Vietnam's dependence on agriculture and its tendency to overproduce could end up deterring investors and damaging its growing economy
On any list of future Asian tiger economies, Vietnam has a place at the top. Its nearly 7% growth rate is close to China's, it boasts an emerging middle class and it is even winning some foreign investment.
Vietnam also is embracing globalisation on its own terms. It wants the benefits that come from the free movement of capital, goods and people, but not a McDonald's or 7-Eleven on every corner. This go-slow approach may help Vietnam's 80 million people avoid the boom-and-bust cycles that slammed so many others in Asia.
Along with the many reasons to be bullish on Vietnam, there is at least one to be concerned about: coffee.
In 2001, Vietnam surpassed Columbia to become the world's number two coffee producer after Brazil. Vietnam's coffee production increased sixfold in less than a decade, contributing to global oversupply that drove prices to three-decade lows. The glut hurt Vietnam's economy, too, making it a victim of its own success.
Now does that not sound a lot like the Asian financial crisis? Vietnam's economy was too closed in 1997 to experience the worst of Asia's meltdown. The crisis was caused by overcapacity; manufacturers produced more goods and created more office space than the world could use. A similar dynamic is now slamming Vietnam's coffee producers.
It is a cautionary tale for economic policy makers in Hanoi. They will have to make sure the nation's coffee bubble is not repeated elsewhere in one of Asia's most vibrant economies. If it is, investors will lack confidence in Vietnam's budding stock and bond markets.
Vietnam may be an emerging Asian tiger, but its continued focus on agricultural pursuits makes it an odd one, TheGlobalist.com, a Washington-based think tank, said in a recent report.
Most tiger countries in the region, including neighbouring Thailand, Malaysia and the Philippines, sought to use cheap labour to develop manufacturing or assembly operations. Traditionally, they strive to move up the technology curve to make higher value-added products.
'Not so for the Vietnamese,' the report said. 'Vietnam's communist government still seems to prize agricultural production above all else. In recent years, it applied the organisational skills and dogged persistence that characterised economic planning to developing one particular crop, coffee.'
An overstatement, perhaps. The good news is that Vietnam's government is working to move up the economic food chain, going after higher value-added production markets. The government already has signed a trade agreement with the US, reduced obstacles for entrepreneurs, created an active stock market and taken steps to boost investment.
Now, it is laying plans to go after the kinds of outsourcing industries that have served India's economy so well. Vietnam has rapidly increased access to information-technology education. Ho Chi Minh City, for example, is experiencing a bull market in computer-related schools; they are popping up everywhere.
Prime Minister Phan Van Khai also wants multinational companies to view Vietnam as an alternative to China. If China's Sars epidemic taught chief executives anything, it is the danger of putting all your proverbial eggs in one basket.
China has become known as the world's production floor; what if a virus like severe acute respiratory syndrome meant factories could not operate? Companies that diversify operations, in say Vietnam, could shelter themselves from that risk. Vietnam could benefit here; it too offers cheap labour and land costs and an increasingly skilled population. Hanoi also is working to diversify agriculture. As of mid-May, it had cut down about 7% of the coffee trees in its main growing province, Dak Lak, to help end the global glut.
'It is our advice to people to convert coffee areas to other crops if other crops also bring the same or higher value,' says Nguyen Van Lang, chairman of the Dak Lak Province People's Committee.
Vietnam plans to offer tax incentives and guarantees to purchase agricultural products to get farmers to shift production. It also wants coffee growers to shift production from lower- quality robusta beans to higher quality arabica beans. Currently, 98% of production is the lower-quality bean.
There is international pressure for such a shift, too. The International Coffee Organisation wants Vietnam to raise the quality of its export beans.
More broadly, the club will urge leaders of the Group of Eight countries to support proposals aimed at easing a glut that threatens the livelihood of 25 million households. Production has been rising at 3.6% a year, while demand is growing at less than half that rate, according to the ICO.
That Vietnam helped overload the global coffee market with cheap, easy-to-produce beans has two parallels with the Asian crisis. First, prior to 1997, Asian tigers also made money flooding the globe with cheap, modest-quality goods.
Second, western companies are profiting from Vietnam's overproduction. It is hurting Vietnam's economy and those of other coffee producers like Brazil, Colombia, Indonesia, Peru and some African nations. But huge coffee operations are profiting from lower input prices. You don't see Starbucks charging customers less, even though coffee prices fell to 30-year lows.
What is worrying, though, is the risk that Vietnam's coffee problems turn out to be a microcosm of the broader economy. Minister of Planning and Investment Vo Hong Phuc recently pointed to the coffee industry as an example of how 'poor-quality planning has caused damage' to local economies.
The important point here is that Vietnam appears to be learning from its coffee woes. If that is indeed the case, investors may have a new tiger to bet on in the years ahead.
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