993 law, in
order to be exempted, subcontracting firms for export must show the original
contract papers, drawn up between Vietnamese (mostly state) firms that place the
orders and foreign buyers. It is virtually impossible for these small (mostly private)
firms to get access to these original documents to fulfill the requirement for tax
exemption. Moreover, it was very difficult for the state to make the distinction
between subcontracting for export and subcontracting for domestic market, given
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the similarities of products and work organization in both of these activities
(Interviews with private owners in the North and South, December 1994).
All these difficulties in the implementation of the 1993 revision led to a
change in late 1995. In response to complaints from small (mostly private)
producers, as of May 1995, the MOF eliminated this subcontracting tax which
promises an improvement in garment exports from both public and private sectors.
The EU Quota Policies: Challenges in Non-Communist Export Markets
In general, these policies reflect the extent to which the state tries to find
ways to achieve both efficiency (based on export performance) and equity
(dividing quotas equitably among all firms in the VTGI), as well as an incentive
structure to promote more exports to the EU. In principle, these policies have
gradually shifted to stress on efficiency more than equity, although it is still
difficult to verify their implementation.
The MOT and the former MOLI have become more powerful with the
Vietnam-EU textile agreement. They were to allocate EU quotas to both SOEs
and private firms, and formed a joint department to grant export licenses and
allocate EU quotas.1 There was a lack of coordination in the beginning, leading to
a two-month delay in quota allocation: late February instead of beginning January
1993. This was quite significant when allocation was supposed to be on a quarterly
basis. Export performance in 1993 was poor. Vietnamese producers utilized less
than half the maximum value (about 220 million out of the maximum 450 million
USD). Part of the problem may be that EU buyers went elsewhere to place their
1 Lien Bo Thuong Mai-Cong Nghiep Nhe in Vietnamese.
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orders in order to meet crucial delivery dates for fashion garment items.
Subsequently, the state has initiated various measures to increase the overall
exports to the EU market (via a change in quota allocation method), and to
encourage greater utilization of different EU categories (via an incentive
structure).
The 1994 allocation guidelines were geared more towards efficiency than
equity.2 Changes in the quota allocation method show some positive effects. EU
garment exports grew in absolute value over time, even if they comprised of
smaller shares of total VTGI export: from about 63% in 1993 to a bit over 50% in
1994 and 1995 (Chart 3.1). As of 1996, the EU remains the largest VTGI export
market.
Uneven utilization of all EU quota categories also led to the formation of
an incentive structure in 1994. While jacket and shirts quotas have been in high
demand, other categories have been slacking behind. Most firms have competed
for jackets, and for women and men shirts, since they have the skills to assemble
these products effectively. However, existing quotas of these two popular EU
categories were not enough to meet this high demand; while the other categories
(such as knitted socks, underwear, T shirts and poloshirts, skirts, sweaters, slack
pants, jogging suits, women jeans, scarves, handbags, fabric gloves) were not frilly
2 The 1994 guidelines were: (I) quotas would go to firms with guaranteed customer orders,
hence firms must maintain their existing clientele; (2) allocation is to be based on 1993
performance; (3) except for large firms (mostly state firms), each firm is limited to 10.000
jackets; (4) there will be no allocation of jackets and men’s shirts to joint-ventures and 100%
foreign-owned firms (presumably to save them for domestic firms); (4) domestic firms can refer
customers to each other to fulfill all customers’ orders.
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utilized as of 1995. Hence, the differentiated quota fee system (to pay for
administrative expenses in MOLI and MOT) was formed to encourage greater
utilization of EU categories other than jackets and shirts (such as business suits
with higher value-added).
The incentive structure is designed as follows. There would be no fees for
very unpopular categories (such as business suits with a few large firms
registered); low fees for less popular categories; and higher fees for very popular
items (such as jackets and shirts). While this is a step in the right direction, more
needs to be done. From my interviews, most SOEs and private firms in the VTGI
are keenly aware of the different levels of value-added of different EU quota
categories, but they lack special machinery, technical know-how and labor skills
necessary to work on the more sophisticated categories (such as business suits).
There is evidence to suggest that large SOEs receive more EU quotas than
do small private firms and that the implementation o f quota policy favored large
SOEs. Since 1993, the top ten exporters have always been nine SOEs and one
large private firm whose owner has a privileged access to government favors due
to his VCP connections {Ministry o f Light Industry and Ministry o f Trade Report
1994; Vietnam Courier 1995).3 The unavailability of the list of quotas allocation
strongly suggests that there are some factors other than efficiency in the allocation
process. Large firms have been allowed to transfer quotas among themselves.
Also, de facto, they have engaged in exchanging EU quotas in black markets, even
3 The owner of that large private firm, Huy Hoang Garment, was a former Communist party
member and maintains close contacts and networkings with other state firm managers and
government officials.
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with the state ban on quota bidding or quota markets (Interviews with private
owners and SOEs’ managers, 1994). While it is natural that large export quotas
would go to large SOEs, there is no way for smaller firms to verify how
proportionate these large quotas (allocated to large SOEs) are, given the existence
of black markets for unused quotas. Also, besides the obvious employment
consideration, there is no clear relationship between size and efficiency in large
SOEs to justify their receipt of large quota allocation.
Export and Import Procedures
Reforms in this area have been quite slow and limited compared with other
trade-related policies. It was not until February 1996 that the customs procedure
was reformed to simplify necessary paperwork for import and export activities. At
present, there is still a need to enforce existing laws (such as the bonded
warehouse as will be explained shortly) and a more consistent implementation of
this procedure towards both SOEs and private firms. Moreover, the recent
simplification of paperwork introduces a new set of issues which requires greater
coordination between state agencies and ministries.
Import and Export Licenses
Most state firms have an advantage over private firms since they already
had export licences before the establishment of the private sector. Most private
firms must meet very stringent financial conditions in order to obtain export/import
licenses.
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Before February 1996, a firm had to obtain two types oflicense from the
MOT in order to export. The first type is a one-time export license that allows a
firm to directly transact with foreign buyers. The second type is an export/import
permit which must be obtained from the MOT every time a firm engages in a trade
transaction, specifying exact types and amounts of import and export products.
Under Decision 296/TMDL (introduced on April 9, 1992), the
requirements to obtain a one-time export license were not changed. Working
capital must be at least 200,000 USD, and legal capital 15,000USD. Owners must
export only goods that have been officially registered, and must have a
knowledgeable staff who can conduct import and export activities professionally
(Documentation on Export - Import 1994, 32-3). Upon receipt of the application,
the MOT is to respond within thirty days whether or not to grant the firm an
export license (Phap Luat Xuat Nhap Khan 1994, 78).
The official reason for the stringent financial requirement (at least
200,000USD) is to ensure that domestic firms have enough money to cover their
transactions with foreign firms should things go awry (Cu Nguyen interview,
November 1995). However, small (mostly private) firms complained that this
policy creates a sort of entry barrier to export activities in the VTGI. The research
findings support this view: in the 58-firm sample, all 29 state firms and 19 large
private firms (over 200 workers) have export licenses; while the remaining ten
small private firms (less than 100 workers) did not have licenses. Some private
owners complained that bribery seems to be the only way out to obtain export
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licenses since it takes months to go through the official channels, and that it is
“cost-effective” to engage in such activity in the longer run.
Further simplification of export/import paperwork raises some new issues.
In February 1996, the MOT eliminated unnecessary paperwork, the export/import
permit. Since then, Vietnamese producers no longer need to obtain a license for
each export/import transaction {Thoi Bao Kinh Te Saigon 1996, 30-1). While
elimination of unnecessary paperwork is a step in the right direction, the main
challenge now is the need for more coordination between the Customs Department
and the MOT to establish the Harmonized Standards (HS) for all types of
Vietnamese export and import products. Also, the Vietnamese producers must
leam to abide by and adjust to this new standard of product classification in their
trading activities.
Customs Procedures
In general, the intention of customs procedures is to protect domestic
fabrics and garment products from external competition. It includes the random
check of all import and export containers to ensure that all imported inputs are
being utilized in ready-made garment exports, and not being sold in the domestic
market {Phap Luat Ve Xuat Nhap Khau 1994, 164). Before February 1996,
exporters had to file three types of paperwork: (1) the export/import permit for
each transaction, as mentioned earlier, (2) detailed listings of all imports and
exports, and (3) the transportation invoice for these transactions {Phap Luat V e
Xuat Nhap Khau 1994, 141-2). Now, they only need to file the last two.
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There has been preferential treatment towards large (normally state) firms,
at least as of 1995. While the check-up procedure is simpler and easier for large
(mostly state) firms, it is quite complex and time-consuming for small (mostly
private) firms. For instance, customs officials would come to the warehouses of
large firms to check their export contents; whereas private firms must transport
their containers to customs offices. If customs officials do not approve the
paperwork, private firms must pay additional fees (such as container rental, port
fees, etc.) until all differences are resolved.
That kind of implementation again leads to bribery which has become the
common practice to expedite customs procedure, at least as of 1995. The
interviews indicate that both SOEs and private firms have reluctantly caved in to
the habit of “greasing” the palms of customs officials in order to expedite their
exports. Their cost-benefit analyses convince them that it is more cost effective to
“grease” the system than to have their containers sit idle at the port awaiting the
official approval. According to informants in both public and private firms, the
range of “gratuity fee” per container of inputs or garment exports is between 20 to
100 USD (Interviews with informants in the South, October 18, 1994).4 Large
firms may be treated better because they can afford more bribery than can smaller
firms: a small percentage from large firms earmarked to “grease” customs officials
is certainly larger than can be afforded by smaller firms.
With bribery so prevalent, it is not surprising that the existing law on
bonded warehouses is not implemented, which could potentially be a solution to
4 Another estimate is about 1.5% to 2% of total production costs.
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complicated customs procedures. A bonded warehouse is a facility that can store
imported inputs which are sheltered from paying import taxes until these inputs are
actually being processed for export (Zodl 1992, 134).
Under the Prime Minister's Decision 104 on March 16, 1994, bonded
warehouses could be formed (Phap Luat Ve Xuat Nhap K hau 1994, 129-131). In
principle, any domestic firm can apply to serve as a bonded warehouse to store
imported inputs. Under this law, any firm (domestic firms, joint ventures, 100%
foreign) can rent them and postpone import duties payment until these inputs are
actually used in production (Phap Luat Ve Xuat Nhap Khau 1994, 132-4). But as
of 1996, the Customs Department has not given clear guidelines on how to
implement this law, such as instructions about operations and management of these
warehouses (Cu D. Nguyen interview, November 1995; Tai Nguyen interview,
March 1996).
Formation of Para-Statist and Private Associations
The existence of a multi-sector economy with a growing private sector in
the VTGI has led to a need for associations to represent different interests. In this
period, the state has permitted a proliferation of both private and para-statist
institutions to facilitate employment and exports in the VTGI. The first private
association was formed in 1993 by private firm owners in the South. The two para-
statist associations are the Vietnamese Garment Industry Association (VGIA)
formed in 1992, and the Vietnamese Chamber of Commerce and Industry (VCCI)
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founded in 1963 and renamed in 1993. Except for the relatively well-established
VCCI, as of 1995 the others were in formative stages and not very successful.
The VCCI has undergone several phases of evolution, related with different
periods o f Vietnam’s history (VCCI 1995, 4-5). It was founded in 1963 as the
Chamber of Commerce of the Democratic Republic of Vietnam, with only state
firms (the private sector was not in existence at that point). After the national re
unification in 1975, the Chamber expanded its activities all over Vietnam. In 1982,
it renamed itself to the Chamber of Commerce and Industry of the Socialist
Republic of Vietnam, widening its scope of operation to manufacturing fields,
comprising of mainly SOEs. In 1993, it was renamed again the Vietnamese
Chamber of Commerce and Industry (VCCI) with the adoption of new statutes
which allow for voluntary association of both SOEs and private firms. While the
VCCI proclaims itself to be a non-governmental organization and operates with
financial autonomy, in reality it has close ties with the government and the state
sector: its President was the former Deputy Prime Minister, and the majority of its
members are SOEs.
The VGIA, formed by the former director of CONFECTIMEX in April
1992, does not have the means to achieve its well-intended goals.5 Its main
intention is to follow some successful examples of the East Asian NICs to help
domestic firms increase garment export. Its primary objectives are to expand
potential export markets, and to establish a price floor for contracting prices in
order to prevent cut-throat competition that is harmful to the well-being of the
5 Hiep Hoi May Viet Nam. The President was Mr. Vu Cong Toan.
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whole industry. Other objectives are to enhance quality control to maintain existing
orders and compete for new ones; to improve workers' productivity through
training and upgrading machinery; and to pool domestic firms’ resources to
enhance their bargaining power with foreign actors ( . Ministry o f Light Industry and
Ministry o f Trade Report June 1993, 3-4).
However, the VGIA has not been able to carry out its objectives. While it
is open to both SOEs and private garment firms, it can attract very few private
firms, and the majority of its 92 garment members are SOEs. Most members firms
have indicated that although this association means well and aims high, it does not
have the financial means nor networking to achieve those goals. For instance, it
does not have an incentive system (i.e., in monetary terms or export quotas) to
award or discipline members, nor has it been able to find export markets or
mobilize capital.
The VCCI has been more effective than VGIA because it addresses the
more pragmatic issue: trying to augment export markets for its (mostly state firm)
members, hence steady employment for workers. It is the most business- and
promotion-oriented association in the VTGI. At least in principle, it offers
protection in sensitive areas such as intellectual property (patents, trade marks,
copyrights) to facilitate more DFI in the VTGI. The VCCI organized the first
Vietnamese trade fair in the US (VlETEXPO) in December 1994 with the
cooperation o f the then San Francisco mayor (Frank Jordan). A total of 118 firms
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from different Vietnamese industries participated, including 24 firms from the
VTGI.6
Private associations have begun to emerge after 1991 in tandem with a
growing private sector. The most prominent one is the Association of Weaving,
Clothing, Knitting and Embroidery (AWKCE),7 formed in 1993 by about 200
private firms in the South, to express their various concerns about state policies.
This association is chaired by a private firm owner in the South (Hoan Nguyen
interviews, 1994). It was weak and ineffective at the beginning, but has been in the
process of creating an effective incentive system to gain more private
memberships, and improving its organization and leadership to provide more useful
services for its members.
The association’s main complaints in late 1994 were with policies dealing
with production and export activities such as taxes, land-lease, the EU quotas,
state loans and export licenses. First, it is very difficult for private firms to obtain
loans from state banks. Second, import taxes do not encourage subcontracting
exports from small (mostly private) producers since they must deposit import taxes
(35% of invoice prices of fabrics and accessories) upon importing these inputs, and
are only reimbursed after using up all these imported inputs in garment exports.
Third, laws on long-term land leases are very ambiguous: Iand-use rights are sold
at unstable prices, and the state has the ultimate right to recall rented land.
6 Interestingly, some firms already foresaw the impending normalization between the US and
Vietnam: CONFECTIMEX with five other state firms authorized the Japanese SUMITOMO
corporation to be their official distributor in the US market.
7 It is "Hoi Det May Theu Dan " in Vietnamese.
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Responses of the State and Firms in the Triangle EU Network
Having examined the evolution of major trade policies, I will now examine
how the government and firms respond to changing international conditions. Since
1991, the VTGI has interacted with two trading networks: the EU and the EE
systems. I will first analyze the organizational linkages in each network and the
roles of main players. Next, I will discuss important implications of these two
networks for the integration and, to a certain extent, labor issues.
This is an analysis of the EU network up to 1995 with the knowledge that
all three main players have been constantly trying to establish more direct contacts
with each other over time. Figure 3.1 provides a snapshot of the structure of the
triangle manufacturing system before the formation of VINATEX (Vietnam
Textile and Garment Corporation) in September 1995 by the Prime Minister
Decision 253/TTG (approved in April 1995). More about VINATEX will be
discussed in the section on textile and garment interests. The three main players are
the Vietnamese garment producers, foreign buyers (primarily the EU buyers,
although the same pattern holds for non-EU markets such as Japan, Canada,
Norway, and the US), and the East Asian NICs’ firms.
In general, most foreign buyers do not place orders directly with
Vietnamese producers but through East Asian intermediaries with whom they have
worked for many years. These middlemen, in turn, supply inputs and machinery,
and send their specialists to stay in Vietnam for weeks or months to monitor all
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stages of production, especially the finishing stages such as quality control and
packaging.
In this network, most inputs and machinery are supplied by the East Asian
NICs’ firms. The sample findings show that 67% of the sample (39 Vietnamese
firms) used only fabrics and accessories from East Asian NICs’ firms for EU
garment export; only 33% used some Vietnamese inputs. Also, 81% of the sample
(47 Vietnamese firms) bought their machinery from Japan and East Asian NICs,
while the rest bought from Germany and other European countries.
Flexible Production Organization
In both public and private sectors, the EU network is multi-layered and
flexible. While most linkages between private and foreign firms are small-scale via
standard subcontracting arrangements, linkages between SOEs and foreign firms
are done via joint-venture or subcontracting arrangements.
