Thayer Vietnam's Regional Integration

VIETNAM’S REGIONAL INTEGRATION: THE COSTS AND BENEFITS OF MULTILATERALISM Carlyle A. Thayer ∗ [Paper to conference on Vietnam’s Integration into the World and State Sovereignty Issues, co-organized the Centre d’Études et de Recherches Internationales and Centre Asie-Europe, Sciences Po and le École des Hautes Etudes en Sciences Sociales, Paris, France, October 25, 2004]

Introduction According to the thematic background paper provided by the conference organizers, the Vietnamese state’s authority has come under challenge (disputation and questioning) as a consequence of its twin policies of domestic renewal (doi moi) and ‘open door’ foreign policy. The thematic background paper argues that current dynamics operating at the national and supranational levels have, in fact, weakened the vertical power of the executive and called into question, to some extent, the sovereignty of the Vietnamese partystate. Finally the thematic background statement asserts: From a foreign policy point of view, the increasing number of commitments linking the Vietnamese State to its foreign partners constitutes another limitation on national sovereignty. Vietnam’s integration into the world community and international organizations, as well as its open-door policy towards foreign investors, implicitly require Vietnamese authorities to accept some exogenous norms and political decisions, and eventually even some transfers of competence away from the national domain.

This paper will explore these propositions by focusing on the process of Vietnam’s regional integration through membership in the Association of South East Asian Nations (ASEAN) from 1995 until the present. 1

∗

Professor of Politics and Foundation Director of The University of New South Wales (UNSW) Defence Studies Forum at the Australian Defence Force Academy in Canberra. In 2005, Professor Thayer will take up the position of C.V. Starr Distinguished Professor of Southeast Asian Studies at the School of Advanced International Studies, Johns Hopkins University in Washington, D. C. Revised October 27, 2004.

1For broad overviews of the regional integration process consult Le Van Sang

(1998), Vu Duong Ninh (1998), Tran Khanh (2003), Luan Thuy Duong (2004) and Vu Van Hien (2004); on the ASEAN Economic Community consult: Dang Cam Tu 1 

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This paper is organized into five parts. Part 1 discusses several key conceptual and definitional issues. Part 2 traces the origins of Vietnam’s multi-directional foreign policy and Hanoi’s decision to join ASEAN. Part 3 reviews Vietnam’s experience with multilateralism as a member of ASEAN both before and after the Asian financial crisis of 1997-98. Part 4 reviews the costs and benefits of Vietnam’s participation in ASEAN with particular focus on the ASEAN Free Trade Area (AFTA) agreement and the reform of StateOwned Enterprises (SOEs). It also includes a short discussion of the ‘code of conduct’ in the South China Sea and the Myanmar question. Part 5 offers some conclusions arising from Vietnam’s experience with multilateralism. Part 1 — Multilateralism, Sovereignty and the State Vietnam’s membership in ASEAN is effectively an exercise in multilateral cooperation or multilateralism. At the onset it is important to consider just what is meant by this term as there are differing ‘brands of multilateralism’ (Quilop n.d.). States may cooperate to attain a common interest, or they may cooperate to avoid a particular outcome. In the case of the former, states cooperate when there is an overlap in national interests and the particular area of overlap cannot be attained by independent action. Thus, states collaborate to attain common interests. But states also share an interest in avoiding certain outcomes. In these circumstances states need only to coordinate their actions to avoid certain outcomes. In other words, these two brands may be identified as collaborative multilateralism and multilateral coordination (Stein 1990). The international relations literature on multilateralism distinguishes between ‘minimalist’ and ‘maximalist’ positions, identified with the writings of Robert Keohane and John Ruggie, respectively. Keohane (1990) defines multilateralism as ‘the practice of coordinating national policies in groups of three or more states though ad hoc arrangements or by means of institutions’ (1990:731). This definition is termed the ‘minimalist definition’ because of its quantitative nature (three or more states) and because multilateral institutions are defined as simply ‘multilateral arrangements with persistent sets of rules’. Ruggie asks what is it about international institutions that make (2004) and Tran Phuong Lan (2004); and for the impact of globalisation, consult: Do Trong Ba (2003) and Van Quang (2003) .

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them multilateral (1992:566-568). He argues that it is not simply the number of actors involved but the qualitative dimension or character of their cooperation. According to Ruggie, multilateral relations involve three or more states coming together to tackle a specific issue or set of issues on the basis of generalized principles of conduct. In other words, multilateral institutions adopt appropriate conduct for a class of actions irrespective of particular interests or circumstances. Ruggie identifies three generalized principles that are important: non-discrimination, indivisibility, and diffuse reciprocity. The first principle is virtually self-explanatory. States that engage in multilateral cooperation do so on an equal basis. The principle of indivisibility means that decisions made through a multilateral institution are mutually binding on state parties. This principle may be illustrated with reference to the General Agreement of Tariffs and Trade (GATT) or the most-favoured-nation (MFN) principle. Under GATT and MFN the trade system is an indivisible whole and all parties agree to treat each other in a like fashion. The principle of diffuse reciprocity means that all members are expected to share equivalent benefits over a period of time. To take another example from the international trading regime, with respect to exports, for example, each party should receive roughly the same amount of benefit in aggregate over a period of time as all the other parties. A final point on multilateralism needs to be made: the practice of multilateralism varies across regions. Multilateralism in Europe, as embodied in the European Union (and its predecessors), is heavily institutionalized, based on rules, regulations and laws, and involves some derogation of national sovereignty (Gramegna 1997, Lim 1997 and Job 1997). In Asia, the process of multilateralism tends to focus more on process and is shaped by norms and principles (Acharya 1997). A quick comparison of the European Union (EU) and ASEAN will bear this out (this point will be discussed at the conclusion of this section). The notion of state sovereignty grew out of a distinctly European tradition. It is one of the central concepts that defines the contemporary international system. Sovereignty was adopted by Southeast Asian’s nationalist leaders and their successors as the cardinal principle of interstate relations in the post-colonial period. In general usage, sovereignty has two distinct meanings – supreme power’ and ‘autonomy’ (freedom for constraint or independence). The Westphalian notion of sovereignty precluded the existence of any higher authority beyond state borders. Sovereignty has both domestic and external dimensions. Sovereignty defines the holders

