Government Eliminates Subsidies, Changes Currency : Vietnam Economic Reforms Stymied by Lack of Incentives

In the past few months, Vietnam has initiated two reforms that would stimulate most economies. But here, so far, there has been barely a quiver.

The first reform was elimination of subsidized products for state workers. They formerly got their wages in cash plus a ration book with coupons good for rice, fuel, fish sauce and a variety of other necessities. The elimination of subsidies became effective in Hanoi on Aug. 1, and state workers now receive more cash instead of coupons.

The second reform was a complete change of currency. The long-term effect is unclear, but the immediate result was panic.

Rumors of the currency change swept this capital on Sept. 13, a Friday. And, “by the middle of the day,” a foreigner who lives here said, “the streets were so crowded with bicycles you couldn’t drive a car.”

Another said: “People were going to any open store, state or private, to buy anything of possible value--food, bikes, anything.”

The price of chicken doubled before the day ended.

Rumor--which proved to be true within 24 hours--had it that the dong, Vietnam’s unit of currency, was to be devalued. In an effort to breathe life into the near-moribund economy, the Communist government had decided to throw out the old money and bring in the new.

The official announcement was made over government radio at 5 a.m. Saturday, Sept. 14. Foreigners were given until noon to declare their holdings in the old currency, which would be replaced at the rate of 1 for 10.

“Russians came in with boxes full of dong,” a Western diplomat said, but only 15,000 old dong could be exchanged immediately. Anything more that was turned in for a promissory note.

Limited Conversion

The Vietnamese had a few days more to exchange their bills, but no fewer problems. Wage earners were limited at first to converting 20,000 old dong for 2,000 new; private businessmen were allowed to exchange 50,000 for 5,000.

Anything over those limits could be left with the authorities in return for a note promising that the government would exchange it for new dong sometime in the future. But no citizen of Hanoi is holding his breath waiting for the government to make good on that promise, and many fear that the excess money has been lost.

“One Vietnamese had put away 180,000 dong for a motorbike, stuffed in the old mattress,” a Westerner here said. “He had it, but he didn’t move fast enough. He should have bought (the motorcycle) Friday. He was wiped out on Saturday.”

In Hanoi, where the average salary before devaluation was 350 dong a month, 180,000 dong is a very large amount of money. But small fortunes--albeit in currency good only in Vietnam--can be put together in the legal private market.

The government was not specific about the reason for the currency change. Speculation centered on three possibilities. One was to catch currency hoarders and participants in illegal currency dealings. But there was no immediate sign of the government moving to punish people declaring large holdings.

Another was to bring the official dong-to-dollar exchange rate closer to reality, which could help restrain the private market. The official rate was 12 to the dollar before the change. It is pegged at nearly 15 to 1 in the new currency, the equivalent of 150 old dong to the dollar, a sharp decline against the dollar.

Liquidity Crunch

The exchange rate on the black market, meanwhile, rose from 400 to 1 to about 470 to 1 in August, compared to the 12-to-1 official rate. In the panic of Friday the 13th, it hit 800 to 1. Ten days after the currency change, the illegal rate had already surpassed its relative position of August, with the dollar trading for 50 to 55 new dong. So, if the change was aimed at curtailing the black market in currency, it failed.

The third explanation for the currency change--and the most likely, according to Western diplomats here--is that the government simply had a liquidity crunch; it did not have enough currency to handle its affairs.

The main reason for the shortage was the elimination of government subsidies for wage earners in the public sector.

The average monthly salary of 350 old dong had been supplemented by ration coupons for a variety of subsidized products, ranging from rice to fuel. The replacement of ration books with increased take-home pay is designed to give consumers some discretion in their buying and to make the system more responsive to demand.

But more in the workers’ pay envelopes meant that more cash was needed. The government could either print more of the old currency--with inflation running at 50% and more, it was getting bulky to carry around--or it could take the course it finally chose: lop a zero off the denomination and print new currency.

The Vietnam News Agency, commenting on the reforms, said: “The mechanism of centralized management and state subsidies was necessary in the wartime and created a state of socioeconomic stability which enabled the whole nation to devote all its energy to the fight. . . . As this system of state subsidies lasted for decades, it has had a profound impact on the people’s minds and has become a habit.”

A European businessman, agreeing with the commentary, said: “The problem with the economy is obvious. There is absolutely no incentive to do anything within the system.”

There is a Vietnamese saying that business or personal relationships are like a knife, with a handle and a blade. If you hold the handle, you have the leverage.

“Nobody within the system is willing to grasp the blade, to stick his neck out,” another visiting businessman said. “Nothing happens here. Nobody does anything.”

Except in the private sector. A diplomat said: “I doubt if there’s a (state) mechanic or construction company that is not doing black-market work after hours.”

Luxury Goods

Antique stores and restaurants are still the main fixtures of private business in Hanoi. But in Ho Chi Minh City, which as Saigon was the wartime capital of the south, the sidewalk market in luxury goods like stereo sets is the most obvious example.

On the sidewalks of both cities, vendors peddle vegetables and other foods brought in from the countryside. Women squat beside displays of citrus fruit or onions, stuffing notes into their waistbands with every sale. Bicycle mechanics are also regulars, fixing flats or repairing broken chains. The bicycle is to Hanoi what the automobile is to Los Angeles.

Reforms to bring incentives to the economy began about five years ago in the rural areas where 80% of Vietnam’s population live. In return for selling a guaranteed portion of his rice to the state for a set price, a farmer gets fertilizer and other technological aid through his cooperative and can dispose of the excess any way he wants.

Farm families may work a designated piece of land in addition to the tasks required of them by their cooperatives. La Xuan Dinh, an official in the Ministry of Agriculture, said now that farmers have the option of selling their surpluses on the private market, to the state or keeping it himself, they are “willing to work the land day and night.”

In the factories, pay differentials and bonuses are designed to bring the same result. At the Thang Long garment company in Hanoi, management has been given broader authority over the work force since the Communist Party Central Committee endorsed reforms last June. Also, it now has more responsibility in signing export contracts with foreign clothing firms.

Both Vietnamese and longtime Western residents say the reforms seem to be making a little difference. The standard of living appears to be inching up. Per-capita income, estimated early in 1985 to be as low as $120 a year, may be closer to $150 now.

But a marginal increase in buying power is no long-term solution in a country that produces so little, a country blessed with natural resources but cursed by an almost nonexistent industrial base and critical difficulties in transportation, roads and other infrastructure.

Military Budget

Western aid workers and diplomats throw up their hands when asked what Vietnam needs.

A smaller proportion of the budget committed to the military would help. Estimates of the military’s share run as high as 50%, and the Soviets are now asking for some sort of return on their aid. The Chinese have shut off aid and trade altogether.

Despite the industriousness of the workers when properly motivated, the state economic apparatus cannot deliver. Economic specialists say it is too compartmentalized. Danish aid has built a cement factory that turns out quality material, but there are no barges to take it to where it is needed.

Foreign businessmen say the Vietnamese are suspicious of private contracts. “They ask too much and wonder why the foreign company walks away,” a West European said.

Optimists in the foreign community here applaud the tinkering with incentive reforms, but none expects any sudden change. So long as there is little he can buy with his extra money, businessmen ask, why should a state worker make an extra effort?