The EU network is coordinated mostly by large state corporations under
the former MOLI and the MOT (Figure 3.2). As of 1995, most foreign buyers
placed orders indirectly with these large and established state-owned garment
manufacturers (which have EU quotas and can ensure quality and on-time
delivery)8 via East Asian NICs’ firms. After these large SOEs receive the garment
orders, they produce only portions of them “in house,” and subcontract the rest to
either smaller local SOEs or private firms.
8 Winter clothing season is between May and October, and spring between November and
January; during these high seasons, firms operate two to three shifts per day.
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Private firms, in turn, either fulfill the contracts by themselves or further
subcontract out simple assembly tasks to household units to meet delivery dates.
These household networks are very small and can be in a form of several people
working on their own sewing machines at home.
The Role of Vietnamese Producers
At present, most Vietnamese producers are assemblers. They cannot use
Vietnamese fabrics since these do not meet the high-quality standards of the
quality-conscious markets such as EU and Japan. Hence, for the EU markets (or
other non-Communist markets), their tasks include applying paper patterns onto
foreign-supplied fabrics, cutting and assembling them into clothes. After the
quality-control process, they package them and ship the final products to buyers or
middlemen.
Most state officials (from the MOT and the former MOLI) and firm
managers that I interviewed realize that Vietnamese producers in the EU system
receive very little value-added, most of which goes toward labor wages (Thinh
Tran interview, December 1994; Dao Nguyen interview, December 1994; Thanh
Mew January 19, 1995).
There is evidence supporting that observation. The bulk of the value-added
goes to the more advanced EU countries, the second largest amount to the East
Asian NICs and only about 4% to developing countries such as Vietnam (Chart
3.2 with estimations in Appendix 3.1). For instance, estimates of the components
of the retail price of a boy’s dress shirt show that about 4% of the total retail price
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would go to Vietnamese firms for cutting, making, and packaging (the CMP
prices). About 16-20% would go to the middlemen for inputs, management and
quality control. The rest, about 76-80%, would go to foreign buyers for designs,
transportation, insurance, marketing and other miscellaneous costs, and retail
mark-up. This evidence reinforces Gereffi’s assertion that most value-added in the
global garment industry can be found not only in backward linkages (such as
designs and inputs) but also in forward linkages (such as distribution and
marketing), and not much in manufacturing (Gereffi 1996, 82).
Therefore, without knowing how the triangle system works, one may
overestimate what the Vietnamese producers actually received by simply looking
at trade statistics. For instance, the value of 1993 textile and garment export
(about $316 million USD) probably overstates the return to Vietnamese workers
because it includes the costs of fabrics and designs in addition to labor wages.
The Role of EU Buyers
The EU remains the main export market for the VTGI (over 50% of total
VTGI export) and most continue to go through (mostly East Asian NICs’)
middlemen for manufacturing garment exports. However, the relationship between
the EU and Vietnamese producers has become more direct over time. Vietnamese
producers have begun to take some element of management control. This direct
relationship tends to benefit both parties: while the Vietnamese producers can
negotiate for contracting prices at 10% to 20% higher than going through the
middlemen, the EU buyers eliminate middlemen’s expenses.
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EU textile and garment exports have grown in absolute value over time
although they comprise smaller shares o f total VTGI export: from about 63% in
1993 to slightly over 50% in 1994 and 1995 estimated figures (Chart 3.1). This
suggests that the VTGI increasingly diversifies to non-quota export markets such
as Japan, Taiwan, South Korea, and Russia. The top nine EU exporters have
always been state firms (the tenth largest exporter is a big private firm in the South
whose owner has close connections with the government) since the beginning of
the EU-Vietnam textile and garment agreement in 1992.
At present most foreign buyers continue to go through the middlemen for
garment manufacturing (although pattern design, distribution and marketing are
still being handled by foreign buyers) mainly due to the ready input supply. As
discussed earlier, most East Asian NICs’ firms have been supplying fabrics and
accessories of consistent quality from their established home-country textile
industries, and increasingly, from their 100% foreign-owned textile firms in
Vietnam which benefit from cheap Vietnamese labor costs. A related factor is risk
reduction for EU buyers: large East Asian NICs’ firms issue letters of credit to
Vietnamese firms to buy inputs from East Asian NICs’ firms, hence EU buyers do
not have to advance any capital. Another is cultural factor: the East Asian NICs’
middlemen have greater familiarity with Vietnamese producers and culture to
strike the best deals. However, all these factors may be overcome as foreign buyers
develop more direct contacts with Vietnamese producers and trust is developed.
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In the time between my visits (1994-1995), there was an increase in direct
dealings between the EU and Vietnam. From the interviews, I found that foreign
buyers are increasingly bypassing the middlemen by dealing directly with
Vietnamese producers (mostly large SOEs), as good working relationships
between them develop. There is also an increasing trend for these EU firms to hire
Asians, not from East Asia, as a way of saving on management costs for their
manufacturing operations in Vietnam. During the field research, I met some
production managers or quality-control personnel from India, Pakistan, and the
Philippines.
Specifically, I found three cases of direct partnerships between large state
firms and some of the most prominent EU buyers (Germany, Britain, France).
These partnerships make high-quality products: Garment Company No. 10 (a
central state firm in the North) and German Seidenstiker making shirts; Viet Tien
Garment (a central state firm in the South) and French Pierre Cardin making shirts
and coats; and Phong Phu Textile (a central textiler in the South) and British
Tootal making sewing thread for almost all garment exporters in Vietnam.9
At present, Germany remains the largest EU market for the VTGI. German
companies have been frontrunners in placing orders directly with the Vietnamese
producers throughout Vietnam in partnerships with both SOEs and private firms
9 Most garment firms throughout Vietnam have used thread made by Tao\a\-Phong Phu joint
venture for their garment export. This is a joint venture between Phong Phu Textile (a large state
firm) and Tootal (a British corporation), using cotton yam from Phong Phu Textile to make
thread for both domestic and export purposes. Ministry o f Light Industry Journal.'‘ Mot so y kien
ve lien ket kinh te -ky thuat nham thue day xuat khau may mac ”, [Some suggestions about
economic-technical linkages to facilitate garment export], September 1993, 23-4.
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( Thanh Mien July 1995; Vietnam Courier October 1995). One of the contributing
factors is that Germany had established diplomatic relationship with Vietnam even
before the re-unification of East and West Germany in 1991. Direct trade with
Germany includes garment exports which comprised about 70% of total exports to
Germany,1 0 and imports of textile machinery and raw materials such as dyestuff
and chemicals (Vietnam Investment Review November 1995, 22).
The U.S. Market
To a large extent, subcontracting arrangements via East Asian NICs’ firms
still dominate the commercial relationship between Vietnam and the U.S. Hence,
the role of US buyers, by and large, is similar to that of the EU buyers. The major
hurdle that Vietnamese exporters still face is the lack of the Most-Favored-Nation
(MFN) status. This trading status was not automatically granted after the
normalization of diplomatic relations between the US and Vietnam on July 11,
1995. The granting of MFN status would lower the tariff rates substantially and
make the prices of Vietnamese garment products competitive. At present, all
garment exports from Vietnam to the U.S. face steep non-MFN tariff rates.
Garment export to the US has increased over time but always via
intermediaries. Starting with the lifting of the trade embargo in early 1994, some
US firms tried to familiarize themselves with Vietnamese producers by ordering
small orders of garments and initiating preliminary talks with the producers to get
1 0 Other export products to Germany consist of agricultural products (such as coffee, tea. pepper,
cassava), aquaproducts. fine arts items, leather and shoes.
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ready for the eventual normalization.1 1 Now, with normalization but without MFN
status, there is an increase in Vietnamese garment exports to the US, although
most Vietnamese producers still go through East Asian NICs’ intermediaries.1 2
Similar to the case of the EU market, direct contacts between Vietnam and US
buyers would be more beneficial for both sides in the long run.
The Role of the East Asian NICs’ Firms
The role of East Asian NICs’ firms (such as Taiwan, South Korea, Hong
Kong, Singapore) has been diverse and is becoming more dominant over time. The
main impetus for more involvement of these firms in the VTGI has to do with the
opening up of the Vietnamese economy and transformation in their own economies
that makes garment manufacturing, and increasingly textile production,
economically infeasible in their home-country factories. They began triangle
production with Vietnam with the signing of the EC-Vietnam textile agreement in
1992. They also started to invest more directly in the VTGI, in the form of both
100% foreign-owned textile firms and joint-ventures with Vietnamese SOEs, in the
early 1990s.
As of 1995, there are three types of linkages between the East Asian NICs
and Vietnamese firms. The first type is 100% foreign-owned firms (mostly making
1 1 I interviewed some private firms which at the time produced garment exports to some familiar
US discount department stores such as Kmart (which sold “French Toast” boy dress shirts from
Fashion Garment in Vietnam), J. C. Penney, Target. During factory visits in the South. I
recognized some familiar brandnames such as Adidas. Bugle Boy. Baby Togs.
1 2 Thang Long Garment (a Northern state firm) exported 2.400 denim shirts worth 100.000USD
to the US in July 1995 via the Export Import of East Asia company from California. Another
Northern state firm (in Hai Phong, a port city) exported 72,000 pieces of children clothes to the
US via a Taiwanese company {Doanh Nghiep Newspaper July 1995; Thoi Bao Kinh Te Saigon
July and August 1995).
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textile products); the second type is joint-ventnres (mostly making garments in
partnerships with SOEs who can provide these East Asian firms with EU quotas);
the third type is business-cooperation contracts (mostly making garments in joint
production and distribution of garment or woven products with local state or
private firms).1 3 All three types take advantage of cheap labor; the last two also
aim at using EU quotas from the Vietnamese firms (Phap Ly Publishing House
1991, 77). Also, from field visits, I found that East Asian NICs’ firms have been
increasingly hiring Vietnamese workers to work in quality-control units in both
SOEs and private firms with which they are in partnerships.
The East Asian NICs’ firms are now major players in 100%-foreign owned
textile firms and joint-ventures in Vietnam, posing a greater challenge to
integration within the VTGI. Since 1992, they have accounted for 54% (or 344
million USD) of all 100% foreign firms making textile products.1 4 South Korean
and Taiwanese firms ranked first and second among these 100% East Asian
textilers (Vietnamese Chamber o f Commerce and Industry December 1995). Some
advantages include: lower wages (than in their own countries), elimination of
transportation costs since fabrics are produced locally and can be supplied for
garment exports, elimination of cumbersome customs procedure for imported
inputs, and supplying their own high-tech textile machinery to these enterprises. In
terms of joint-ventures, the East Asian NICs’ firms accounted for 67% (or 107
1 3 The nature of business-cooperation contracts is similar to regular business contracts, although
the former enjoys some tax incentives. Regular business contracts are subject to normal tax
policies.
1 4 83% of all 100% foreign firms in the VTGI make textile products (635 million out of 763 mill
USD).
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million USD) of joint-ventures in the VTGI. Hong Kong and Taiwanese firms top
the list of all East Asian NICs’ joint-ventures making silk products and garment
products (VCCI, December 1995).
Most production from these 100% East Asian NICs’ textilers supply the
Vietnamese market (i.e., sold in Soai Kinh Lam market); the rest is for EU
garment exports and for East Asian NICs’ markets (Tai Nguyen interview, March
1996). However, more research is needed to find out the real impacts of these
100% foreign textilers, and how VINATEX and other Vietnamese textile firms
compete with these foreign firms.
Direct Relations in the Eastern European Network
As discussed in Chapter n, backward linkages with the EE exports has
been established since the 1970s. The VTGI had at least a partly integrated
structure (using Vietnamese fabrics in garment exports to the EE market), but it
was based on inefficient and high cost production resulting in low quality fabrics.
In comparison with the EU markets, the relationships between Vietnamese
producers (from both public and private sectors) and EE buyers are more direct
and facilitate more backward and forward linkages.
To produce EE garment exports, large state garment firms use domestic
fabrics from central textilers; while private garment firms use fabrics made by
private weavers. Also, at least during their own economic transition, most EE
consumers can afford inexpensive garment products from Vietnam while more
expensive products from Western Europe may be too costly. It is conceivable,
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however, that over time EE consumers will demand higher-quality garments which
provide an incentive for Vietnamese textilers to manufacture higher-quality
Vietnamese fabrics in order to satisfy more sophisticated consumers.
The organization structure is multi-leveled and flexible (Figure 3.3). Under
direct inter-governmental agreements, large state corporations, such as
CONFECTIMEX and TEXTIMEX, control most EE quotas. Firms want to obtain
EE quotas so that they can expand production and employment and take
advantage of favorable exchange rates set for these EE markets (Interview with
Informant I, December 1995). After obtaining these quotas, they either use them
in their own plants or subcontract to either public or private garment firms. These
intermediate firms, in turn, may produce “in-house” or subcontract further down to
small household production units.
The role of large state textilers is prominent in this network. Most have
advantages in exporting to these EE countries. In addition to having control over
EE quotas, they are familiar with EE consumers’ preference after years of barter-
trading. They use their own fabrics to produce garments and woven products in
their existing plants. Sample results show that most of textile and garment exports
from large state textilers (such as Viet Thang Textile, Thang Loi Textile, Nam
Dinh Textile) were to EE countries such as Russia, Poland, Hungary, and
Czechoslovakia.
Moreover, the flexible and dynamic nature of the private sector fits well
with the EE markets. There are many small private firms, mostly in the South,
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producing directly for the EE markets and also subcontracting to countless
household production units. Reliable statistics on these small-scale EE garment
exports, however, are not available.
The intermediaries in this network are Vietnamese contractors, not the East
Asian NICs’ firms as in the triangle system. Most are garment owners themselves
who were contract workers or state officials stationed in the EE before the
disintegration of the CMEA. They have maintained close connections with these
markets and become quite astute about EE consumers’ dressing styles, taste and
preferences. Since 1991, they have travelled back and forth between Vietnam and
EE, bringing all necessary details (such as sizes, styles, quantity) to place garment
orders with small (mostly private) firms throughout Vietnam.
Implications of Both Trade Networks
There are two main implications emerging from the above analysis of the
two trade networks: the integration issue, and the labor issue which is linked to the
subcontracting nature of both networks.
The Integration Issue
The previous discussion demonstrates different levels of integration in the
two main trade networks. Chapter IV provides empirical findings about the low
value-added of the EU network in relation to the EE network, leading to a general
hypothesis about the positive relationship between higher value-added and greater
integration within the VTGI.
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There is greater integration in the EE than in the EU networks. The EE
network facilitates backward linkages (using Vietnamese fabrics and accessories)
and forward linkages (by means of established marketing channels via inter
governmental agreements or Vietnamese liasons) to distribute directly to EE
customers. In the EU network, Vietnamese producers have no control over the
input supply (no backward linkage) and distributing products directly to the EU
markets (no forward linkage). The emerging contacts between Vietnam and EU
buyers/firms do not give Vietnam direct market access to the EU: most
Vietnamese producers still subcontract for EU firms and earn only subcontracting
wages.
Moreover, this analysis raises some more specific observations about
value-added, types of integration and quality of exports. About the relationships
between value-added and specific types of integration within the EU network, as
the boy’s dress shirt example suggests, most value-added can be found in forward
linkages (such as distribution and marketing), rather than in backward linkages
(such as domestic inputs) or in manufacturing (assembly).
In the VTGI case, high value-added does not necessarily come from high-
quality exports (although at a higher level of VTGI development and its
correspondingly different position in the global garment industry, this situation may
change). As discussed earlier, while garment export to the EU network has higher
quality in relation to that of the EE market, Vietnamese garment manufacturers
cannot reap profits from inputs nor retail mark-up since most fabrics are provided
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by the East Asian NICs’ firms, and final outputs are marketed by the EU buyers.
On the other hand, despite the Iower-quality EE garment exports, Vietnamese
producers earn higher value-added since they have control over the input supply
(using fabrics made in Vietnam) and can distribute garment products directly to the
EE consumers, thus eliminating middlemen’s costs.
The Labor Issue
Emerging from the two trade networks is the prevalent subcontracting
work organization which has important implications for some critical issues such
as wages, working conditions, job instability, labor unions and labor grievances.
The first challenge has to do with wages in the VTGI which are much
lower than those of the East Asian NICs, but comparable to other sectors in
Vietnam. Even with low wage rates, given the unemployment and
underemployment problems in Vietnam, most Vietnamese workers are willing to
find jobs in the VTGI. More research, however, is needed to address questions
regarding the extent to which workers can survive on such wage rates.