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of state authority and their prerogatives and grants them supreme authority within their territorial boundaries and in dealing with each other. But sovereignty is not a static concept or a material given (O’Hagan 2004). For example, in its original form state sovereignty in Europe emerged from a medieval system characterized by overlapping systems of authority that were unified under the concept of Christendom. Popular sovereignty, embodied in the American and French revolutions, led to an alteration in the locus of state, authority and legitimacy from rulers to ‘the people’. The rise of the concept of ‘self-determination’ led to a further modification of how sovereignty was perceived. Whatever the historical period state sovereignty was never absolute. As is the case with multilateralism, there are differing ‘brands’ of sovereignty. It is common in the field of international relations to distinguish between juridical and empirical sovereignty. Empirical sovereignty refers to a state’s ability to demonstrate its political and economic capacity for self-governance while juridical sovereignty refers to sovereignty as a moral right. Stephen D. Krasner (1999; see also Krasner 2001), for example, identifies four distinct types: interdependence sovereignty, 2 domestic sovereignty, international legal sovereignty and Westphalian sovereignty. 3 In sum, state sovereignty today is based on norms and practices and shared understandings among states that evolved as a particular historical process. The phenomenon of so-called failed states has increasingly blurred the distinction between domestic and external sovereignty. This situation presents formidable challenges to the international community in deciding on who (which actors) forms the sovereign community. The impact of globalization has also touched off another debate over whether globalization undercuts or reconfigures state sovereignty. As noted above, ASEAN is a different type of multilateral 2Krasner is highly critical of this concept, which is defined as ‘freedom from external influences’, because it is historically inaccurate and because it confuses ‘control’ with ‘authority’. 3Westphalian sovereignty rests on two principles – territoriality and the exclusion of external actors from domestic authority structures. Krasner terms this concept ‘organized hypocrisy’ because states have never been free from external intervention in their domestic affairs.

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organization from the European Union falling somewhere in between the minimal and maximalist positions. ASEAN has eschewed formal institutionalization for most of its history. The powers of the ASEAN Secretary General are quite limited and the ASEAN Secretariat comprises no more than one hundred full-time staff. ASEAN puts a premium on consultation and consensus decision-making based on the norms of non-interference in a member state’s internal affairs. And, according to one Vietnamese writer, ASEAN is a ‘loose economic alliance’ and ‘not really a coherent bloc’ (Tran Phuong Lan 2004). ASEAN’s generalized principles are enshrined in the 1967 Bangkok Declaration, the 1976 Treaty of Amity and Cooperation (TAC or Bali Concord I), and the more recently adopted Bali Concord II (2003). The norms and principles that guide ASEAN decision-making are known collectively as ‘the ASEAN Way’. A detailed study by Tobias Nischalke (1999 and 2000) of fourteen case studies of ASEAN foreign policy behaviour concluded that ASEAN’s ‘shared meaning structures’ were based on a ‘narrow foundation of regional norms of conduct and agreement on the benefits of power balancing in security affairs’. The Nischalke study found that ASEAN states quite often took unilateral foreign policy decisions without prior consultations with other members. ASEAN, he concluded, was not an identity-based community but an emerging rules-based community in which the norms of the TAC were increasingly accepted. In sum, ASEAN and the ‘the ASEAN Way’ operate as a process designed to prevent a clash between institutional multilateralism and state sovereignty (the question of Myanmar is discussed in part three). ASEAN has no mechanisms to force compliance with its decisions. Its main dispute resolution mechanism, the ASEAN High Council, has never operated. The one possible exception is the AFTA and its implementing mechanism the Common Effective Preferential Tariffs (CEPT) arrangements discussed in part three below. Increasingly, on other economic matters, ASEAN has adopted a decision-making formula that permits members who disagree on a certain policy proposal to opt out, while other states, which are in agreement, to proceed. ASEAN also practices ‘positive discrimination’ in economic matters in relation to its newest and less developed members Vietnam, Laos, Myanmar and Cambodia. If the concepts of multilateralism and sovereignty are problematic, so

