Vietnam shows the euro crisis is a developing world problem, too. Twenty-five years after opening up to the global economy with its “doi moi” liberalisation programme, the communist nation is facing 22 per cent inflation, a tumbling currency and dwindling reserves, thanks partly to the troubles of its trade partners. On October 11, German Chancellor Angela Merkel was in Hanoi pledging new aid, but Ho Chi Minh’s inheritors may prefer to see her take action at home.
Vietnam followed China by opening its economy in 1986 and implementing market-oriented reforms. An end to US embargos and admission to the WTO helped it use foreign investment to fund growth in light industries like textiles. But, Vietnam is still in a state of awkward adolescence. While GDP is growing at an average seven per cent a year, it imports so much capital equipment that it has been running a current account deficit close to six per cent of GDP over the last five years.
Openness has brought risks as well as opportunities. Vietnam’s trade gap means it hasn’t amassed the huge foreign exchange reserves of its neighbours. Where a safe norm is three months, it has enough for just six weeks’ worth of imports. Domestic investors have dumped the local currency, the dong, for dollars and gold, and Hanoi needs hard currency from foreign investment and exports to replace what they take out. Problems in the United States and the euro zone are putting those flows at risk.
If reserves run out, Vietnam will have to hit up donors to pay for imports or pay off foreign loans. The country has borrowed heavily from governments abroad, notably former occupiers, Japan and the United States. Even if they roll over debts, a plunging dong means Vietnam’s interest costs have climbed about 12 per cent this year.
Hanoi isn’t totally powerless. Investment is weak, partly because of endemic corruption and half-hearted reform. Addressing those would attract more long-term inflows, but will take longer than the six weeks Vietnam’s reserves would last if trade and investment collapsed. That leaves Vietnam’s leaders at the mercy of Western policymakers. If things worsen, they may wonder whether opening up was such a good thing after all.