Under the prevalence of subcontracting in the VTGI, both state and
private workers earn piece-rate wages since state workers no longer received wage
subsidies after the late 1980s. Under this contract system, what one earns would
depend on various factors: quantity of clothing pieces assembled (the more one
assembles, the more one earns), and types and quality of products (the higher
quality, the higher piece rates). Hence, it is very difficult to estimate accurately the
hourly wage rate of textile and garment workers in Vietnam. However, some
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attempts have been made and showed that, on average, labor cost in Vietnam
remains one of the lowest in Southeast Asia. The average hourly wage of a
Vietnamese garment worker is broadly estimated to be between 20-40 cents per
hour, compared with over 4.00USD per hour in some East Asian NICs such as
South Korea, Singapore, Taiwan, and Hong Kong (Vietnam Economic Times,
December 1994, 12-13; Smith 1995, 2).1 5
The very low wages in the VTGI are, nevertheless, comparable to wages in
other major economic sectors in Vietnam. The average monthly garment wages
range from 30USD (or the minimum monthly wage in firms with DFI) to about
100USD (mostly in the South where high value-added garment products are
subcontracted).1 6 Relatively speaking, average garment wages are relatively high
compared to agriculture (the estimated average agricultural wages are between 20-
25 USD/per person/per month), but about the same as the average manufacturing
wages (the estimated figures are about 30-40USD/per person/per month) (Vietnam
Living Standard Survey 1994, 93, 97). However, it is certainly not in the best
interest of the Vietnamese workers in the longer run to maintain these rates.
Similar to conditions in other developing countries, working conditions in
the VTGI are difficult. Long working-hours is just one aspect. Over 80% of all
textile and garment workers are women, working from ten to twelve hours per
day, six days per week. The working atmosphere is not ideal either. From my visits
ls It is conceivable that wages in some ASEAN countries such as Indonesia and Thailand would
be more comparable to those of Vietnam.
1 6 It is difficult to compare average wages in firms with DFI with domestic firms since in either
type of ownership, given the piece-rate basis, the more one works, the more one earns.
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to many firms (both public and private) throughout Vietnam, the general working
environment is hot, arduous, and unsanitary in most textile and garment factories.
Instability of employment is another challenge to workers. Due to clothing
seasons, full-time employment is available only during peak time (for nine months
between May and January) in which firms operate two to three shifts per day.
During slack time (for three months between February and April), the VTGI labor
force fluctuates since workers move between factories trying to find full-time jobs.
Moreover, there is fierce competition among Vietnamese garment firm owners in
slack time, who reduce their contracting prices to make deals with the EU buyers
and the East Asian NICs’ firms, resulting in very low piece rates paid to workers.
Domestic employers must also confront these seasonal fluctuations. Only a
few innovative public and private firms can smooth out these fluctuations by
steadily augmenting their internal and external markets. Some firms find year-
round (domestic and foreign) markets to stabilize their production and maintain
employment. For instance, Chien Thang Garment Company (a central garment
firm in the North) produces maternity clothes all year-round. Tien Long Garment
(a small private firm in the South) produces all sorts of sports clothes and
children’s clothes, primarily for the EE and domestic markets.
Given an increasing presence of foreign firms of all three types of DFI in
the VTGI, the state tries to protect workers by adjusting labor legislation, which
resulted in the new Labor Code (effective since January 1, 1995). In principle, this
Code offers more protection for workers on major issues such as labor contracts,
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labor unions (especially in firms with foreign investment), legalization of strikes to
protect their rights (except under circumstances that could jeopardize national
security), and maintaining minimum wages (with some differentials in different
regions: higher in big cities than in rural and mountainous areas). Its
implementation, however, remains to be seen.
At present, only a few foreign firms have labor unions. The Minister of
Labor, Mr. Tran Dinh Hocm, estimates that only 20% of companies with foreign
investment have labor unions, and only a fraction of these firms have signed
collective-bargaining agreements with workers (Far Eastern Economic Review,
January 1996:22). Hence, workers in companies without either labor unions or
collective-bargaining agreements have no representation nor protection. Moreover,
the Vietnam General Confederation of Labor, still the only trade union in Vietnam,
is under government control. It is unclear whether it represents only the interests
of workers, or also those of the state and even of the employers who subsidize a
portion of most union officials’ salary. The potential problem of conflict of
interests is very real.
Moreover, new issues have emerged, especially in partnerships between
Vietnam and some East Asian NICs’ firms. Tension on the factory floor is on the
rise. There has been a consistent rise in labor grievances in many textile and
garment joint-ventures between Vietnam and some East Asian NICs’ partners
(Angie Ngoc Tran 1995. 2, 11, 22). However, the problem is more than meets the
eye. The relevant question to ask is why most publicity has been given only to
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cases o f labor grievances and strikes in DFI firms when in fact they also occurred
in some domestic firms. According to a VINATEX official, there have been,
indeed, a few cases of labor strikes in both Vietnamese SOEs and private firms.
However, only private firms were reported (Tai Nguyen interview, March 1996).
More research is needed to arrive at some answers to these important questions.
Interests of Textile and Garment Firms in Both Public and Private Sectors
Within the context of a more market-oriented economy, competing
interests in textile and garment industries have emerged. It is important to
understand these different interests since they explain the emergence of new
policies in 1995 and 1996, as well as some potential problems regarding the
integration issue, both within the VTGI and into the world-economy. Textile firms
want to have more domestic integration (supplying their own fabrics to garment
manufacturers); garment firms want to have more flexibility and choice (sourcing
inputs from both domestic and foreign markets for garment exports), hence not
necessarily promoting backward linkages. However, Vietnamese garment firms
would switch to domestic textile firms if these textilers produce fabrics competitive
with imported ones, and if easier terms of payment can be obtained to buy
domestic inputs (to better compete with the prevalent use of LCs as discussed
earlier).
In general, their ultimate objective is the same (over 95% of firms in the
sample want to raise the value-added of their textile and garment exports), but they
propose different strategies to achieve that goal: improving integration (cutting,
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designing and marketing, as well as using domestic fabrics) and upgrading final
product quality. Both public and private firms in the VTGI have tried to simplify
the complex Vietnamese customs procedure, and welcomed the recent elimination
of paperwork in trading activities (February 1996).
Expression of interests is different in both sectors. In the private sector,
different interests are less apparent and tend to be coordinated by the market
system. In the state sector, competing interests can be observed in the competition
between the two state groups ( Viet Tien Garment et.al represented textile interest
and CONFECTIMEX for garment interest) leading to the formation of VTNATEX
in September 1995 (Tiem Phan interview, 1995).1 7
Textile Interests
In general, most textilers want to engage in forward linkages: supplying
Vietnamese garment firms with domestic fabrics and accessories. To accomplish
this, they must produce fabrics competitively in terms of price and quality; and
because of this competition with foreign fabrics, they need investment fund for
more advanced equipment. Most prefer long-term development strategies with
state investment in machinery to modernize their plants and increase quality and
productivity in order to supply high-quality fabrics at a competitive price to
garment manufacturers.
Viet Tien Garment et.al represented the textile interest which tends to
focus more on linkages between textile and garment industries. Their concern is to
1 7 It may sound odd that a garment firm like Viet Tien represented the textile interest. However.
Viet Tien has established one of the most sophisticated vertical integration in the VTGI, and
supported greater backward linkages with the textile industry.
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maintain employment for thousands of textile workers whose jobs were on the line
after the collapse of the CMEA markets.
Garment Interests
In general, from the garment manufacturers’ perspective, backward
linkages with the textile industry is not their overriding concern. What they want is
to have more flexibility and choice in sourcing inputs (for their garment exports)
which may come from both domestic and foreign markets for quality and cost
reasons. For instance, high-quality fabrics and accessories that Vietnamese textilers
cannot supply at competitive prices can be sourced from external markets, while
simple fabrics or accessories can come from domestic textilers. Another external
reason that discourages the use of domestic inputs is that most East Asian NICs’
firms provide garment producers with letters of credit which facilitate input
procurement from the East Asian NICs’ own sources.
Moreover, garment producers would prefer to have more linkages within
the domestic garment industry including upstream activities (such as cutting,
producing garment accessories, clothing design, pattern making) and downstream
activities (such as marketing efforts via domestic and international trade fairs, and
retailing).
CONFECTIMEX represented the garment interest, and tended to favor
more integration within the garment industry, not necessarily with domestic
textilers. Garment manufacturers wanted to produce their own garment accessories
if possible, and source high-quality fabrics from external markets which can be
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achieved by the system of international fabric distributors located right in Vietnam
to supply high-quality fabrics on a timely basis for garment production and export.
They also proposed bonded warehouses to stock up imported inputs.
The formation of VINATEX, a state conglomerate in the VTGI, suggests
the winning influence of textile interest. It also reflects an increasing state attention
to the domestic integration issue and the ability of domestic firms to compete with
foreign firms in joint-ventures or 100% foreign textile firms. It is premature,
however, to evaluate the effectiveness of VINATEX in terms of facilitating greater
integration both within the VTGI and into the world-economy.
VINATEX consolidated both CONFECTIMEX and TEXTIMEX. Other
state corporations under the MOT (such as GENERALIMEX) and local state
corporations (such as IMEXCO under the People’s Committee of Ho Chi Minh
City) remain intact.1 8 While providing overall development guidance for all
member SOEs, it allows each member firm full autonomy in production and
export. The MOF is to put them under more rigorous budget constraints, however,
and oversee their financial performance (Thoi Bao Kinh Te Sai Gon March 14,
1996).
1 8 Up to mid 1996. in addition to VINATEX the Prime Minister approved the establishment of
twenty two other state conglomerates: each has legal capital of at least 50 million USD (Nhan
Dan April 1996). They range across all types of strategic industries: from heavy industries (i.e..
electricity, coal, cement, oil, steel, gold and precious stones), to light industries (textile/garment,
coffee, food processing in the North and the South, paper, cigarettes), to high-tech and service
industries (postal communications, airlines, shipping). Memberships in these state conglomerates
are restricted to only central SOEs who continue to obtain state assistance. The main functions of
these conglomerates are budget-oriented: (1) maintaining public funds invested in all central
SOEs; (2) being the main source of tax revenue for the state. Moreover, they are to provide
guidance about overall development strategies to all central SOEs in these industries, and to be
important sources of employment for Vietnam (Interview with Mr. Doan Kim Dan. on December
8. 1995).
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VINATEX has representative offices in Ho Chi Minh City and Moscow, as
well as branches in big cities such as HCMC, Hai Phong City and Danang City. Its
membership consists of all central SOEs (40 textile and garment firms) and several
joint-ventures with foreign firms. As of May 1996, it manages about 100,000
workers (Thanh Nien, May 1996).1 9 As of 1995, it had about 50 million USD as
legal capital, mobilized from various sources such as the ODA (16 million USD),
state sources (16 million USD), joint-ventures (10 million USD); the rest (about 5
million USD) comes from private sources (Interview with Dan K. Doan, December
1995). As of November 1996, Japan has approved over 100 million USD from the
ODA for Vietnam to build a cotton fiber and weaving plant in Hanoi (Thoi Bao
Kinh Te Saigon, November 1996).
The general director of VINATEX stressed the importance of linking
textile with garment industries, engaging in industrial upgrading activities,
investing more in cotton cultivation, and competing better with foreign firms,
especially 100% foreign textile firms. He also emphasized the importance of
serving the large domestic market of nearly 100 million Vietnamese in the 21st
century (Vietnam Economic Times November 1995, 23).
The functions of VINATEX are suggestive of a state apparatus aiming to
implement industrial policy, and providing services that central SOEs could not
and will not do by themselves. Its basic functions are three-fold (Decision
1 9 Local state firms remain to be under the jurisdiction of provincial governments: they are
smaller, and not contributing much to the state budget There was no immediate plan to include
local SOEs. A state official said that the state will include local SOEs in VINATEX only after
being successful with central SOEs (Interview with Mr. Doan Kim Dan. December 8, 1995).
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253/TTG, 4; Bui Xuan Khu 1995). First is to engage in industrial upgrading
activities: such as renovating outdated machinery in existing plants, improving
product quality to meet international standards, improving technical know-how
and other skills, engaging in R & D. Second is to end unhealthy competition that
adversely affects domestic groups (i.e., domestic firms compete against one
another for foreign contracts resulting in very low subcontracting rates). Third,
given its size and resources, VINATEX can better negotiate with larger and well-
established foreign partners in terms of subcontracting prices, technology transfer,
working conditions, etc.
In particular, VINATEX plans to achieve the first objective by utilizing
state resources for backward linkages (producing inputs for the garment industry:
building yam spinning mills, fabric weaving mills, establishing local sources of raw
materials, and building synthetic fiber factories), and forward linkages (engaging in
marketing efforts to reach customers directly). VINATEX aims to achieve the
second objective by setting fundamental pricing parameters favorable to domestic
producers and workers: for instance, setting ranges of minimum piece rates for
some standardized garment products, and ranges of maximum prices for imported
inputs.
The garment interest remains intact even after the establishment of
VINATEX in mid 1995. The former CONFECTIMEX became one of its member
enterprises and continues to serve the functions that it proposed before: sourcing
inputs from both domestic and foreign markets, as well as providing marketing and
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retailing services for both SOEs and private firms (Tai Nguyen interview, March
1996).
Integration Within the State Sector
Modem machinery can facilitate linkages in textile and garment industries.
Most SOEs purchase modem textile and garment machinery financed by a
deduction o f a certain percentage from the subcontracting prices. State textilers try
to obtain more modem weaving and dyeing machinery to improve fabric quality
(as well as reducing industrial pollution) and high-speed sewing machinery to make
garment and simple woven products using their own fabrics. State garment
manufacturers seek modem, high-speed garment machinery to improve
productivity and make higher-quality garment products.
For SOEs, the most common way to obtain modem machinery is to form
partnerships with foreign corporations.2 0 In general, it is from mutual interests, not
governmental pressure, that foreign firms and SOEs voluntarily form joint-
ventures. On the one hand, SOEs have access to privileges that are conducive to
forming partnerships with foreign firms, such as the control of export quotas, use
of land and facilities, and easier customs procedure. On the other hand, most large
foreign firms would prefer to place orders with large SOEs since they have worked
with these firms for a number of years. Hence, trust has been established in terms
of quality, prompt delivery and competitive pricing. However, this situation may
20 Thang Loi Textile is in partnerships with many large Japanese corporations (such as NISSHO
IWAI. ITOCHU. TOMEN) which provide new machinery from Japan and South Korea. This
new machinery replaces some vestiges from the pre-1975 Southern government: some 1960 US
Westpoint sizing machines and 1968 US warper machines.
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change over time when foreign firms have also established good working
relationships with private firms.
There is a downside to technology transfer. According to some managers
in joint ventures between SOEs and foreign firms in the South, several years ago
some East Asian NICs’ firms flooded the Vietnamese garment producers with
subcontracting clothes that all required embroidery. This led to a high demand
(from the Vietnamese producers) for embroidery machines which can be very
expensive. These East Asian NICs’ firms then sold their embroidery machines to
many Vietnamese producers (financed by deducting from the CMP prices) who
compete among themselves, resulting in lowering the overall prices of embroidered
products, which also benefited these East Asian firms as buyers! This suggests that
foreign firms have the financial strength to control both supply and demand which
ultimately benefits them. However, this may have happened because the VTGI
connections to international suppliers were still very limited.
Moreover, given the capital-intensive nature of textile industry, textilers
need to have comprehensive investment plans to determine which production stage
- cotton spinning, weaving or dyeing - to prioritize if they cannot completely
overhaul all machinery for all stages of fabric production. Where large textilers do
not have an investment strategy, they may invest unwisely in one stage, ignoring
other stages.
A case in point is the near-bankruptcy Nam Dinh Textile, the biggest and
oldest state textiler in Vietnam that used to supply lower-quality fabrics to the EE
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and domestic markets. It was unable to recover from poor investment decision and
the loss of the EE markets.2 1 At least in the short run, the social cost of closing
down this large textiler would be huge: over 15,000 direct workers would be
unemployed (this does not even consider indirect workers, working in supportive
functions in the affiliated machine shops, child care center, hospitals, etc). In other
words, the whole city of Nam Dinh (a fairly large city in the North) would be
economically devastated should this firm be closed. Many large state firms quickly
offered temporary assistance. For instance, Viet Tien Garment leased a section of
this huge textiler and hired workers to assemble some of its large garment
contracts; some other state textilers in the South (such as Binh Loi Textiler)
contracted Nam Dinh workers to assemble some woven products such as blankets,
sheets, pillow cases, etc. However, it remains to be seen whether Nam Dinh
Textiler survives in the long run.
Diversification Within the State Textile Firms
Most state textilers survived the collapse of the EE markets in the late
1980s, and have been integrating within their own firms. In the early 1990s, most
state textilers diversified production into garments utilizing their own fabrics and
accessories produced in their existing plants.2 2 By 1994 the quality of these
2 1 For two years (1993 and 1994) about 32 million USD was invested in new machinery in an
effort to cope with the loss of major EE markets and the competition from an increase in
smuggled Chinese fabrics. Most of the capital was invested in primarily one stage (dyeing, a
finishing stage) at the expense of other stages (such as cotton spinning and weaving). By the end
of August 1995, Nam Dinh Textiler had accumulated debts totalling about 50 million USD
( Vietnam Economic News August and November 1995: Saigon Giai Phong October 1995: Lao
Dong Newspaper September 1995).