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too is the nature of the Vietnamese state. 4 Scholars have debated whether Vietnam is a ‘weak’ or ‘strong’ state (Dauvergne 1998, Migdal 1988). Some argue that the Vietnamese state is strong in some policy spheres while weak in others. Some academics see an erosion of party-state fusion with the state taking on a more powerful role via the National Assembly and other government institutions. Still other scholars question whether concepts of ‘strong’ and ‘weak’ state are at all useful in characterizing contemporary relations between Vietnamese party-state authorities and society (Painter 2003:22). This issue will arise in part three below within the context of an official program to equitize state-owned enterprises (SOEs). Part 2 — Vietnam’s Multi-Directional Foreign Policy Since the birth of the Democratic Republic of Vietnam in 1945, and more particularly since the partition of Vietnam in 1954, communist Vietnam has been relatively isolated in international affairs. During the Vietnam War Vietnam was dependent on aid and assistance from the Soviet Union and China. Perhaps its only major experience with multilateralism came through membership in the Council for Mutual Economic Assistance (CMEA). Vietnam was grouped with Cuba and Mongolia as less developed members and held a dependent subordinate place in Moscow’s international division of labour (Thakur and Thayer 1992:173-198 and 224-226). Vietnam’s foreign policy was almost entirely framed by communist ideology and political-strategic dependence on the USSR. During the 1980s, a remarkable transformation took place in how Vietnam’s policy elite conceptualized foreign policy. The roots of this transformation were two fold. They lay in domestic circumstances arising from the socio-economic crisis that confronted Vietnam at that time. And secondly, they also lay in external influences arising from the ‘new political thinking’ emanating from Gorbachev’s Soviet Union. Vietnam turned from a foreign policy framework heavily structured by ideological considerations to a foreign policy framework that placed greater emphasis on national interest. Vietnamese officials now emphasized global economic forces and the impact of the revolution in science and technology over militaryindustrial aspects of power when weighing the global balance (Nguyen Manh Cam 1995:223-230, and Vu Khoan 1995:71-76). The old and new foreign policy frameworks overlapped and co-existed

4See summary overviews by Gainsborough (2002 and 2003), Kerkvliet (1995a,

1995b, 2003a and 2003b) and Thayer (1995).

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for a period of time. In December 1986, at the sixth national congress of Vietnam Communist Party (VCP), Vietnam adopted the policy of doi moi. This policy was mainly concerned with overcoming the domestic economic crisis by the adoption of socio-economic reforms. But the sixth party congress sanctioned the beginnings of the open door foreign policy; Vietnam now began to encourage foreign direct investment from developed free market economies. It was not until May 1988 that Vietnam’s new foreign policy orientation was codified. This took the form of Politburo Resolution no. 13 which asserted that ‘economic weaknesses, political isolation and economic blockade are major threats to our country’s security and independence’. Therefore Vietnam should pursue ‘the establishment of a framework for the Indochinese-ASEAN peaceful co-existence as conditions for maintaining peace, developing the economy and consolidating the relationship of cooperation and solidarity among the three countries’ (quoted in Luu Doanh Huynh 2004:30). The objective now was ‘to maintain peace, take advantage of favorable world conditions’ in order to stabilize the domestic situation and set the base for economic development over the next ten to fifteen years (Nguyen Dy Nien 1996:47). This was a landmark policy decision that set Vietnam firmly on a ‘multi-directional foreign policy’ orientation. After Vietnam’s withdrawal from Cambodia in September 1989, both Vietnamese and Southeast Asian leaders began to discuss the prospects of and conditions for Vietnam’s membership in ASEAN. In November 1990, Indonesia’s President Suharto became the first ASEAN head of state to pay an official visit to Vietnam. In March 1991, Malaysia’s Prime Minister proposed the initiation of a dialogue between ASEAN and the non-member states of mainland Southeast Asia (Vietnam, Myanmar, Laos and Cambodia). This was immediately welcomed by Vietnam which also signaled its desire to attract investment from ASEAN businessmen. These developments took place while a comprehensive political settlement of the Cambodian issue was being negotiated. An important elaboration of Vietnam’s ‘multi-directional foreign policy’ was adopted by the seventh national party congress in June 1991 (Vu Khoan 1995:75). Vietnam now sought ‘to be friends with all countries’. Vietnam’s Strategy for Socioeconomic Stabilization and Development Up to the Year 2000, declared that Hanoi would ‘diversify and multilateralise economic relations with all countries

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and economic organizations...’ Since the seventh party congress, Vietnam succeeded in diversifying its foreign relations. The major accomplishments of this new orientation were fivefold: normalization of relations with China (November 1991), the restoration of official assistance from Japan (November 1992) and in 1995 normalization of relations with the United States, membership in ASEAN, and the signing of a framework agreement with the European Union. For the first time, socialist Vietnam had established relations with all five permanent members of the UN Security Council and equally importantly, with the world’s three major economic centers: Europe, North America and East Asia. Vietnam’s overall diplomatic relations expanded to include diplomatic ties with 163 countries by the end of 1996. In 1989, Vietnam had diplomatic relations with only twenty-three non-communist states. In August 1991, Phan Van Khai, first vice chairman of the Council of Ministers, speaking at an international symposium in Hanoi, signaled Vietnam’s desire to cooperate with ASEAN members. Pham Van Tiem, chairman of the State Price Committee, stated that ‘ASEAN can become the bridge between Vietnam and the world’ (quoted by Andrew Sherry, Agence France-Presse, August 25, 1991). In September, during the course of a visit to Hanoi by Thailand’s Foreign Minister, Vietnam expressed its willingness to accede to the 1976 ASEAN Treaty of Amity and Cooperation and then followed up by officially notifying the Philippines of its intention (Kavi Chongkittavorn, The Nation, September 24, 1991). The Cambodian peace agreement, signed in October 1991, and the collapse of the Soviet Union in December that year represented a major watershed in the development of Vietnam’s ‘omni-directional’ approach to foreign policy (for the effects on Vietnam’s economy consult Flatters 1997). The Cambodian settlement meant that Vietnam was no longer an international pariah state subject to an aid and trade boycott. After the Cambodian settlement, Vietnam quickly moved to restore relations with the individual members of ASEAN and with ASEAN as a regional organization. Vo Van Kiet, then chairman of the Council of Ministers, led a highlevel government delegation to Indonesia, Thailand and Singapore in October-November 1991. The following year Kiet visited Malaysia, the Philippines and Brunei. Kiet’s trips marked a return of Vietnam into the regional fold and a turning back of the clock to 1976–77 when Vietnam-Southeast Asia relations were at an all time high. Since Kiet’s ground-breaking visits, Do Muoi, Secretary General of the Vietnam Communist Party, paid visits to Singapore,