22 Garment firms, on the other hand, also try to integrate within their own firms by producing
garment accessories, and/or trying to market their garment products. More will be discussed in
the next section.
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garment products increased to the point that most high-quality products were
exported (Norlund 1995, 143). For instance, some use their woven fabrics to make
garments and woven products (such as children’s pajamas, bed spreads, pillow
cases, and car seat covers) for Japan, the EU, and Vietnamese markets. Thcmg Loi
Textile (a central state firm in the South employing over 1,000 people) utilizes
over 80% of its own fabrics in garment export to Japan and the EU markets. In
1994, it used only its fabrics to make bed spreads, pillow cases, children’s clothes,
and car seat covers to export to Japan. It also increased the utilization of its own
fabrics in making shirts and jackets to be exported to the EU markets.
Some use their knit fabrics to make high-quality knitting products. Hanoi
Knitting Company (a local state firm in the North employing about 400 people)
produces socks and stockings for Japanese and Vietnamese markets. Thanh Cong
Textile is widely known for its high-quality and multi-colored knit T-shirts; it has
been exporting to Japan, Taiwan, Hong Kong, as well as selling them in domestic
shops throughout Vietnam. Moreover, since the beginning of 1995, Thanh Cong
Textile has exported 30,000 pull-overs to the US, valued at over $100,000 USD
(Saigon Times, July 28, 1995).
Local state textilers (textile firms owned by local governments) can also
engage in integration, although on a smaller scale. For instance, the director at
Thua Thien Hue Textile (a small state firm in the Central of Vietnam) planned to
replace its 1960s’ shuttle-weaving looms with more modem textile machinery in
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1995 as more garment orders were placed by foreign buyers and some central
garment firms in Hanoi or Ho Chi Minh City.
Linkages Within the State Garment Firms
Many large state garment firms have downstream linkages, producing
garment accessories such as buttons, zipper and clothing paddings, as well as a
concern for upgrading product quality. They use mostly Vietnamese fabrics for the
EE markets, but for the EU markets, they still use imported fabrics. Viet Tien
Garment, the largest state garment firm in Vietnam, has formed five joint-ventures
with Hong Kong and Taiwanese corporations in 1991.2 3 It is also the first garment
firm in Vietnam that developed its upstream linkages by producing garment
accessories (polyester paddings, embroidery products, buttons) as well as
supplying sewing machines and spare parts. Moreover, Viet Tien Garment is very
concerned with upgrading quality: it is one of the first garment firms to set up
stand-up assembly lines making business suits for men.2 4 The men’s business suit
product line is an improvement in product quality (compared with regular garment
export items such as shirts, T-shirts, jackets) and should earn them higher value-
added.
2 3 I visited four of these five joint-ventures in 1994 and 1995.1 was very impressed with state-of-
the-art machinery in the polyester paddings (for lined jackets, blankets) plant, the embroidery
plant, the buttons plant, and the sewing-machine store.
24 The “stand-up” assembly lines are more modem and productive than the regular “sit-down”
assembly lines. Operators would stand up to do their sewing tasks rather than sitting down as in
regular assembly lines. When I visited in 1994, Viet Tien was the first firm in the VTGI to own
these stand-up assembly lines. I interviewed the team supervisor who was to be trained by
Japanese specialists on how to operate these machines. Some workers that I talked to seemed to
be excited about this modem technology.
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However, most large garment firms realize that their forward linkages
(such as marketing and retailing) are still very inadequate. They all see the need for
more systematic market research on consumer demands in potential export
markets. But, as yet, nothing like the Taiwanese China External Trade
Organization (CETRA), a semi-private institution acting as a central marketing
department and providing marketing studies on export products, exists in Vietnam.
Only a few large SOEs in the VTGI have their own marketing channels to establish
retail stores or kiosks to sell their products in Russia and some EE countries. With
respect to the EU markets, as of 1995, most Vietnamese producers could not
distribute garment products directly to the EU consumers. The increased contact
between Vietnamese garment manufacturers and EU buyers has been primarily on
the production side, not on distribution to final consumers.
Integration Within the Private Sector
Private textile and garment firms do integrate among themselves although
on a smaller scale than that of the state sector. Thanks to changes in policies that
permit the growth of private sector, most private garment firms have backward
linkages. They use fabrics or accessories sold in the fabric market in the South
(Soai Kinh Lam Market) or rely on private weavers (small-scale producers
concentrated mostly in Nga Tu Bay Hien, a weaving center in HCM City). Their
forward linkages are small-scale and based on individual networking. Most
Vietnamese middlemen have established business contacts with local retail stores
or kiosks in Russia and some EE countries during their stay in these countries.
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They are also knowledgeable about consumers’ tastes and preferences. I
interviewed two such resourceful managers, one from the South {Tien Long) and
one from the North (HEPRO), who were both in the Army and spent years
working in some EE countries. They have been able to utilize their established
connections in these EE countries in their marketing efforts.
Some private garment firms have engaged in upstream activities such as
design and cutting. I interviewed some innovative firm managers throughout
Vietnam, who have designed their own labels by adapting clothing styles from
fashion foreign catalogues (from Thailand, other Asian countries and the EU) to
match Vietnamese taste and sizes. For instance, Viet An Garment (a firm in the
North, employing about 400 people) has its own line of women’s and children’s
clothes. Also, two large private firms in the South have created their own designs
and labels. For instance, Huy Hocmg Garment (a large firm in the South,
employing about 1,800 people) designs its own “Glory” label for overcoats and
jackets. Minh Phung Garment (another large private firm in the South, employing
about 5,000 people) creates its own “Minh Phung’ label for the whole range of
garment products: from various types of jackets for all seasons and ages, to
sportswear and embroidered clothes. Minh Phung also produces some clothing
accessories such as jacket paddings and buttons to supply its garment products.
Most private firms can upgrade their machinery, preferably via regular
business contracts with foreign partners, instead of joint-ventures as in most
central SOEs. The main reason for such preference is that it is much faster to get
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government approval (about four months) for a business contract than to obtain a
joint-venture license (from two to three years) (Le Bui interview, August 1994).
After the contract is approved, private garment owners can purchase modem
sewing machinery supplied mostly by the East Asian NICs’ firms. The financing
method is the same as in the state sector: deducting a certain percentage from the
subcontracting prices over a period of time to pay foreign firms.
New Issues Since 1995
There are more dynamic interactions between firms in the VTGI and policy
changes, especially towards the end of the 1991-1995 period than in the pre-1991
period. As the VTGI further developed with coordination between SOEs and
private firms in a subcontracting work organization in both trade networks, they
started to have some impacts on policy change such as the recent elimination of
subcontracting tax in 1995 (which was a state response to many complaints from
mostly small private firms), and simplification of customs procedures (elimination
of import/export license per transaction) since February 1996 (which is in the
common interest of both public and private firms).
Policy changes since late 1995 occurred within the context of consolidation
of major state ministries in November 1995 which has centralized state
management of SOEs. The former Ministry of Light Industry was dissolved into
the new Ministry of Industry which does not directly manage central SOEs as
before. Also, while the Ministry of Trade continues to control and allocate all
export quotas, the Ministry of Finance directly oversees financial performance and
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12 9
responsibilities of VINATEX, as well as all central textile and garment firms
(Decision 253/TTG 1995, 47-8). The main implication of MOF management of
central SOEs is that they are subject to a tougher budget constraint. At least in
principle, as long as they are financially solvent, they can maintain their autonomy
in production and trade. If not, they are to be shut down.
Over time, there has been more competition and direct involvement of both
foreign buyers and East Asian NICs’ firms in the VTGI. These two trends have
significant implications for VTGI development and integration. On the one hand,
an increase in direct involvement of the East Asian NICs’ firms in Vietnam (mostly
via 100% East Asian NICs’ textilers) poses more challenges for domestic
integration and an increasing competition that all Vietnamese textilers (public and
private) must face.2 5 As discussed above in the EU network, there is much less
integration at the higher end of the VTGI: most Vietnamese garment firms must
use imported inputs which are increasingly produced by 100% East Asian NICs’
textilers in Vietnam. There are two main reasons for this: (1) more liberal DFI
policies; (2) these 100% East Asian NICs’ textilers have taken fuller advantage of
Vietnam’s quotas as well as cheap labor by having inputs (i.e., fabrics) as well as
final garment products manufactured in Vietnam. Moreover, foreign-made
secondhand clothes as inexpensive and stylish alternatives to expensive new
designs are catching on in Vietnamese fashion circles, and competing directly with
domestic garment products (Vietnam News, August 1995).
2 5 For instance, there are some state-of-the-art Taiwanese textile firms operating since the
beginning of 1995, and a Japanese polyester garment factory which will operate in 1997. Tuoi
Tre Newspaper, July 29. 1995; Vietnam News. February 24-March 2, 1995.
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On the other hand, there is also an increase in direct dealings between the
EU and Vietnam. Over the past year, foreign buyers have increasingly bypassed the
middlemen by dealing directly with Vietnamese producers, as good working
relationships between them develop. As noted above, direct trade relationships
benefit both parties. The Vietnamese producers can negotiate for contracting
prices at 10% to 20% higher than going through the middlemen; the foreign buyers
can eliminate middlemen’s expenses.
Conclusion
This Chapter outlines the evolution of major trade-related policies during
this market reform period in response to opportunities as well as challenges from
exporting to non-Communist markets. Challenges from the dissolution of the
CMEA in the late 1980s and the start of commercial relations with non-
Communist gave an impetus to further reforms that were already started in the
early 1980s. As mentioned earlier, there was no comprehensive industrial policy
during this period. Although overall trade-related policies were adjusted over time
to meet new export requirements (more liberal DFI laws, a more rigorous budget
constraint on SOEs, some flexibility in adjusting major tax policies, emergence of
both para-statist and private associations), the implementation of some
protectionist policies lagged behind (i.e., the ban on light industry imports).
Moreover, there is still a need to enforce more apparent and verifiable
implementation of the EU quotas policies and import/export procedures.
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Through the analysis of the two main trade networks (EU and EE), this
Chapter implies a relationship between domestic integration and value-added. It
also identifies emerging issues since 1995 that have important implications for
future policy changes and further VTGI development. Chapter IV will present an
empirical model to assess the impacts of some specific state policies and other
factors on the performance of the sampled firms in the VTGI. In so doing, it
explores the extent to which quantitative findings converge with qualitative
findings on the integration issue.
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CHAPTER IV
THE EFFECTS OF STATE POLICIES ON THE VTGI
This Chapter discusses the sub-hypothesis on policy effectiveness. It
analyzes the effects of various factors on the performance of sampled firms in
1993. These factors include state policies, as well as other internal and external
factors that affect the performance of the 58-firm sample. It ends with a discussion
of how 1993 policies helped lead to some policy changes since 1995, hence
reflecting the more dynamic relationship between state ability and developmental
efficacy.
In terms of organization, first, this Chapter discusses the expected
significance of major variables and their actual effects reflected in the final model.
Second, it presents the three interim models leading to the final model. Third, it
discusses the significance (or lack thereof) of some trade-related policies and other
factors. It will end with an explanation of how external and internal constraints
affected policy implementation, leading to a discussion of state response, via some
policy changes in 1995 and early 1996, in relation to the 1993 policies discussed in
the final model.
Variables: Expected Significance and Actual Effects
This Chapter uses two types of variables, binary and continuous, to
represent state policies, other internal and external factors, and their effects on
total sales. Continuous variables take on the real values of such indicators (for
instance, total sales would be measured in thousands Vietnam Dong). Binary
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133
variables are appropriate for state policy variables for several reasons. Most often,
the magnitude of state subsidies, or the exact quantity of EU quotas allocated
cannot be obtained for confidentiality reason. Most firms were more willing to just
answer “yes” or “no” when asked whether or not they received any state
assistance, rather than elaborating on how much they actually received. Binary
variables take on the values of 0 and 1, indicating whether some conditions hold
or not (Studenmund, 68-9). For instance, value I is for the receipt of some state
assistance; 0 for none. The dichotomous and qualitative characteristics of binary
variables fit well with the availability of data on state policies and most other
factors.
The final model has one dependent variable and eight independent
variables. The dependent variable of the model represents total sales per firm
(SALES) which include both domestic and international sales. SALES is the best
available indicator to measure the performance of the VTGI via the sampled firms.
The eight independent variables represent trade-related policies, as well as internal
and external factors, and their effects on total sales.
Variables that Represent Trade-Related Policies
Six variables were selected to represent state initial response to the more
market-oriented system in 1993. Their expected significance and actual effects on
total sales are as follows.
Variable XINCMP is a combined variable, reflecting export incentives to
promote EU exports including simple customs procedure and some EU quotas.
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This variable is a product of the share of CMP export in total VTGI export
(CMP/EXP) and export incentives (XINCEN). The combined term, XINCMP,
takes on continuous values between 0 and l.1 This variable is expected to be
significant since it addresses the most relevant and critical issues that have impact
on EU garment exports: customs procedure (since most inputs are imported) and
EU quotas (the more the better since most firms do not have enough export orders
to work with). In reality, it is positively significant (t>2) and contributing to total
sales.
Variable XLICENSE represents the policy on export licenses. This policy
is intended to limit the number of smaller producers that can undercut
subcontracting prices by increasing domestic competition. It takes on the values of
1 (firms that receive an export license from the Ministry of Trade), and 0 (firms
that do not have this). In principle, without an export license, a firm cannot sign
export contract with foreign buyers. From my sample, 48 firms received this (all 29
SOEs, and 19 private firms). This variable turns out to be insignificant. The main
reason is that both large and small firms can export, either directly or indirectly,
imall (mostly private) firms that do not have an export license can always
subcontract for larger firms that have both export licenses and orders from foreign
customers.
1 For instance, this product term (XINCEN*CMP/EXP) can take on the value such as 0.80 for a
firm that exported 80% of its total production to the EU markets and did receive sonv*. trade
incentives for doing so. For firms that do export to the EU markets but received no trade
incentives, its product term will be zero.
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Variable XINCEN is expected to be significant because it deals with the
EU quotas. It takes on the values of 1 (firms that receive export incentives, most
notably the EU quotas), and 0 (firms that do not have this). This stimulatory policy
is general, applying to any firms that receive some EU quotas. From my sample, 31
firms received this (21 SOEs, and 10 private firms). This variable turns out to be
insignificant. The reason might be that most firms did receive some EU quotas
either directly or indirectly. While large SOEs exchange quotas among themselves,
and subcontract to smaller private firms and household production units, smaller
firms without EU quotas can take orders from large SOEs at lower subcontracting
prices than the negotiation prices that SOEs obtain from foreign buyers.
Variable TAXINC is chosen because most firms had to pay some trade-
related taxes such as subcontracting and import taxes. While SOEs must pay
capital tax (as a kind of interest on state loans), most (smaller) private firms must
pay a subcontracting tax since they must go through larger (mostly state-owned)
firms. It takes on the values of 1 (firm that receives any exemption from paying
subcontracting tax, capital tax, land-use tax, etc), and 0 (firms that do not have
this). From my sample, 15 firms received this (10 SOEs and 5 private firms). This
variable turns out to be insignificant. There are two reasons for this: first, most
firms can find ways to evade paying subcontracting taxes; second, the state wanted
to promote exports during the beginning of the market-reform process by
exempting most import taxes (if all imported inputs are used up in garment
exports), and interest payments on state loans.
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Variable DEPEXEM represents exemption for SOEs to pay back state
loans. This is chosen because most SOEs received state loans to buy their
machinery. In principle, SOEs must repay these state loans. This exemption is
expected to be helpful since SOEs can save it for reinvestment purposes. It takes
on the values of 1 (SOEs that are exempted from paying the annual capital
payment to the government who invested in them), and 0 (any firms that do not
receive this). In the sample, 35 firms received this (29 SOEs and 6 private firms).
This variable turns out to be insignificant since most old machinery in SOEs were
paid off by 1993, while newer machinery is financed by the firms themselves. At
present, local producers buy newer machinery from mainly Japan or the East Asian
NICs, and pay them indirectly by deducting a certain percentage from the
subcontracting prices.
Variable CREDIT2 refers to indirect state subsidies such as low-interest
short-term loans from state banks to buy inputs, intended for both SOEs and
private firms. It is expected to be significant since most inputs for EU export are
imported. It takes on the values of 1 (firms that receive these low-interest short
term loans), and 0 (firms that receive nothing). From the sample, 39 firms received
this (all 29 SOEs and 10 private firms). This variable turns out to be insignificant.
The main reason is due to the triangle EU arrangement. Most Vietnamese
producers did not have any control over the input supply for EU garment exports.
Most have used Letters of Credit (LCs), provided by the East Asian NICs’
middlemen, to buy imported inputs mostly from East Asian sources.
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Variables that Represent Internal Factors
Four variables are chosen to show the effects of different export types,
ownership types, and geographical location.
Given the importance of the largest EU export market, variable CMP/EXP
is chosen to represent the share of EU export in total VTGI export. Its values are
continuous and between 0 and 1,2 As discussed in Chapter HI, the value of EU
export is mainly CMP (cutting, making, packaging), or mainly wages paid to
Vietnamese workers and managers. This variable turns out to be significant (t>2).
Region and ownership variables are chosen because they raise important
issues related to fundamental neo-classical assumptions.3 The usual economic
expectations are that private firms operate more efficiently than SOEs, and that
geographical region (in and of itself) should not have any economic significance.
Both turn out to be significant, implying that region and ownership do have
independent contributions to total sales. The discussion about the significance of
these two variables is at the end of this section.
Variable REGOWN (or the product of variables REGION and OWNER)
reflects the combined effects of region and ownership, and is intended to find out
the effects of SOEs in the more commercial Southern region.4 These Southern
SOEs are large and expected to have an impact on total sales. This combined
variable turns out to be negatively significant. By itself, it implies that SOEs in the
: For instance, if a firm exports 90% to the EU markets out of its total exports, this variable takes
on the value of 0.9.
3 Variable REGION takes on the value 1 for any Southern firm and 0 otherwise. Variable
OWNER takes on the value I for any SOE and 0 otherwise.
4 It takes on the values of I for SOEs in the South and 0 otherwise.
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South have a negative impact on total sales. However, its negative effect is
outweighed by the positive effects of both region and ownership. Hence, in the
final analysis, it mitigates the separate positive effects of region and ownership
variables. More will be discussed at the end of the Chapter.
Variable That Represents External Factors
To understand the effects of foreign-capital recipients on total sales,
especially from the South, variable REGFOR is used. This variable combines the
effects of geographical location and foreign investment.5 It is expected that most
foreign corporations would prefer to form partnerships with Southern firms rather
than with firms in other regions, due to the reputation of high entrepreneurialship
and better infrastructure in the South. This variable turns out to be positively
significant, implying that if any Southern firm from either public or private sectors
obtains some foreign capital, it would contribute positively to total sales.
However, in reality, most foreign firms do not exactly invest in Vietnam
but sold their used machinery to Vietnamese producers who have financed them by
deducting a certain percentage from the subcontracting prices.
The Model and Testing Procedure
This section explains the production function, testing procedures, and the
process to arrive at the final model. The basic structure of the model is the Cobb-
5 REGION takes on values 1 for the South and 0 for other regions; FORCAP takes on values 1
for any firms that have some DFI. This combined variable takes on the value I for any Southern
firm (SOE or private) that receives some foreign capital; and 0 (any firms that do not receive
foreign capital). Some forms of foreign capital are joint ventures. 100% foreign-owned firms, and
business agreements between domestic and foreign firms. Foreign capital is also in the form of
foreign machinery bought by Vietnamese producers and financed by deducting from the
subcontracting prices.
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Douglas production function. In the process of obtaining the final model, more
variables were added to the basic Cobb-Douglas function to represent the effects
of trade-related policies, foreign investment, and internal factors such as region
and ownership, on total sales.
The Basic Production Function
The Cobb-Douglas function is used to establish a relationship between the
dependent variable (total sales) and independent variables (capital, labor).
The non-linear, stochastic (random) form of the Cobb-Douglas function is
as follows: Y = bO X2 X3;
where Y = value of total sales (in thousands of Vietnamese piasters, or VND, per
firm)
X2 = capital input, or K (in thousands of VND per firm)
X3 = labor input, or L (number of workers per firm)
In order to work within the framework of the classical linear regression
model, I “log-transform” the above model to obtain:
InSALES = InbO + b2 InK + b3 InL + u or b 1 = InbO
u = stochastic disturbance term
Stochastic disturbance term is a term that is added to a regression equation
to introduce all of the variation in the dependent variable (SALES) that cannot be
explained by the included independent variables (Capital and Labor) (Studenmund,
1992, 10).
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After the log-transformation, I have a linear regression model which is
linear in the parameters: bl, b2, b3. The significance of these parameters reflects
the importance of the intercept and all independent variables. Their specific
meanings are as follows:
(a) b2 is the partial elasticity of output with respect to the capital input. It
measures the percentage change in SALES per one percentage change in the
capital input, holding the labor input constant.
(b) Similarly, b3 is the partial elasticity of output with respect to the labor input.
It measures the percentage change in SALES per one percentage change in the
labor input, holding the capital input constant.
(c) The sum of (b2+b3) provides information about “ returns to scale”, or
proportion o f output with respect to both capital and labor inputs. If this sum is 1 ,
then we have constant returns to scale. If it is less than 1, then we have decreasing
returns to scale. If it is greater than 1, then we have increasing returns to scale.
Tests to Select Significant Variables
The following tests are used to examine the significance of the estimated
coefficients (or b-values) of independent variables, n is the number of firms in the
sample.
The t-test is used to test hypotheses about the significance of individual
regression coefficients. A variable is significant if its t-value is greater than 2.
These values distinguish the “acceptance” region from the rejection region, with
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degrees of freedom equal to number of observations minus number of coefficients
estimated (Studenmund, 142, 160). The results show t-values in parentheses.
The F-test provides a formal hypothesis test of the level of overall
significance of a regression model. It tests hypotheses about significance of more
than one regression coefficient, or the joined effects of variables added together to
the equation. It works by determining whether the overall fit of an equation is
significantly reduced by constraining the model to conform to the null hypothesis
(which asserts that all regression coefficients are zeros). The null hypothesis is
rejected if the calculated F-ratio is greater than the appropriate critical F-value
(Studenmund, 161-2).
Statistical Tests on a Model
Once a new model is selected, the following indicators or tests are
performed to make sure that the newly-added variables are significant in explaining
total sales (t-test, F-test, Rsqd), and that the model is correctly specified (Ramsey).
(1) R-squared (Rsqd) value measures the overall significance of the model (or the
“goodness of fit”). Its values are between zero and 1 ; the higher the better. R-
squared is the percentage of the variation of the dependent variable (total sales)
around the average of Y, that is explained by the regression equation
(Studenmund, p. 47). In this case, R-squared is the percentage of variation of
InSALES around the average value of InSALES that is explained by all
independent variables on the right hand side of the equation.
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(2) The Ramsey test to determine the likelihood of an omitted variable or some
other specification errors. This is done indirectly by measuring whether the fit of a
given equation can be improved by adding more variables to the model:
(InSALES)-squared, (InSALES)-cubed, and (InSALES) to the fourth. This test
only indicates the likelihood that the model may have omitted some variables or
some other specification errors. It does not tell us what variables are missing in the
final model.
(3) If that model passes the Ramsey test, t-tests and F-tests are performed to test
the effectiveness of independent variables. The t-tests examine the effectiveness of
each independent variable added separately to the model. The F-tests examine the
effect when all six independent variables are added jointly to the model.
Tests After Obtaining the Final Model
When the model cannot be improved further by adding more variables, in
addition to the Ramsey test, t-tests, and F-tests, more tests are used to ensure that
estimates from the final model are unbiased and consistent.
The Breusch-Pagan detects if there is heteroskedascity in the final
equation: whether the variance of the error term in the final model is constant for
all observations in the sample. The preferred outcome is that no heteroskedascity
to be found in the final equation. This test is performed by measuring the overall
significance of a secondary regression that specifies the original residual-squared to
be a function of the intercept and all explanatory variables (x’s). In other words,
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the orginal residual-squared would become the dependent variable, while the
intercept and all x’s are explanatory variables.
The direct test of endogeneity (similar to the Two-Stage Least Squares)
is used to detect if there is endogeneity of some independent variables in the final
equation. In the case of the VTGL it detects explanatory variables that may be
dependent on total sales. For instance, given the fact that most garment production
is for export, there is a reason to suspect that variable that represents export can be
explained by total sales (which represents sales to both domestic and foreign
markets).
The instrumental variable (IVs) method is used to test whether a suspected
independent variable is endogenous.6 First, one regresses the “suspected” variable
on the intercept and all IVs. Then one adds the residuals from this regression as an
explanatory variable to the final equation, and runs another regression. The
significance of the residual coefficient (determined by the t-test result and the null
hypothesis which states that the residual coefficient is 0) shows whether the
suspected variable is endogenous.
The Three Interim Models: Test Results and Significance
As noted above, Model I follows the basic Cobb-Douglas function with the
two main variables: capital and labor. To improve the first model, more variables
were added, resulting in Model II and Model E H . This section first presents the test
6 Instrumental variables are used as instruments (or proxies) to substitute for explanatory
variables that are suspected of being endogenous (not independent) and may correlate with the
error term. A proxy for variable X is chosen such that it is highly correlated with X. but is
uncorrelated with the error term. (Studenmund. 491-2. 547. 571). Appendix 4.1 lists all these
instrumental variables and the rationale for selecting them.
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results of these three models, then raising some questions from Model IE, as well
as explaining how to arrive at the Final Model.
Model I
The regression results of the basic Cobb-Douglas production function is as
follows:
InSALES = b l + b2 InK + b3 InL + u Rsqd = 0.75 n=58
(4.4) (4.5) (3.8)
bl = 8.27 b2 = 0.50 b3=0.54
Model II
Variable REGION was added to Model I to obtain Model II, since there
is evidence that Southern firms perform better than firms in other regions. For
instance, their profitability (PROFIT/SALES) is double that of firms in other
regions (6.4% to 3.2%, respectively). Second, their return of capital
(PROFIT/TOTAL CAPITAL) is also higher than that of other firms (22.7% to
8.2%, respectively).
InSALES = b l+ b2 InK+ b3 InL+ b4 REGION Rsqd = 0.79 n=58
(4.48) (4.84) (4.40) (3.44)
bl = 7.78 b2 = 0.49 b3=0.57 b4=0.81
The results of Model 2 show that REGION is positively significant (t > 2),
and adding to total sales. The model is improved: R-squared increases from 0.75
to 0.79.
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Model IT I
Variable OWNER was added to Model II to obtain Model m . This is to
test whether SOEs contribute to total sales. Most state firms are large, well-
established and enjoy many privileges such as the use of land, facilities, export
quotas, and ease of customs procedures.
InSALES = bl + b2 InK + b3 InL + b4 REGION + b5 OWNER
(4.15) (5.68) (2.32) (4.26) (2.71)
Rsqd = 0.82; n =58
bl = 6.94 b2 = 0.57 b3=0.34 b4=0.99 b5 = 0.72
Results from Model III show that OWNER is positively significant (t >2),
and adding to total sales. The model is improved: the value of R-squared increases
from (0.79) to (0.82).
Model HI raises two important questions that have to do with fundamental
neo-classical assumptions which expect private firms to operate more efficient than
SOEs, and that region by itself should not have any economic significance. First,
the significance of region, represented by contribution to total sales from firms in
the South, has to do with past history of capitalism and entrepreneurship of
Southern firms and workers before 1975. This implies that geographical location,
in and of itself, does not necessarily contribute to total sales. Second, the
significance of ownership has to do with privileges (most significantly export
quotas) received by SOEs; those privileges were very prevalent in the early 1990s.
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This implies that SOEs contribute to total sales since they can get access to
preferential treatment which is not available to private firms; or being a state firm,
in and of itself does not necessarily guarantee contribution to total sales. In short,
to a certain extent, those neo-classical assumptions hold in the case of the VTGI.
The Final Model
The Final Model is reached after adding selected variables to the basic
Cobb-Douglas function. Two types of variables were added to Model HI: binary
variables (Appendix 4.2) and continuous variables (Appendix 4.3) to evaluate the
effects of trade-related policies, foreign investment, as well as internal factors such
as ownership and region.7
InSALES =12 + (0.31) InK + (0.55) InL + (0.72) REGFOR + (-1.52)CMP/EXP
(9.27) (4.24) (5.40) (3.98) (-7.25)
+ (0.36) XINCMP + (1.42) REGION + (1.28) OWNER + (-0.84) REGOWN
(2.01) (5.47) (4.27) (-2.70)
Rsqd = 0.93 n = 58
The final model indicates that we have decreasing returns to scale in the
VTGI.
(a) The fact that (b2 = 0.31) means that per one percent increase in the capital
input, there is 0.31% increase in total sales, holding the labor input constant.
OWNER is exactly the same as CREDIT1 (or firms that receive both long-term and short-term
loans from state-owned banks).
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(b) The fact that (b3 = 0.55) means that per one percent increase in the labor
input, there is 0.55% increase in total sales, holding the capital input constant.
(c) The fact that (b2 + b3 = 0.86 < 1) implies that we have decreasing returns to
scale.
Some main reasons that firms in the VTGI produce outputs less than
proportionately to inputs include: (1) some carried-over effects of the former
command- economy with a focus on employment security rather than productivity;
(2) the lacking of skills in making more sophisticated garment products and know
how to utilize more modem machinery.
The final model can be rearranged to reflect the decrease in productivity of
either labor or capital. This rearrangement demonstrates that the model accounts
for size differences by considering total sales per worker (or total sales per dollar
of capital investment in the case of reflecting a decrease in capital productivity).
With the dependent variable as productivity, the only changes are the coefficients
of labor and capital; coefficients of other variables remain the same.
For instance, InL can be subtracted from both sides of the model, resulting
in:
InSALES - InL = 12 + (0.31) InK + (0.55) InL - (1) InL + (0.72) REGFOR +
(-1.52) CMP/EXP+ (0.36) XINCMP + (1.42) REGION + (1.28) OWNER
+ (-0.84) REGOWN
Mathematically, the left hand side of the model becomes labor
productivity:
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In (SALES/L) = 12 + (0.31) InK + (-0.45) InL + (0.72) REGFOR +
(-1.52) CMP/EXP+ (0.36) XINCMP + (1.42) REGION + (1.28) OWNER
+ (-0.84) REGOWN
The negative coefficient of InL indicates that as one worker is added to the
model, his/her productivity is reduced by (-0.45) unit.
The same process can be done with capital, resulting in:
InSALES - InK = 12 + (0.31) InK - (1) InK + (0.55) InL + (0.72) REGFOR +
(-1.52) CMP/EXP+ (0.36) XINCMP + (1.42) REGION + (1.28) OWNER
+ (-0.84) REGOWN
Mathematically, the left hand side of the model becomes capital
productivity:
In (SALES/K) = 12 + (-0.69) InK + (0.55) InL + (0.72) REGFOR +
(-1.52) CMP/EXP+ (0.36) XINCMP + (1.42) REGION + (1.28) OWNER+
(-0.84) REGOWN
The negative coefficient of InK indicates that as one dollar of capital is
added to the model, its productivity is reduced by (-0.69) unit.
Test Results To Confirm The Final Model
The final model passed all significance tests, indicating that it is the best
possible model which explains various factors contributing to total sales. The
followings are detailed results of these tests:
(1) The results of t-tests and F-tests show that all five state variables (XINCEN,
XLICENSE, TAXINC, DEPEXEM, CREDIT2) are insignificant when added
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separately or jointly to the final model. The null hypotheses are accepted,
signifying that when the five state variables are added separately or jointly to the
final equation, their coefficients are insignificant, or statistically zero.
F = 0.514 < Fc (5,44) = 2.4
(2) The Ramsey test shows that this final model is correctly specified.
F = 2.611 < Fc (3,46) = 2.80
(3) The Breusch-Pagan test shows that there is NO heteroskedasticity in the final
equation (or that the null hypothesis is accepted). This means that the variance of
residuals in the final equation is constant for all sampled firms.
(4) The direct test of endogeneity is performed because there is an expectation
that total sales (dependent variable) may explain the share of EU export (an
independent variable, or CMP/EXP). Since most VTGI production in 1993 was
geared toward export and that most VTGI export was of CMP type to the EU
market, there is a possibility that the share of CMP export (CMP/EXP) is
explained by total sales. However, the result shows that CMP/EXP is not
explained by total sales. Moreover, this test shows that the coefficient estimates in
the final equation are unbiased and consistent (the residual is insignificant when
added to the final equation).
Discussion of Empirical Findings
Empirical findings suggest a positive relationship between domestic
integration cmd value-added. Contrary to conventional belief, in both absolute and
relative terms, more value-added can be earned in garment exports to the EE
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markets than to the more affluent EU markets.8 At least in 1993, the negative
effect of garment exports to the EU (measured as a share of total VTGI export or
CMP/EXP) on total sales indicates that the greater the amount o f exports to the
EU markets, the smaller the contribution to total sales 9 For instance, as indicated
by the final model, for one unit increase in the share of EU export in total VTGI
export, total sales will be reduced by 1.52 unit.
This result is reinforced by the value of export per worker to both markets
in 1993. From the sample average, more export value per worker is generated in
exporting to the EE than to the EU markets: 3,460 USD/worker and 2,110
USD/workers, respectively.1 0
This can be explained by the fact that in the EE system, most garment
producers can utilize domestic inputs (hence income for both textile producers and
workers) and distribute garment products directly to final consumers (hence profits
and price mark-ups). This happens regardless of simpler and lower-quality garment
exports to the EE markets.