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Malaysia, Thailand, New Zealand, Australia, Japan, South Korea and Myanmar. The end of the Cambodian conflict also brought with it an end to ASEAN’s trade and aid embargo. This led to unprecedented levels of commercial interaction. ASEAN investment increased ten fold in just three years (1991–1994), and made up fifteen per cent of total direct foreign investment. ASEAN states became involved in over 147 projects with a paid up capital of US$1.4 billion by the first half of 1994. Thirty-seven development agreements were signed between Vietnam and ASEAN businesses during this period. Sixty per cent of Vietnam’s foreign trade was with ASEAN states. In 1994, Singapore overtook Japan to become Vietnam’s biggest trading partner. Four of the ASEAN countries ranked among the top fifteen foreign investors in Vietnam. Singapore and Malaysia ranked sixth and seventh, respectively, after Hong Kong, Taiwan, South Korea, Australia and France (figures published by the State Committee for Cooperation and Investment, August 11, 1994). The industrializing economies of Thailand and Malaysia also made them important models for Vietnamese emulation. The collapse of the Soviet Union in late 1991, coupled with the prior collapse of the socialist system in Eastern Europe in 1989, drastically altered Vietnam’s strategic environment. Military confrontation of the Cold War era was now a thing of the past. More importantly, Vietnam suffered from the abrupt loss of Soviet aid and markets. Since 1992, in preparation for membership, Vietnam joined six ASEAN committees and five ASEAN projects on functional cooperation, including science and technology, environment, health services, population, tourism, culture, civil aviation and maritime transportation. In 1992 and 1993, Vietnam attended the annual ASEAN Ministerial Meetings as an observer. In July 1992 Vietnam acceded to the 1976 ASEAN Treaty of Amity and Cooperation. By so doing Vietnam renounced the use of force or the threat to use force in foreign relations. And Vietnam committed itself to the non-violent resolution of any conflict which might arise under mechanisms spelled out in the 1976 Bali Treaty. Two years later, at the ASEAN Ministerial Meeting in Bangkok, ASEAN officially invited Vietnam to become its seventh member. Vietnam’s application was formally approved in late 1994 and it became a member in July 1995. Vietnam also joined the ASEAN Regional Forum at this time (Nguyen Phuong Binh 1994a:30-34 and Vu Tung 1994:28-33).

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Upon joining ASEAN, Vietnam reorganized its bureaucracy by creating a National ASEAN Committee headed by a Deputy Prime Minister with responsibility of coordinating all institutions that interacted with ASEAN or ASEAN-affiliated bodies. An ASEAN Department was created within the Foreign Ministry. In sum, Vietnam’s new multidirectional foreign policy paid handsome dividends in terms of international prestige and economic benefit. As a member of ASEAN Vietnam could bask in the prestige of the organization itself and participate in its various socioeconomic and cultural programs, including regional economic integration. Vietnam attended the fifth ASEAN summit and the first Asia-Europe Meeting (ASEM) both held in 1995. That same year Vietnam exchanged thirty-five major delegations with ASEAN states. President Le Duc Anh visited the Philippines and Vietnam hosted the King of Malaysia. Figures released at the end of 1995 revealed that ASEAN states had invested in 234 projects with a total investment capital reaching US$3.2 billion. As of 16th May 1997, these figures had risen to 312 projects with a total capitalization of US$7.6 billion or 20% of the total foreign direct investment in Vietnam. Singapore ranked first in both the number of projects, totaling 156, and capital invested, US$5.1 billion (Le Quoc Phuong, Saigon Times Daily, May 21, 1997). Part 3 — Vietnam in ASEAN Since Vietnam joined ASEAN there has been a new openness in Vietnamese official pronouncements on foreign policy and an increased productivity of academic writing on foreign affairs. This material has provided greater nuance to our understanding of Vietnamese foreign policy motivations at this time. This section reviews the factors that influenced Vietnam’s decision to join ASEAN and how Vietnamese officials and scholars evaluated membership both before and after the Asian financial crisis of 199798. Why did Vietnam join ASEAN? 5 Vietnam joined ASEAN primarily for a mix of politico-strategic and

5This section draws on Thayer (1999c and 2004b). For contemporary views consult

Nguyen Vu Tung (1993), Hoang Anh Tuan (1994 and 1996), Goodman (1996), Nguyen Manh Hung (1996), Singh (1997), Zagoria (1997), Pham Duc Duong (1998) and Takahiro (1999).

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economic motivations. According to one official, for example, Vietnam expected ASEAN membership to provide enhanced national security, external support for economic development, and as a catalyst to its domestic reform process (Doan Manh Giao 1995). According to Nguyen Phuong Binh and Luan Thuy Duong (2001:186-189) there were three ‘driving forces’ behind Vietnam’s desire to join ASEAN: (1) a favourable external environment with peaceful and friendly relations with neighbouring countries; (2) economic co-operation; and (3) enhanced standing in the wider AsiaPacific region and the world (including relations with the United States, Japan, China, Russia and India). I have written elsewhere that Vietnam joined ASEAN with the prime strategic objective of securing of a more peaceful international environment in which to guarantee Vietnam’s national security against external threat (Thayer 1999). This has been misconstrued by one writer as implying that Vietnam joined ASEAN in order balance China. (Nguyen Vu Tung 2002). The word ‘threat’ was not meant exclusively in its narrow military sense as Politburo Resolution No. 13 had already identified economic threats (such as embargoes) as one of its main security concerns. 6 There were at least two main aspects to Vietnam’s politico-strategic strategy. The first aspect was to overcome the recent historical legacy of suspicion and mistrust with its ASEAN neighbours. It has only to be recalled that Thailand and the Philippines both provided air and naval bases to the United States during the Vietnam War. Thailand contributed armed ground forces for combat while the Philippines provided civic action teams to assist in pacification. The ASEAN states took a strong stand opposing Vietnam’s decade-long occupation of Cambodia. Thailand worked with China in providing bases and assistance to the anti-Vietnamese resistance forces. The non-communist resistance forces received support from Singapore and Malaysia as well. By joining ASEAN Vietnam signaled a fundamental change in its foreign policy orientation. Vietnam now sought ‘security with’ rather than ‘security from’ Southeast Asia. Vietnam moved quickly to resolve such problem areas as the repatriation of Vietnamese refugees, demarcation of continental shelves, overlapping territorial claims involving Malaysia, the Philippines and Thailand and fishing disputes (Kawi

6For a detailed evaluation of Vietnamese views of the ‘China threat’ consult Thayer (2002c).

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Chongkittawon, The Nation, January 29, 1992 and Amer 1999, 2003 and 2004). These legacies of history were seen as irritants that could impede the development of close ASEAN-Vietnam relations. Vietnam also joined ASEAN primarily for the political and strategic benefits it calculated it would gain vis-à-vis the ‘great powers’, China and the United States. This constitutes the second aspect of the politico-strategic dimension. Vietnam’s membership in ASEAN was expected to lead to enhanced standing and prestige in the wider Asia-Pacific and the world. And this in turn provided Vietnam with an enhanced bargaining position in global affairs. Vietnam expected to be able to leverage its ASEAN membership with the major powers without any detrimental effect on its existing external relations. Vietnam did not join ASEAN to balance against China. As noted by Hoang Anh Tuan, ‘Vietnamese history shows that one-sided relations have led to political isolation and economic difficulties.... Therefore, Vietnam’s ASEAN membership should be achieved in a way that would strengthen instead of harm Vietnam’s relations with China’ (1993:288-289). Chinese assertiveness in the South China Sea in 1992 was undoubtedly a consideration in Vietnamese decisionmaking regarding ASEAN membership, but was not the prime motivating factor. In Hanoi’s view, ASEAN membership transformed what was a bilateral issue between Beijing and Hanoi into a multilateral one involving China and ASEAN as a group. Vietnam also sought membership in ASEAN as a means to improve its relations with the United States. In 1994, before Vietnam was a member, it was still subject to a US-imposed trade and aid embargo. In Hanoi’s view, Vietnam would be strategically more important to Washington as a member of ASEAN. Vietnam hoped that ASEAN membership would transform its image as a ‘communist trouble maker’ into a potential ‘partner for peace’. Indeed, the United States lifted its embargo just as Vietnam joined ASEAN. Hanoi expected that ASEAN membership would provide it some political ‘insulation’ in its dealings with the United States and Europe on such issues as human rights and democratization. According to one Vietnamese political analyst, Vietnam would be ‘quite happy to hide behind’ Malaysia and Singapore on those issues (Adam Schwartz, Far Eastern Economic Review, March 16, 1995 and Nguyen Phuong Binh 1994b:26). According to Nguyen Vu Tung (2002), the above explanations, based on realist and neo-institutionalist paradigms, are not wholly

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adequate in explaining why Vietnam joined ASEAN. Tung, basing his analysis on the constructivist paradigm, stresses the importance of state identity. Tung concludes his analysis: The tentative argument is that there is a strong linkage between the search for a new state identity in the aftermath of the Cold War and the making of foreign policy in Hanoi. The search for a new state identity - which is compatible to that of the ASEAN states – suggests that Vietnam would forge a closer co-operative relationship with the ASEAN states, and that membership in ASEAN would inform Vietnam’s present and future foreign policy.