Three major issues will be discussed below: an explanation of the effects of
state policies in a changing environment; significance of domestic factors such as
ownership and region; and constraints and benefits of exports.
8 As defined earlier, value-added of the VTGI would be equal to the sum of wages of workers in
both textile and garment firms, entrepreneurs’ profits and interests, and land owners’ rents.
9 Total sales do include both EU and EE exports, in addition to insignificant domestic sales. The
coefficient of CMP/EXP is significant and negative (-1.52) with a highly significant t-value (-
7.25).
1 0 Total export to EE markets is worth about 138 million USD (employing 39.900 workers):
whereas total EU export is worth about 80 million USD (employing 38.000 workers).
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Explanation of the Effects of State Policies in A Changing Environment
Why do most state policies turn out to be insignificant except for the policy
on trade incentives to the EU markets (XINCMP)? The main reason has to do with
both internal and external barriers that prevent policies from being properly
implemented.
External constraints pose some barriers to many well-intended policies.
Specifically, subcontracting in the EU triangle arrangement has exerted constraints
on the implementation of some trade-related policies. Several examples can be
cited from the empirical analysis.
First, incentives to receive EU quotas (XINCEN) were meaningless if
quotas can be exchanged among SOEs, who then subcontract down to smaller
private and local state firms. This multi-levelled coordination between domestic
public and private firms in subcontracting arrangements, as discussed in Chapter
HI, renders this export-incentive policy insignificant.
The second example is state policy to exempt SOEs from paying back
long-term state loans (DEPEXEM). It is insignificant not only because most old
state-funded machinery was paid off by 1993, but also due to the fact that most
large firms (from both public and private sectors) can deal directly with foreign
firms to buy newer machinery financed by deducting a certain percentage from the
subcontracting prices. In effect, those domestic firms have been able to buy this
equipment by themselves via direct negotiations with foreign partners.
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The third example is low-interest short-term state loans for domestic firms
to buy inputs (CREDIT2). This policy is directly countered by the prevalence of
the main financial instrument used in the triangle system: letter of credit (LC).
Most SOEs and private firms use LCs issued by foreign buyers or East Asian
NICs’ middlemen to buy fabrics and accessories for garment exports to the EU.
The fourth example is the requirement to have export licenses
(XLICENSE). The design of this policy is a bit skewed to favor larger firms due to
its high financial requirements. Again, it is insignificant due to the multi-levelled
subcontracting in the triangle system in which smaller firms without export licenses
can also participate in world trade. However, in the final analysis, smaller (mostly
private) firms tend to be the losers since without export licenses, they continue to
rely on larger (mostly state) firms which subcontract garment products to them at
lower prices than they would have earned if they were to deal directly with foreign
buyers or East Asian NICs’ middlemen.
There are also some serious internal barriers which prevent policies from
being carried out effectively. These barriers are either rampant corruption in
customs procedures, or smuggling activities at the borders with China, Thailand or
Laos. This situation provides a justification for greater central state control to
enforce policies regardless of opposition and pressure from its own state
bureaucracy, state ministries, and local governments.
Some poorly-designed policies point to a need of enhancing state technical
ability to design policies that can actually be implemented. For instance, the
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subcontracting tax (included in TAXINC) is intended to apply only to
subcontracting for domestic markets, and exempting all subcontracting for exports.
The condition is for subcontractors to present all necessary paperwork to tax
officials. However, it is virtually impossible for thousands of small household
subcontractors to gather all required original paperwork. This common situation
resulted in the fact that smaller (mostly private) firms tried to find ways to evade
this tax. In reality, most of these small firms were successful in doing so with the
cooperation of larger firms who subcontract garment orders to them and want
things to run smoothly.
Significance of Domestic Factors: Access to Privileges and Entrepreneurship
Contrary to neoclassical belief, SOEs had independent positive contribution
to total sales. According the final model, a SOE will add about (1.28) unit to total
sales. However, it is more complex if one considers the combined effects of
SOEs in the South. Not all SOEs in the South contribute to total sales, as implied
by the negative coefficient of variable REGOWN, discussed earlier. This variable,
in a sense, adjusts or fine-tunes the added positive effects of geographical location
(REGION) and ownership (OWNER) on total sales. Hence, the net effect of SOEs
in the South is still positive yet smaller than the combined effects of REGION and
OWNER. The sum coefficient of all three variables (1.86) is smaller than the sum
of coefficients of REGION and OWNER (2.70).1 1 For instance, a SOE in the
South adds only (1.86) additional sales unit, instead of (2.7) units. In the final
analysis, most state firms in the South are still helpful in contributing to total sales,
1 1 (1.42+1.28-0.84=1.86) as opposed to (1.42+1.28=2.70)
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but there is also some contribution from the growing private sector which is
primarily concentrated in the South (hence private firms’ contribution is included
in the strong positive effect of the variable REGION).
Also, the contribution of geographical location (REGION) to total sales is
more significant if one considers its added effect with the positive effect o f foreign
capital in the South (REGFOR) on total sales.
Constraints and Benefits of Exports
The main constraint that Vietnamese producers encounter in exporting to
the EU markets is the low value-added discussed earlier.
On the one hand, due to the triangle arrangement in the EU system,
domestic actors earn mainly wages. In addition to wages for garment workers,
domestic producers earn some insignificant amount from domestic packaging
materials (such as cartons). While local governments accumulate some land rent or
lease mainly from local private producers,1 2 no wages nor profits are earned by
local textilers since garment producers must use fabrics supplied by the East Asian
NICs’ firms. Moreover, local garment producers do not earn any profits from
distributing and marketing activities since foreign buyers and East Asian NICs’
middlemen control these functions in the triangle system. Hence, the bulk of the
value-added is accumulated and repatriated by foreign firms.
On the other hand, in the EE system, more value-added is earned since
Vietnamese producers can utilize domestic fabrics and accessories (hence
u The normal scenario is that SOEs use state facilities at no charge, while private firms must pay
high land lease.
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backward linkages). Textile producers earn some profits by supplying fabrics to
garment exporters; textile cmd garment workers earn wages. Profits are likely to
stay in Vietnam for further domestic investment and production. Moreover, local
garment producers can earn higher profits from distributing garment products
directly to the EE consumers (hence forward linkages).
In fairness, however, Vietnamese producers do gain some benefits from
exporting to the EU markets. Vietnamese producers and workers learn new skills
necessary to integrate more into the world-economy. Both public and private firms
have been acquiring new skills and general knowledge by themselves, or in
cooperation with foreign firms in joint-ventures or in regular business contracts.
Most of this learning process happens in the EU triangle system.
From the interviews with SOEs’ managers and private owners, I found that
most are quick learners when it comes to “know-how” in areas such as
management and accounting techniques, input procurements, negotiation skills,
quality control, assembly line setup, and establishing contacts with foreign buyers
for future direct export.1 3 They also learn the importance of producing high-
quality products, meeting delivery time, and competitive pricing. Through the East
Asian NICs’ firms, Vietnamese producers also learn how to meet the more
sophisticated demands from non-Communist markets, and begin to establish good
working relationships and track records with foreign buyers for future direct
dealings.
1 3 This is demonstrated in their assembly-line setups; an increase in the sophistication of
products compared to products exported to the EE markets in the 1980s; also, their knowledge in
the use of LC and more direct dealings with the EU buyers.
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Some cooperation emerges between domestic and foreign firms in
facilitating more direct garment trade. This is done by way of disseminating
knowledge primarily about the structure of EU quotas and preferences of EU
consumers via seminars or workshops under the auspices of Vietnamese and
foreign firms. I attended one such seminar in Ho Chi Minh City in 1994 which was
mostly attended by managers from SOEs. This workshop was co-sponsored by
CONFECTIMEX and a German consultancy firm to facilitate more understanding
about different types of EU quotas, the situation of Vietnam in the global garment
trade (in relation to the East Asian NICs, other Asian countries and developed
countries), and strategies for Vietnamese producers to increase their value-added.
Some specific discussion topics include: how to increase the utilization of all EU
quotas, the importance of quality and meeting delivery schedule, consumer
preferences, and international trade fairs.
Private firms have begun to participate more in these activities. Most
sampled private firms have access to information on these workshops via the
VCCI offices (the main office is in the North and a branch in the South), and in the
former MOLI Journal. Moreover, as more direct contacts are being established,
foreign buyers approach them directly. The same German consultancy firm that
cooperated with CONFECTIMEX also sought out reputable private firms
throughout Vietnam and contacted them directly to discuss similar issues.
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Conclusion
This chapter has outlined the empirical findings and the rationale behind
them. The most interesting finding is the significance of domestic integration and
its relationship with value-added, as demonstrated in the two main trade networks.
From the point of view of costs of production to a given firm, value-added may be
greater if it sources inputs from foreign firms that are presumably more cost-
efficient than domestic firms. However, from the perspective of the state for
national development, it is preferable to source from domestic firms for reasons of
integration of production, maintenance of employment and, to a certain extent,
saving of foreign exchange.
Moreover, while policies appear not to have been very effective due to
internal and external constraints, the state has responded to some of the problems
and complaints. This suggests that if these barriers were to be overcome, trade-
related policies could be more effective in the future.
Chapter V will integrate both quantitative and qualitative findings, and
provide the final analysis of the role of the state in the VTGI.
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PART III. LOOKING AHEAD
CHAPTER V
IMPLICATIONS FOR THE VIETNAMESE STATE
This study attempts to shed some light into the very important question
about the extent to which the Vietnamese state plays a developmental role in a
transitional economy with an emerging private sector. The previous chapters have
delineated the dilemmas that Vietnam has been facing in the course of economic
transformation embedded in a changing world-economy with illustrations from the
VTGI. This last chapter discusses the implications for state autonomy and capacity
based on findings from previous chapters.
Evolution of the Developmental Goals of the State
The Vietnamese state has two overall goals. One is to increase efficiency
(production and productivity), introduced formally in Five-Year-Plans. The other
is to maintain equity: both among workers on issues such as employment, wages,
working conditions, and between different types of firms (SOEs and private firms).
The equity objective is implied in labor laws introduced in the late 1980s and the
new Labor Code in 1995. Due to time constraint, this study has concentrated on
the first goal of productivity, while also raising issues about equity for further
research. It focuses more on equity among different types of firms by way of
examining state incentives given to SOEs. In general, however, equity does also
include other labor-related issues such as wages, working conditions, and
employment security.
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To survive and develop in the post-1991 period, development priorities
have been to increase production and export. Policy changes have increasingly
emphasized efficiency for the VTGI. The nature of state planning (via the Five-
Year Plans) has changed, beginning in 1986, from directive to guidance planning,
without numerical production and export targets. Since 1995, the state has begun
to pay more attention to long-term planning for domestic integration, through
initiatives such as VTNATEX, with the intention to develop the domestic textile
industry to supply fabrics for garment exports, in addition to providing more
marketing services. More needs to be done, however, to improve the enforcement
of labor laws which would enhance equity.
From the perspective of the state, there are some means, or subordinate
goals, to reach those overall goals, mainly through decentralized economic
decision making.
As discussed in previous chapters, those sub-goals are state tolerance of
decentralized decision-making for both SOEs and private groups (via “fence-
breaking” activities), greater domestic integration, as well as greater control over
international relations (mostly with EE markets).
Summary of Findings
Before discussing the implications for a developmental state (in terms of
state autonomy and state capacity) in the case of the VTGI, both qualitative and
quantitative findings are summarized as follows:
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Integration Issue
- The greater the amount of exports to the EU markets, the smaller the
contribution to total sales
- Higher export value per worker is generated in exporting to the EE than to the
EU markets
- The bulk of the value-added goes to the more advanced EU countries, the second
largest amount to the East Asian NICs and only about 4% to Vietnamese
producers
- Most value-added can be found in forward linkages (distribution and marketing)
rather than in backward linkages (inputs) or in manufacturing
Implications of the Integration Issue
There is greater domestic integration in the EE than in the EU networks for
the following reasons: (1) The EE network facilitates backward linkages and
forward linkages; (2) The EU network facilitates insignificant linkages: Vietnamese
producers have no control over the input supply nor product distribution
Emerging Tendencies about Forward Linkages
- The EU buyers establish relations with Vietnam, eliminate middlemen
- The East Asian NICs’ firms change from being middlemen to textile producers
Policy Issue
- In general, a combination of state autonomy and some degree of flexibility has
been conducive to long-term economic growth.
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- Internal and external constraints pose barriers to policy implementation: (1) use
of Letter of Credit gives foreign firms total control over inputs; (2) most large
firms deal directly with foreign firms to buy machinery; (3) quotas are exchanged
among SOEs who subcontract to smaller firms; (4) corruption in customs
procedures and border smuggling activities; (5) poorly-designed policy
(subcontracting tax) cannot be implemented.
- Consistent policy implementation has positive effect such as simplified customs
procedures and efficient quota allocation.
- The state begins to formulate more complex policies: VINATEX, product
classification system, the new Labor Code. It remains to be seen, however, how
these policies are implemented to provide the Vietnamese state with more policy
options to reach its developmental goals.
Implications for State Autonomy
The combination of state autonomy and flexibility has been beneficial for
long-term economic development, and in particular, a factor in the VTGI
development. Since the early 1990s, the Vietnamese state has had political capacity
to sustain development policies. Moreover, as demonstrated by an analysis of the
“fence-breaking” activities, in order to maintain autonomy, or insulation from
particularistic interests, the state must continue to be flexible, yet maintain its
overall guidance and planning.
There was substantial policy debate within the VCP leadership in 1980
leading to state approval of such activities. The winning influence of the reform-
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minded officials led to state tacit admittance that the command-economy model
had become unsustainable. The state legalized those activities starting with Sixth
Plenum of Central Committee in 1979, and further liberalized industrial production
with the Three Plan system in 1981. In effect the state did respond to critical
social checks on its command-economy policy, indicating some level of state
flexibility in accommodating changing social conditions.
The “fence-breaking” activities (1979-81) provide a nice illustration of
state flexibility within the context of state autonomy in allowing greater decision
making at the local and firm levels. These activities were initiated by various
societal groups (individuals, agricultural cooperatives, SOEs) to either allocate raw
materials among themselves and/or to trade with some neighboring Asian countries
without going through various bureaucratic channels. The reinstitution of central
state control, during the 1980-1982 period when these fence-breaking activities
were out of control with rampant smuggling, demonstrates that the state had
maintained its autonomy at the same time that it exhibited some flexibility. Fence-
breaking activities created mounting difficulties for the central state in enforcing
tax laws and import duties: ministries and local governments became
commercialized and tried to squeeze more subsidized resources out of the central
government to trade in the black markets; moreover, local Southern authorities
allowed smuggled industrial goods into the Mekong Delta province in the South
(Fforde 1996, 270-1).
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In particular, these “fence-breaking” activities affected textile and garment
producers in a positive way. Back in the early 1980s, SOEs were under control at
both central and local levels. However, during the “fence-breaking” period, central
state control was relaxed. During this difficult period, central SOEs (including
major textile SOEs) were allowed to try out new ways to coordinate with each
other. While they were still obliged to produce the types of products that were
assigned by the state (such as working clothes), they had some control over how
they produced them, such as contacting directly with other SOEs to get the needed
inputs (i.e., Southern fabrics supplied rural areas in the North and used to make
working clothes for the EE markets), or services (i.e.. raw fabrics from the North
to be processed with more modem dyeing and finishing equipment in Southern
SOEs), rather than waiting for state supplies or going through bureaucratic state
channels.
Relationships between the State and Domestic Groups
Relationships between the state and domestic groups have complex
implications for state autonomy. Since the private sector is only now emerging, the
symbiotic relationship between the state and large SOEs is more significant.
The State and the SOEs
Both the state and SOEs benefit from preferential treatment of the SOEs by
the state: they have converging interests in maintaining this relationship. The state
continues to favor large SOEs at the expense of smaller (mostly private) firms,
which do not enjoy most privileges that large SOEs have, for the reason that large
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SOEs can implement development policies more effectively than smaller (mostly
private) firms.1 At least during the transition, successful implementation of such
policies means attainment of development goals, thus legitimacy for the state to
govern. Large SOEs continue to receive preferential treatment (albeit subject to
harder budget constraints since 1991), leading to larger productive capacities and
more well-established foreign contacts compared to private firms. Interestingly, as
demonstrated in Chapter IV, SOEs have an independent contribution to total sales,
indicating that their decentralized decision-making is compatible with overall state
planning and guidance. Central SOEs in the VTGI now have the freedom to
produce what they can do most effectively (i.e., woven, knit, or artificial fiber
products), as well as complete freedom as to how to produce them.
This symbiotic relationship between the state and SOEs, can degenerate
into corruption and clientelism.2 Continued bribery and resistance of loss-making
SOEs to be shut down are some examples of the negative aspects of such
relationship. The process to close down loss-making SOEs still has a long way to
go for several reasons. First, an impartial accounting system to evaluate the true
value of SOEs in order to classify them into different categories, profit or loss-
making, has yet to be established. Second, SOEs’ managers have no incentive to
1 This is similar to South Korean development strategy, and different from that of Taiwan which
spreads incentives to all large and small firms.