This point of view deserves further consideration. But it should be born in mind that as late as 1992 ideological considerations continued to shape Vietnamese foreign policy perceptions (Bui Tin 1995:191; and for the contemporary period see Phan Doan Nam 2003). When Vietnam joined ASEAN in 1995 it subscribed to the principles of the Treaty of Amity and Cooperation. Yet one Vietnamese writer has revealed that Hanoi retained reservations. According to Pham Cao Phong, ‘despite announcing its commitment to the Treaty of Amity and Cooperation… Hanoi is not so certain whether it accepts the rules of the game, that is, accepts all the written and unwritten norms of the relationship among ASEAN countries without any exceptions’ (Trends, Business Times Weekend Edition, June 29-30, 1996). According to Hoang Anh Tuan, ‘[p]olitically, due to ASEAN’s high international prestige, ASEAN membership would enhance Vietnam’s diplomatic standing and integrate Vietnam’s security with the security of the whole of Southeast Asia, thus creating an external environment favorable for economic development’ (1993:283). In other words, Vietnam’s second major motivation for joining ASEAN was economic. This motivation has several dimensions. First, as a member of ASEAN, Vietnam expected to learn from the developmental experience of its original members and receive their support in addressing Vietnam economic concerns, especially as a developing country. In other words, membership in ASEAN would act as a catalyst for and further accelerate domestic reforms in Vietnam. Second, Vietnam expected to benefit from increased trade and investment from ASEAN states (Ramasamy 1996:29-47 and Le Quoc Phuong). And third, Vietnam wanted to secure integration with the regional and global economies as a long-term goal. It is significant to note, in light of the state identity question, that when Vietnam initially sought admission to ASEAN it requested not

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to participate in the AFTA process (Flatters 1997:1). ASEAN members, however, made this a requirement for entry (Guina 1997:13). ASEAN foreign affairs and economic ministers were split on the modalities of Vietnam’s admission and Vietnam took advantage of this to obtain a three-year extension in meeting AFTA’s tariff reduction goals (Guina 1997:24). Vietnam’s membership in AFTA was not expected to greatly affect the other ASEAN economies as trade with Vietnam at that time comprised about 2.5 percent of the existing intra-ASEAN total. The AFTA came into being in January 1992 with the objective of eliminating tariff barriers among ASEAN members and thus integrating the ASEAN economies into a single production base and regional market by 2010 (ASEAN Free Trade Area n.d.; Bowles 1997; and Southeast Asia: A Free Trade Area 2002). This target date was later brought forward and separate deadlines were set for newer members. The key mechanism is the Common Effective Preferential Tariff (CEPT) scheme. Signatories are required to classify all manufactured goods into one of four categories: Inclusion List, Temporary Exclusion List Sensitive List and General Exclusion List. AFTA members have agreed on a schedule to reduce tariffs on goods in the first two lists to within the range of 0-5% according to an agreed schedule. AFTA members are also required to remove quantitative restrictions and other non-tariff barriers (Lao-Araya 2003:61; Ahmad 2003). On 15th December 1995, Vietnam signed the protocol acceding to the agreement on the CEPT as a first step in joining the ASEAN Free Trade Area (Setboonsarng 1996:36-38). Vietnam was required to provide information on its trade regime and reduce tariffs on its immediate Inclusion List to 0-5% by January 1996. In actual fact, all 857 lines on Vietnam’s immediate Inclusion List already met this requirement. Vietnam retained 1,189 tariff lines (54% of the total) on its Temporary Exclusion List and 26 tariff lines on its Sensitive List (1% of the total). Vietnam was obligated to phase in tariff reductions on its temporary exclusion lines in five equal installments beginning in January 1999 and ending by January 2003. By 2003, ninety-two per cent of all tariff lines used by Vietnam would fall under the CEPT scheme. Most of Vietnam’s sensitive list includes unprocessed agricultural products. In 1996, after the first anniversary of Vietnam’s membership in ASEAN, Vietnamese officials were generally upbeat in their assessments. Foreign Minister Nguyen Manh Cam stated that Vietnam made the right decision to join ASEAN despite the

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difficulties it now faced in liberalizing its economy in an effort to catch up with the other six members (1995:223-230 and Lee Kim Chew, The Straits Times, September 10, 1996). Cam also mentioned difficulties caused by differences in the political systems, noting in particular Vietnam’s socialist government, planned economy, inexperience with the free market, and the lack of English-speaking officials. Nonetheless, Cam stated, Vietnam would meet its obligations to open its economy under AFTA by 2006. ‘We want to strengthen the trend towards regionalism and international integration. This will promote peace and stability’, he declared. Among the Vietnamese foreign policy elite there too was a general consensus that the decision to join ASEAN was correct and had been a success (Vu Khoan 1998). By May 1997, three ASEAN countries—Singapore, Malaysia, and Thailand—ranked among the ten largest foreign investors in Vietnam (Indonesia ranked eighteenth, the Philippines twenty-first). Singaporean investment was concentrated in the fields of hotel construction and tourism. Malaysia and Indonesia invested in Vietnam’s oil sector, while Thailand has concentrated on mineral exploitation and processing. ASEAN investment was expected to rise as investors sought to exploit Vietnam’s lower labor costs in resource and labor intensive industries (Nguyen Xuan Thang 1998). What was the situation with trade? By 1997 Vietnam developed a trade imbalance and growing deficit with other ASEAN members. 7 As intra-ASEAN trade expanded Vietnam reoriented its exports to take advantage of this large market. About thirty percent of Vietnam’s exports went to ASEAN states. Imports from ASEAN accounted for nearly one-half of Vietnam’s total imports. The volume of trade with ASEAN countries rose markedly in dollar value terms and resulted in a situation in which more than half of Vietnam’s trade deficit of US$3.5 billion (1996 figures) was with other ASEAN countries. The Asian Financial Crisis and After In 1997 ASEAN was affected by a series of crises that severely tested its unity and cohesion. These included the Indonesian ‘haze’ problem, the violent breakdown of coalition government in Cambodia, and the impact of the Asian financial crisis. The later provoked serious political instability and unexpected leadership 7For a contemporary macroeconomic assessment of the Vietnamese economy see