2 In his discussion about the predatory state in Zaire with the preoccupation of the political class
with rent-seeking, Evans did talk about the negative aspects of arbitrary, patrimonial, and
personally-connected state apparatus which has turned the rest of the society into its prey (Evans
1992. 149-151).
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voluntarily cease operation if there are no other sources of income and
employment for themselves and workers.
In the longer-run, as SOEs become more independent, with direct
relationships with foreign firms, they may have their own sets of goals and interests
which may not be the same as national development goals such as greater domestic
integration and maintenance of employment. At that point, it remains to be seen
how such scenario would affect state autonomy in making and implementing
policies for national development goals and the extent to which it can still rely on
SOEs as state apparatus in carrying out those policies.
The State and the Private Sector
Contrary to conventional belief, private ownership can coexist with the
state sector, especially in coordination with SOEs as discussed in previous
chapters. Laws on the private sector introduced in 1988 and 1991 (with laws on
DFI introduced as early as 1987) have facilitated private production and trading.
Many fabric and garment markets sprung up in big cities such as Hanoi and HCM
as a result. Private associations have also been formed; they are quite new,
however, and do not have much impact on state policy. As the private sector
develops and co-exists with SOEs over time, the relations between the state and
private sector will become more complex. By that time, the Vietnamese version of
the developmental state will become more comparable to that of the East Asian
NICs, with the weakening of the developmental state and a more developed
society with dense public-private networks.
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The State and Competing Interests of Textile and Garment Industries
As the Vietnamese economy further develops, there is an emerging
tendency for domestic interests to be aligned not so much along ownership line
(since SOEs and private firms increasingly share some common concerns such as
subcontracting tax and customs procedures), but increasingly based on the type of
industry. While most textilers want to engage in backward linkages (supplying
Vietnamese garment firms with domestic fabrics and accessories), garment
manufacturers want to have more flexibility and choice in sourcing inputs which
may come from both domestic and foreign markets for quality and cost reasons.
Backward linkages with the textile industry is not the overriding concern for them.
The formation of VINATEX in April of 1995 was a result of competing
textile and garment interests, as well as an increase in state awareness about the
need for greater domestic integration. First, it indicates the dominance of the
textile interests which support greater backward linkages as well as promoting
forward linkages. Second, it signifies that state officials have been aware of
international tendencies discussed earlier (more direct relations between Vietnam
and the EU buyers, as well as more direct East Asian NICs’ investment in
Vietnamese textile industry). In principle, as discussed earlier, VINATEX has the
resources and potential to compete with those 100% East Asian NICs’ textilers
than could any individual SOE or private firm. It can potentially negotiate for
better terms with foreign firms which place subcontracting orders with Vietnamese
manufacturers.
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The Effects of International Factors on Development Policies
International factors have exerted constraints, in terms of markets, linkages
and leverage, on state ability to formulate and enforce development policies
(Stallings 1992, 48-55). This has resulted in some limits on Vietnamese policy
options. While the state maintains control over quota allocation and customs
procedures, and to some extent labor policies, it has much less control on other
trade-related policies. For instance, policies on long-term loans (to buy machinery)
or short-term loans (to buy raw materials) have become meaningless since
machinery can be purchased directly from foreign firms via negotiations with
domestic firms (which are not always to the domestic firms’ advantage, as
discussed earlier), and most inputs are supplied by either EU buyers or East Asian
NICs’ firms within the EU system (which result in very low value-added for
domestic producers and workers).
In general, vulnerability to external pressure lies with previous policy
choices, such as liberal DFI policies and lack of state overall guidance in
negotiations with foreign firms for better subcontracting prices and in purchasing
newer machinery from foreign firms. However, to a certain extent, the Vietnamese
state and firms have been able to turn international factors to their advantage
(similar to the cases of the East Asian NICs especially when these countries faced
textile/garment export restrictions by the MFA). Within this environment, the
Vietnamese (public and private) firms obtain some long-term benefits which
include: learning new skills when interacting with foreign firms; establishing direct
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contacts with the EU buyers after years of manufacturing in the triangular
framework.
Markets/Linkages
International constraints and opportunities since 1991 have led to two
tendencies with contradictory implications. On the one hand, the EU buyers are
establishing direct relations with Vietnam, eliminating the role of the East Asian
NICs’ middlemen. On the other hand, there is a gradual change in the role of East
Asian NICs’ firms from being middlemen (exporting fabrics to Vietnam to be
assembled, and for most part, importing garments back to their countries and then
re-exporting them to the EU) to producing fabrics in Vietnam which are either for
the domestic market or for garment exports to the EU markets. This is a strategic
move for the East Asian NICs’ firms to cope with the new situation.
The linkages with the non-CMEA countries via the EU triangle system
have limited Vietnam policy options. While decentralization is beneficial in
coordinating domestic productive activities, it does has some negative
consequences in dealing with foreign firms: examples can be found in the
arrangement of buying foreign machinery as in the case of embroidery machines,
and the use of Letter of Credit. Most firms in the VTGI have made direct financial
arrangement with foreign firms for their (mostly used) machinery. This
arrangement is primarily with Japan and the East Asian NICs by way of deducting
a certain percentage from the already very low subcontracting prices paid to the
Vietnamese producers. Moreover, the use of Letter of Credit gives foreign firms
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total control over inputs (which are supplied by the East Asian NICs’ textile firms
in their home countries, or increasingly from their 100% textile firms in Vietnam)
hence leaving no room for domestic backward linkages.
While the existence of 100% East Asian NICs’ textilers in Vietnam would
contribute primarily in terms of employing workers at the minimum $30-per-month
wage, there is no other significant advantage for Vietnam. The East Asian NICs’
firms accumulate the bulk of the value-added with control over low labor costs and
profitable export directly to the EU or other Pacific Rim countries.
International Leverage
With the resumption of lending from multilateral and bilateral sources as of
1993, the Vietnam state has been subject to conflicting ideologies.3 The state
response suggests that it has maintained some independence in dealing with foreign
influence, implying that there may be some advantage in being able to respond to
more than one external power as opposed to a single hegemonic one. For instance,
while the Vietnamese state has been adopting advice from international lending
agencies for macro-economic stability (i.e., reducing inflation) and embarking on
economic restructuring (i.e., closing down loss-making SOEs), it has maintained
its own pace in terms of equitization process (the Vietnamese expression for
privatization), and has begun to embark on industrial policy (as alluded to earlier,
the formation of 23 large state corporations is intended to carry out development
3 As discussed in Chapter I, on the one hand, the IMF. World Bank. Asian Development Bank
condition their lendings on restructuring adjustments which emphasize an increased market role
and reduced state role. On the other hand, bilateral sources such as Japan (since 1992) would
argue for a greater state role via industrial policy.
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policies in all major industries). The overall policy from the most recent Eighth
Party Congress (meeting from June 28 to July 4, 1996) indicates that the market
reform process is to be continued, although the whole approach will be cautious
and there will be no wholesale surrender of the state economic control: the state
sector still plays the dominant role in the economy.
Implications for State Capacity
There are several major issues to examine with respect to state capacity:
evolution of bureaucratic structure, issues of implementation, and performance of
SOEs.
Evolution of Bureaucratic Structure
Given the historical legacy of Vietnam, the state bureaucracy has come a
long way. Vietnam does not have a long-term bureaucratic tradition in which there
is a selection of state officials on a meritocratic basis. However, the state apparatus
has evolved over time from central control with many bureaucratic layers to a
more consolidated bureaucracy in a market-oriented economy.
In 1995, there was consolidation of ministries, state agencies and the
establishment of VINATEX. As o f November 1995, the National Assembly
approved measures to consolidate the most important ministries into three new
ministries. Specifically, the former ministries of Energy, Light Industry and Heavy
Industry were consolidated into the Ministry of Industry. The State Planning
Committee (SPC) and the State Committee for Cooperation and Investment
(SCCI) were joined to become the Ministry of Planning and Investment. Also, the
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ministries of Agriculture, Food, Forestry and Irrigation were also consolidated into
the Ministry for Agriculture and Rural Development (Adrian Edwards 1995).
Most state officials are in the process of obtaining the technical capabilities
necessary to provide clear guidance for implementing economic policies in a more
market-oriented system. While the majority of older party leaders (most were
revolutionaries) do not have experience in economic developmental efforts, many
mid-level state officials have been studying abroad or re-training in Vietnam to
obtain more technical tools to manage the market economy. It remains to
be seen how these officials cope with new requirements to manage the more open
economy.
Issues of Implementation
There are inconclusive findings about the significance o f five trade-related
policies since there exist both internal and external conditions that create barriers
to proper policy implementation. As of 1993, most constraints arose from the
subcontracting arrangement, either with foreign actors in the triangle system or
among domestic firms (between SOEs and private firms). For instance, the use of
the Letter of Credit in the triangle system renders the policy of short-term state
loans insignificant. Moreover, direct contacts between domestic and foreign firms
to buy newer machinery render the policy exempting long-term state loans for
domestic firms insignificant.
The state needs to redesign some trade-related policies to ensure firm
compliance. For instance, quota policies must be able to deal with the prevalence
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of quota exchange and domestic subcontracting which render quota allocation
policy insignificant. Also, flexible coordination between SOEs and private firms in
making garment exports makes the requirement for all domestic firms to have
export licenses unnecessary (although small firms without export licences must
pay fees to larger, mostly SOEs, in order to manufacture export products).
Moreover, the poorly-designed subcontracting tax policy does not make a
distinction between subcontracting for the domestic market and for the export
market, thus hindering rather than helping to increase exports. This policy
implementation failure led to its elimination in mid 1995.
Problems of corruption and smuggling negatively affect policy
enforcement. For instance, rampant corruption in customs procedures and
smuggling activities at the borders with China, Thailand or Laos pose as serious
barriers which prevent domestic integration and export-promotion policies from
being carried out effectively: Chinese fabrics and garment products have been
dumped to Vietnam at very low prices which hurt the domestic textile industry.
Moreover, the costs of bribery would drive up production costs, hence making
manufacturing in Vietnam not price competitive, regardless of cheap labor costs.
Performance of SOEs in the VTGI
Theoretically, SOEs can enhance state capacity by being effective in
implementing state policies. This is demonstrated in the cases of East Asian NICs,
especially in the case of Taiwan, in which SOEs are instrumental to economic
development. For instance, many of Taiwan public enterprises have had the
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capacity to pioneer new industries (such as artificial fibers, petrochemicals,
plastics, steel, shipbuilding). When these industries were up and running, the KMT
state transferred them to private ownership (as in the cases of plastics, glass,
cement).
While the efficacy of the Vietnamese SOEs in general is questionable,
SOEs in the VTGI do contribute to total textile and garment production and
exports, and to some extent, domestic integration. Quantitative findings show that
SOEs have a direct and positive effect on total VTGI sales at least according to
1993 data (although it is clear that most SOEs have access to privileges that
private firms do not have, hence there was no level playing field). As discussed in
Chapter HI, SOEs’ coordination with both private and foreign firms has facilitated
greater garment integration through upstream (clothing design, cutting),
downstream activities (marketing, retailing), and backward linkages with textile
industry (using Vietnamese fabrics).
It would be interesting to study the performance of VINATEX which is
now under more rigorous budget constraints (compared with the former central
SOEs), hence at a relatively more equal footing with private firms. This analysis
can provide interesting insights into the contribution of SOEs which are being
exposed to more competition from both private firms and foreign corporations.
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CONCLUSIONS
Vietnam is an unusual case of a centrally-planned economy, attempting to
make a transition to a developmental state within the context of a market-oriented
economy. In response to the second part of the research question about the role of
the Vietnamese state in facilitating economic development within a changing
environment, this study has demonstrated that the Vietnamese state has some
characteristics of a developmental state in terms of state autonomy and state
capacity.
The convergence of quantitative and qualitative findings suggest that within
the constraints imposed by the international conditions, the state has autonomy in
its ability to respond flexibly to demands from domestic manufacturers as well as
to external pressures, to allow more decentralized decision-making and establish
budget constraints. In other words, a combination of state autonomy and some
degree o f flexibility has been conducive to long-term economic growth, as
represented in the VTGI, during the 1975-1995 period.
However, its capacity has been lacking, given problems of implementation
due to corruption in customs, use of bribery, selling and exchanging export quotas,
etc. The Vietnamese state needs to improve its technical ability to formulate and
implement more complex policies, design more detailed conditions for firms to
receive subsidies, and plan all stages of long-term strategic projects with a
decreasing level of state involvement over time. This study also indicates a
dynamic relationship between state capacity and policy formulation as
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hypothesized in Chapter I. As the technical ability of the Vietnamese state
improves over time, it increasingly engages in more complex state policies as
demonstrated in VINATEX, the garment product classification system (HS), and
the new Labor Code.
Policy Recommendations
In addition to being autonomous and flexible, given the continued
dependence of garment firms on imported fabrics and inputs, the state will need to
focus on specific policies to achieve its goal of greater domestic integration and be
selective in its tasks to conserve resources (Evans 1992, 163, 177). About the
importance of domestic integration, it can provide some guidelines about
backward linkages such as the domestic-content requirements (foreign firms must
use Vietnamese inputs) as part of a bargaining process between domestic (both
public and private) and foreign firms. This is not an insurmountable task since a
number of foreign firms have begun to use Vietnamese fabrics and accessories for
garment exports to both EE and EU markets. The other side of this is making
Vietnamese fabrics and garments more price competitive with improved quality.
To do that, the state can promote public-private partnerships in projects that most
firms have no incentives nor resources to undertake by themselves. For instance,
an R&D partnership with SOEs and private firms can establish export niches for
the VTGI, addressing the integration and quality issues such as researching on the
types of fabrics, accessories or garments that Vietnam can most effectively
produce, as well as designing, cutting, and marketing services. At present, this type
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176
of partnership exists primarily between the state and SOEs within VINATEX.
Private firms, to a large extent, have not been included.
In order to ensure firm compliance with state directives, the state needs to
develop detailed conditions for firms to receive subsidies (above and beyond total
production and export). At present, this level of detail is not clearly established.
For instance, there is no clear guideline as to how quota allocation is contingent on
quality and prices of garment products. Hence, without clear conditions, it is
impossible to enforce discipline and facilitate reciprocity. Moreover, the state must
continue adjusting trade-related policies to meet current conditions, in addition to
implementing effective policies consistently.
For new policies, the state must be able to design policies with detailed
conditions, including all stages of long-term strategic projects. For instance, those
stages might include initiation, consolidation and fading out; in other words, there
would be more state involvement during the initiation stage and less involvement
as the projects develop, and finally, the state would transfer them completely to
firms when the projects are fully up and running. The East Asian NICs’ experience
shows that their protection policies were designed to be gradually reduced over
time. For instance, the Taiwanese “textile entrustment scheme,” which assured
market and raw materials as well as minimized risks for entrepreneurs, was
gradually phased out when this industry was fully developed (Evans 1992, 162).
Challenges for state bureaucracy arise from the introduction of complex
policies in coping with the new situation. For instance, while the elimination of
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Ill
license per export transaction cuts down unneccessary paperwork, it leads to the
need for a clear product classification system (or a harmonized system~HS) which
is to be recognized by both the customs department and the MOT. Moreover,
there is also a need for better coordination between these state bureaucracy to
implement such policy.
The Vietnamese Developmental State: Challenges Ahead
In principle, it is desirable to have a combination of centralized state
control (through guidance and planning), and decentralization (through market
decision-making of SOEs). As demonstrated in this study, a combination of state
autonomy and flexibility seems to strike a balance between central state control
and decentralized market coordination. In the longer-run, however, as society
further develops with growing domestic and foreign groups, the state will have to
grapple with inherent conflicts of market socialism: the monolithic VCP (with
centralized power and control at ministerial and central agency levels) coexisting
with a market structure (with increasing public-private networks. This
development may weaken state autonomy over time, hence affecting overall
guidance).
Moreover, although this study has concentrated on the first development
goal of productivity, it is vital for the Vietnamese state to also focus on the other
goal of ensuring equity. One of the few controls that the state still has is through
the labor laws. While the state formulated relatively strong labor laws to protect
workers, it has not yet been successful in implementing them. There is still no labor
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178
union in most joint-ventures and firms with foreign investment in the VTGI, nor
are there state agencies to provide unemployment benefits and services for the
unemployed. Hence, due to the lack of labor unions (even if they do exist, their
effectiveness is also questionable), Vietnamese workers do not have much
bargaining power in negotiations with foreign firms (one must also consider the
unemployment and under-employment problems in Vietnam).
Further Research
This analysis suggests that the integrative framework of developmental and
world-systems perspectives can be applied to a socialist country such as Vietnam.
Moreover, international factors and emerging tendencies about the relationships
with foreign actors point to a need for a developmental state for economic
development.