Do Duc Dinh (1998).

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change in Indonesia. These triple crises overlapped with ASEAN’s expansion in membership to include Myanmar and Laos (Thu My 1998). According to two Vietnamese writers, ASEAN members became preoccupied at this time with internal stability and sought to recover by emphasizing policies of self-help over regional cooperation. The Asian financial crisis also undermined both regional and national resilience as well as ASEAN’s collective selfconfidence (Nguyen Phuong Binh and Luan Thuy Duong 2001; for a general assessment see Pham Duc Thanh 1998). Vietnamese writers assert that ASEAN’s disarray in dealing with these issues also served to reinforce those voices in Vietnam who urged a go slow approach to economic integration (and political reform). Vietnamese officials became alarmed by three developments in particular. The first concerned the impact of these multiple regional crises on Vietnam’s economic and political stability. In late 1997 Vietnam was wracked by a series of peasant disturbances in Thai Binh province (and elsewhere) that may have contributed to a change in leadership at this time (party Secretary General Do Muoi was replaced by Le Kha Phieu in December; Thayer 2001). The second development concerned the economic impact of the Asian financial crisis and ASEAN disarray on Vietnam (Pham Quoc Tru 2003). This took multiple forms. Several ASEAN members reduced their expected contributions to Vietnam’s economic development at intergovernmental and private sector levels. Monetary devaluations in the region resulted in stiff competition in some sectors as ASEAN goods entered the Vietnamese market place in greater amounts (Nguyen Phuong Binh and Luan Thuy Duong 2001:185-205). In other words, economic transactions between ASEAN and Vietnam became less effective as the structure of trade worked against Vietnam’s economic interests. As ASEAN’s cohesion came under challenge, Vietnamese leaders worried that the development gap within ASEAN between old and new members would widen and create a two-tiered organisation. 8 Vietnamese concerns were fueled by statements attributed to officials from the original ASEAN 5 that alleged enlargement had led 8This is also a current concern. Hoang Thi Thanh Nhan (2004) and Tran Khanh (2003) argue that the development gap between ASEAN members adversely affects regional economic security. For difficulties in narrowing this gap and achieving ‘convergence’ consult (Gates 2000, 2001 and 2001b); and for a more general discussion on the lessons for Vietnam, see Tran Van Tung (2003), Van Quang (2003) nd Vu Anh Tuan (2004).

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to a slow-down in ASEAN decision-making and consensus-building and new members were an economic and political burden. The third development concerned a move by Thailand, supported by the Philippines and the Deputy Prime Minister of Malaysia, Anwar Ibrahim, to modify ASEAN’s long-cherished principle on noninterference in the internal affairs of other member states (Thayer 1999). Thailand’s proposal was aimed at Myanmar whose domestic policies, it was alleged, spilled over and threatened regional stability. Malaysia’s Deputy Prime Minister wanted Cambodia included in this discussion on constructive intervention. Vietnam supported the status quo. The Asian financial crisis and its aftermath shook Vietnam’s expectations of mutual support from fellow ASEAN members and raised serious concerns in Hanoi about the benefits and advantages of multilateralism through membership in ASEAN. As a result Vietnam adopted what might be termed a three-pronged approach in its external relations: (a) ‘positive discrimination’ in the case of ASEAN’s new members; (b) developing a caucus of less developed politically closed states within ASEAN (Thayer 2000c); and (c) increased emphasis on bilateral relations with China and the United States. Vietnam used its status as the host for ASEAN’s sixth summit meeting in December 1998 to successfully obtain endorsement from other ASEAN members for special treatment for the four newer members: Cambodia, Laos, Myanmar and Vietnam. In order to overcome the development gap between ASEAN’s more developed and less developed economies, the ASEAN 6 (the five original members plus Brunei) agreed to assist and grant special treatment to the latter in their development efforts. This ‘positive discrimination’ was embedded in the Hanoi Plan of Action and other documents adopted by the sixth summit. The theme of reducing the development gap between the ASEAN 6 and ASEAN’s newer members has become of central feature of ASEAN economic programs, such as the ASEAN Investment Initiative. Vietnam has had close and long-standing historical ties with the regimes in Cambodia, Laos and Myanmar (CLM) which pre-dated their membership in ASEAN. After the ‘CLM’ countries were admitted into ASEAN, and particularly after the 1997-98 debate over ‘constructive intervention’, Vietnam has moved to ensure that bilateral relations remain as firm as ever. In addition, Vietnam has also developed develop multilateral cooperation through a grouping