While this study embarks on an evaluation of the developmental role of the
- state in the VTGI, further research is needed to reflect a more dynamic
relationship between state ability and developmental efficacy of the Vietnamese
state, as articulated in the sub-hypothesis in Chapter I. Future (quantitative and
qualitative) research which assesses the full impacts of the aforementioned 1995
and 1996 policy changes in relation to the 1993 policies would address the
hypotheses in a more dynamic analysis.
Moreover, with respect to several relationships about the significance of
the integration issue arising from this study, a dynamic analysis of the performance
of VINATEX to promote domestic integration as one of the developmental goals
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179
can reveal interesting insights into state efficacy in economic development. For
instance, two relationships can be examined in a more systematic way. First, the
finding that garment exports to the less-affluent EE markets (with backward
linkages) earn higher value-added than to the EU markets (with no linkages),
advances the notion that the more integration between domestic textile and
garment industries, the higher the value-added. Second, there should be further
research about the relationship between domestic integration and international
integration. For instance, some questions about that relationship can be raised,
within the GCC framework, how does domestic integration improve the VTGI’s
position in the global textile and garment industries (or moving up the ladder of
different export roles as discussed by Gereffi)? And how does greater in.emational
integration, in turn, would facilitate higher domestic industrialization?
The findings of this research contribute to the development of studies on
the political economy of countries in Southeast Asia. It is an exciting beginning of
further research in the years ahead.
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BIBLIOGRAPHY
180
Interviews with:
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Indochina (monthly, English)
Lao Dong Newspaper (weekly, Vietnamese)
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Thanh Nien, Ho Chi Minh City (daily, Vietnamese)
Thanh Nien Chu Nhat, Ho Chi Minh City (weekly, Vietnamese)
Thoi Bao Kinh Te Sai Gon, Ho Chi Minh City (weekly, Vietnamese)
Vietnam Courier, Hanoi (weekly, English)
Vietnam Economic News, Hanoi (weekly, English)
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Vietnam Investment Review, Hanoi (weekly, English)
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Vietnam Thoi Bao Kinh Te, Hanoi (weekly, Vietnamese)
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Reproduced with permission o f th e copyright owner. Further reproduction prohibited without permission.
CHART 1
SHARE OF VTGI EXPORT IN TOTAL VIETNAM EXPORT
5000
4500
4000
3500
Q 3000
V)
3
z 2500
0
□
1 2000
1500
1000
500
0
YEAR
16.11%
1990 1991 1992
YEAR
1993 1994 1995 (est.)
Sources: Ministry of Light Industry (former), Ministry of Trade.
Vietnam Courier (October 22-28,1995)
189
APPENDIX 1
STRUCTURE OF THE VIETNAMESE COMMUNIST PARTY
(As of July 1996)
POLITBURO
Highest ranking members o f the party... holds unlimited power in policy making...
19fu ll members, no alternate members.
(Listed in order of ranks)
DO MUOI
LE DUC ANH, Gen.
VO VAN KIET
NONG DUC MANH
LE KHA PHIEU
DOAN KHUE, Sr. Lt. Gen
PHAN VAN K H A I
NGUYEN MANH CAM
NGUYEN DUC BINH
NGUYEN VAN AN
PHAM VAN TRA
TRAN DUC LUONG
NGUYEN THI XUAN M Y
TRUONG TAN SANG
LE XUAN TUNG
LE M INH HUONG
NGUYEN DINH TU*
PHAN THE DUYET
NGUYEN TAN DUNG
* passed away 7/96
POLITBURO STANDING COMMITTEE
Oversees the day-to-day implementation ofpolicy. (listed in order of ranks)
5 members.
General Secretary DO MUOI
President of Vietnam LE DUC ANH
Prime Minister VO VAN KIET
Sr. Lt Gen. LE KHA PHIEU
Deputy Minister of Interior NGUYEN TAN DUNG
CENTRAL COMMITTEE
Elected by the Party Congress...in theory, vested with all political power: in actuality, delegates power to
Politburo...elect Politburo members...confirmspolicy made by Politburo...meets at least twice annually in plenums...
consists o f 161 members, no alternate members.
ORGANIZATIONS UNDER SECRETARIAT
Department Heads of Central Committee Central Military Committee
Central Control Committee Mass Organizations
(General Secretary of the Vietnamese Communist Party)
(Head of State, President of Vietnam)
(Head of the Government Prime Minister)
(Chairman of the National Assembly)
(Central Committee)
(Central Committee, Minister of Defense
(Deputy Prime Minister)
(Minister of Foreign Affairs)
(Head of Ho Chi Minh Institute, Ideologue)
(Vice Chairman, Organization Committee)
(Deputy Minister of Defence)
(Deputy Prime Minister)
(Vice Chairman, Central Control Committee, female)
(Secretary of HCM City)
(Secretary of Ha Noi)
(Deputy Minister of Interior)
(Chairman of Central Science and Education Committee)
(Former Secretary of Hanoi)
(Deputy Minister of Interior)
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L A B O R I N T E X T IL E A N D G A R M E N T INDUSTRIES
1 9 0
■X
o
c
o
O
□
(spuesnoin) U09VT
R eproduced with perm ission of the copyright owner. Further reproduction prohibited without perm ission.
Source: T ran Hoang Kim, Economy o f Vietnam, 1994.
(Data unavailable between 1980-1986)
191
APPENDIX 3.1
ESTIMATES OF COMPONENTS OF THE RETAIL PRICE
OF A BOY’S DRESS SHIRT
Fashion Garment Company in HCMC is a 100% Hong Kong company which
oversees the manufacturing and export of boys dress shirts to the US market
since 1994. The following estimation comes from two sources: (1) interviews
with the Fashion Garment manager in November 1994, and (2) a K-Mart retail
store in California (the retail price for a boy’s dress shirt is S10USD, before
taxes).
I obtained the following information from the Fashion Garment manager:
- inputs: all capital, fabrics, accessories, and clothing designs come from
Hong Kong.
- management: except for the manager who is from Pakistan, all of his
assistants (in office works, supervision, and quality control) are Vietnamese. I
assume that the management cost per shirt is relatively low since wages
earned by the Vietnamese assistants are not much higher than the minimum
wage ($30USD/per month/per cap) which would be comparable to other
Vietnamese assembly workers.
- subcontracting price: the cutting, making, packaging (CMP) price per shirt
is 40 cents paid to Vietnamese workers.
- manufacturing cost: the manager sold me the same boy dress shirt (when
we met in Vietnam) for $2.0 USD, explaining that this price consists mainly of
inputs (fabrics, accessories), some management costs, and the CMP. This does
not include any retail-markup, transportation and other miscellaneous costs.
From the above information, I estimated the components as follows:
- retail price of the shirt: S10USD
- inputs, CMP, and some management costs: S2.0USD
- CMP per shirt: 40 cents
- inputs and some management costs: $2.0 - $ 0.4 = $1.6 USD
- other components o f the retail price such as designs, transportation,
insurance and marketing costs, retail mark-up:
$10 USD - $2 USD = $8.0 USD
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Reproduced w ith permission o f th e copyright owner. Further reproduction prohibited without permission.
CHART 3.1
SHARE OF THE EU TEXTILE AND GARMENT EXPORT IN THE VTGI EXPORT
700
600
500
S'
» 400
c o
z
o
d 300
z
200
100
0
SOURCES: Ministry of Light Industry (former), Ministry of Trade.
(Selective years between 1981 and 1995)
estimated)
1985 1989 1990 1991 1992 1993 1994
YEAR
(est.)
1 9 2
Reproduced w ith permission o f th e copyright owner. Further reproduction prohibited without permission.
CHART 3.2
COMPONENTS OF THE RETAIL PRICE OF A BOY'S DRESS SHIRT
(Inputs, M anagement and Quality Control)
(Cutting, Making and
Packaging)
Source: S e e estim ations in Appendix 3.1
Designs,
Transportation and Insurance,
Marketing,
M iscellaneous Costs,
Retail mark-up.
ID
OJ
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FIGURE 3.1
THE TRIANGLE MANUFACTURING SYSTEM
THE CASE OF THE VIETNAMESE TEXTILE AND GARMENT INDUSTRIES las of April 1995)
FOREIGN BUYERS
* EU
* JAPAN
* CANADA
‘ NORWAY
* US
VIETNAMESE PRODUCERS
•STATE CORPORATIONS
'C onfect/m ax * Texgamex
‘ Textlm ex ’ G enerallm ex
‘ Im exco
•STATE FIRMS
•PRIVATE FIRMS
• • • •
EAST ASIAN MIDDLEMEN
• TAIWAN
* SOUTH KOREA
* JAPAN
• HONGKONG
Household Household Household Household Household Household I . Household
Production Unit | i Production Unit ' Production Unit I i Production Unit Production Unit ; | Production Unit ' ! Production Unit
e * Subcontracting agreem ents.
SOURCE: Interviews by author, 1994.
Note: After 4/95, there w as a consolidation of som e major state corporations In the VTGI.
i
1 9 4
1 9 5
FIGURE 3.2
VIETNAM • EUROPEAN UNION TRADE NETWORK
Coordination between State and Private Sectors
fa s of April 1995)
Household Production
Units
Household Production
Units
Household Production
Units
PRIVATE FIRMS
People's Committee of Ho Chi Minh City
Imexco
LOCAL STATE FIRMS
CENTRAL STATE FIRMS
Ministry o f Light Industry
Confectimex
Textimex
Texgamex
Ministry o f Trade
Generalimex
• -------------- ► Subcontracting agreements.
S o u rce: Interviews by author, 1994.
N ote: After 4/95, there was a consolidation of som e major state corporations in the VTGl.
R eproduced with perm ission of the copyright owner. Further reproduction prohibited without perm ission.
1 9 6
FIGURE 3.3
VIETNAM - EAST EUROPEAN TRADE NETWORK
Coordination Between State and Private Sectors
(As of April 1995)
MINISTRY OF UGHT INDUSTRY
CONFECVMEX
TEXVMEX
TEXGAMEX
MINISTRY OF TRADE
GENERAUMEX
EASTERN EUROPE MARKETS
PRIVATE FIRMS
CENTRAL/IND LOCAL
STATE FIRMS
’ ’ '
I
HOUSEHOLD
PRODUCTION UNITS
HOUSEHOLD
PRODUCTION UNITS
HOUSEHOLD
PRODUCTION UNITS
PRIVATE FIRMS
NOTES:
CONTRACTS THROUGH INTERGOVERNMENTAL AGREEMENTS.
SUBCONTRACTING AGREEMENTS.
Source: Interviews by author, 1994.
Note: After 4/95, there was a consolidation of some major state corporations in the VTGI.
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197
APPENDIX 4.1
INSTRUMENTAL VARIABLES
The following variables are used as instrumental variables which can detect
whether the independent variable CMP/EXP (the share of garment export to the
EU markets, or the value of CMP export, in total VTGI export) is endogenous. In
general, the rationale for selecting them is that they are correlated with variable
CMP/EXP.
- InK: most capital would come from foreign partners from non-Communist
countries.
- InL: most labor is hired for CMP export.
- QUOTAFEE: firms export to the EU must pay quota fees to the government.
The rate is determined by the Ministry of Trade.
- REGFOR: any Southern firm that receives foreign capital exports to non-,
Communist countries.
- XINCEN: firms that receive these EU market-oriented incentives, export mostly
in CMP terms.
- REOWFO: majority of large state firms are concentrated in the South and
forming partnerships with foreign corporations that export to non-Communist
markets.
- OWNFOR: most state firms in Vietnam form partnerships with foreign
corporations that export to non-Communist markets.
- REGOWN: state firms in the South have access to privileges (such as use of land
and facilities, export quotas, etc) in forming partnerships with foreign corporations
that export mostly to non-Communist markets.
- REGION: the significance of the South has to do with its past history of
capitalism and entrepreneurship of Southern firms and workers before 1975, hence
more conducive to
attract foreign corporations to subcontract for export to non-Communist markets.
- OWNER: most state firms, with their privileges such as use of land and facilities,
export quotas and ease of customs procedures, can attract foreign buyers/investors
to place orders or form partnerships for exports to non-Communist markets.
- XLICENSE: most firms, with export licenses, export to non-Communist
markets.
- INPCMP: most inputs and accessories for the CMP export are supplied by
foreign buyers or the East Asian NICs.
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198
APPENDIX 4.2
BINARY VARIABLES
Trade-Related Policy Variables
XLICENSE has values 1 (firm that receives export b'cense from the Ministry of
Trade), and 0 (firms that do not have this). In principle, without an export license,
a firm cannot sign export contract with foreign buyers. From my sample, 48 firms
received this (all 29 state firms, and 19 non-state firms).
XINCEN has values 1 (firms that receive export incentives such as the EU
quotas), and 0 (firms that do not have this). This stimulatory policy is general, and
applying to any firms that receive some EU quotas. From my sample, 31 firms
received this (21 state firms, and 10 private firms).
TAXINC has values 1 (firm that receives any tax exemption such as export/import
tax, capital tax, land-use tax, etc), and 0 (firms that do not have any exemption).
From my sample, 15 firms received this (10 SOEs or firms having connections with
some ministries or the VCP, and 5 private firms).
DEPEXEM has values 1 (state firm that is exempted from paying the annual
capital payment to the government who has invested in all state firms), and 0 (firms
that do not have this). Only state firms, or firms having connections with some
ministries or the Party have this exemption. From my sample, 35 firms received
this (29 state firms or firms having connections with some ministries or the Party,
and 6 firms having connections with some ministries or the Party).
CREDIT1 is a direct state subsidies, mostly to state firms. Its value are 1 (firms
that receive both fixed and working loans from state banks), and 0 (firms that
receive nothing). Its values are exactly the same as those of OWNER. All 29 state
firms received both loan types, while non-state firms received only working loans.
CREDIT2 is an indirect state subsidies for both state and private firms such as
low-interest short-term loans from state banks to buy input materials. Its value are
1 (firms that receive these low-interest short-term loans); and 0 (firms that receive
nothing). From my sample, 39 firms received this (all 29 state firms, and 10 non
state firms).
Variables about foreign investment and regional impacts
FORCAP (1 for any firms that obtain some foreign capital from various sources
such as joint ventures; commercial agreements; long-term loans to buy machinery;
international loans for industrial development; 0 for none). Foreign capital is very
instrumental in modernizing machinery, hence increasing labor productivity, and
contributing to SALES. This variable is significant (t>2) but it does not explain
specifically why Southern firms and state firms contribute to total sales.
REGFOR (RJEGION*FORCAP) with values: 1 for any Southern firm (state or
non-state) that receives some foreign capital;1 0 (all Southern firms that do not
receive foreign capital plus all non-Southern firms). I added this variable because I
suspect that most foreign corporations would prefer to form partnerships with
1 Some forms of foreign capital are joint ventures, 100% foreign-owned firms, and business agreements
between domestic and foreign firms. Foreign capital is also in the form of foreign machinery bought by
Vietnamese producers and financed by deducting from the subcontracting prices.
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199
Southern firms rather than with firms in other regions due to its reputation of high
entrepreneurialship and better infrastructure. This variable is significant (t>2).
RE GOW N (REGION*OWNER) 1 for state firms in the South; 0 otherwise.
Since the majority of large state firms in Vietnam are concentrated in South, and
that they receive many types of state subsidies; it is likely that they would form
partnerships with foreign corporations, hence can contribute more to total sales.
This variable is significant (the absolute value of t is greater than 2). However, its
coefficient (b-value) is negative, hence negatively affect total sales.
OW NFOR (OWNER*FORCAP) 1 for any state firm that receives some foreign
capital;
0 otherwise. Given all privileges that state firms have been receiving, I expect
foreign firms to have more incentive to form partnerships with state firms than
with private firms. This variable is insignificant (t<2).
REOW FO (REGION* OWNER*FORCAP) with values of 1 for any state, firm in
the South that receives some foreign capital; 0 otherwise. All large state firms in
the South have some forms of foreign capital that is embodied in high-tech and
state-of-the-art machinery. This variable is insignificant (t<2).
APPENDIX 4.3
CONTINUOUS VARIABLES
CMP/EXP: the share of CMP export (mainly wages paid to Vietnamese workers
and managers) in total VTGI export, with continuous values between 0 and 1. This
variable is significant (t>2).
XINCMP (XINCEN* CMP/EXP) export incentives aimed at promoting CMP
export to the largest export market, the EU market. Its values are continuous,
between 0 and 1. This
variable reflects the effects of simplified customs procedure and efficient EU
quotas allocation. This variable is significant (t>2).
R eproduced with perm ission of the copyright owner. Further reproduction prohibited without perm ission.

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Creator Tran, Angie Ngoc B. (author)

Core Title An analysis of the developmental state: The case of the Vietnamese textile and garment industries

Degree Doctor of Philosophy

Degree Program Political Economy and Public Policy

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, General,OAI-PMH Harvest,political science, general

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Hamilton, Nova (committee chair), Kalada, Robert E. (committee member), Quang, Vuong (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c17-532662

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