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of Mekong states at sub-regional level. These economic and political linkages may be designed to mirror the influence of the ASEAN 5/6 within ASEAN itself and may represent a nascent caucus of politically closed states within the Association (Thayer 2000c). Finally, it is notable that in the aftermath of the Asian financial crisis, Vietnam moved to improve its bilateral relations with the major powers. In 1999, Vietnam was one of the first ASEAN members to sign a long-term cooperative framework agreement with China that sets the context for bilateral relation into the first decade of the 21st century. By the end of 2001, all other members of ASEAN had entered into roughly similar long-term cooperative framework agreements with China (Thayer 2003a). Bilateral relations with the United States took on a decidedly new dimension in 2000 when Vietnam finally agreed to the terms of a long-term Bilateral Trade Agreement (BTA) with the United States. Vietnam must undertake a comprehensive set of commitments on tariffs and non-tariff barriers for industrial and agricultural goods, services, intellectual property rights, investment, transparency and other matters. This has required Vietnam to amend legislation and bring new laws and regulations into effect in order to meet its BTA commitments. In addition to gaining access to the American market, the BTA will act as a stimulus to further domestic economic and legal reforms and serve as a solid foundation for membership in the World Trade Organization. 9 The improvement of Vietnam’s bilateral relations with China and the United States should be seen as complementary actions. As a near neighbour, Vietnam must adjust to the rise of the Chinese economy. At the same time, Vietnam needs access to the world’s largest market if it is to become fully integrated with the world economy, a goal long advocated by its leaders. In sum, Vietnam too has pursued selfhelp measures to advantage itself in light of ASEAN’s disarray following the Asian financial crisis. Vietnam’s decision to join ASEAN was heavily influenced by both 9According to Deputy Prime Minister Vu Khoan, ‘Vietnam depends on the world economy in terms of both input and output. Therefore, the need for the country to join the WTO is necessary… Besides WTO members have pledged to remove quotas by 2005. Not being a WTO member, Vietnam will face numerous difficulties as it will still have quotas imposed. That’s why the WTO admission is not the government’s ambition or [anybody] else, but an objective need’; Viet Nam News Agency, December 13, 2003. For an overview consult: Nguyen Thanh Nga (2003), Nguyen Van Thanh (2003) and Vu Van Phuc (2003).

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the domestic and external environments. Domestically, Vietnam faced a major economic crisis in the mid-1980s to which it responded with a policy of economic renovation. At the same time, the success of export-led growth by the East Asian ‘tiger’ economies spurred Vietnamese leaders to adopt outward-orientated economic policies in order to catch up with its Southeast Asian neighbours (Guina 1997:10l and Tran Van Tung 2003). Externally, the Cold War era of confrontation and regional polarization gave way to a period of heightened regionalism and cooperative security among the states in Southeast Asia. Vietnam quickly moved to defuse the outstanding irritants with its neighbours left over from history. For the first time since independence, Vietnam faced no imminent military threats to its borders. This resulted in a massive ‘peace dividend’ as Vietnam slashed defence spending and demobilized over two-thirds of its main forces (Thayer 2000b). These developments helped shape a peaceful regional environment in which Vietnam could engage in economic development. ASEAN experienced a number of difficulties in managing differences among its members on such issues as democratization and human rights, security perceptions, and attitudes towards international institutions and the great powers. This was particularly the case in the period of the Asian financial crisis and its aftermath (Thayer 2004a). Disarray in ASEAN meant that ASEAN became less effective as an organization in dealing with external powers. Singapore, for example, pursued a policy of self-help in negotiating a number of free trade agreements with external powers (Mahani 2002). Vietnam, for its part, sought to shore up bilateral relations with China and the United States. Part 4 —Costs and Benefits of Multilateralism Through ASEAN Membership At the height of Vietnam’s dependency on the Soviet Union, Vietnam’s leaders were widely known for their nationalism and independence in defence of state sovereignty. When Vietnam joined ASEAN it had to become a ‘team player’ and adjust its external policies to fit in with the ASEAN consensus (Truong Giang Long 1997:57-59). The ASEAN process is a weak form of multilateralism. Institutionalization is at a nascent stage and ASEAN has no formal compliance mechanisms to compel or punish its members. Vietnam’s decision to join AFTA marks the first time Vietnam has

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taken part in regional economic cooperation. The AFTA is one of the least restrictive regional trading agreements (Lao-Araya 2003:62). Timetables for the implementation of CEPT commitments vary among individual states (Vo Thi Thanh Loc 2001:3). An AFTA Council was set up to supervise AFTA’s implementation but it too has no powers to force members to comply. This section explores the nature of ASEAN multilateralism with reference to AFTA and the reform of Vietnamese state-owned enterprises (SOEs), the ‘code of conduct’ in the South China Sea, and the Myanmar question. ASEAN Free Trade Area 10 As noted above, during preliminary discussions about ASEAN membership, Vietnam requested that it be permitted to join without being required to become a party to the ASEAN Free Trade Area agreement. ASEAN declined and five months after joining, Vietnam signed on to the Common Effective Preferential Tariff scheme. 11 The deadlines for CEPT tariff reductions have been repeatedly brought forward so Vietnam is now required to reach the last stage of tariff reductions in 2006. The deadline for the ASEAN 6 states came into force in 2004. AFTA also included a forty percent local content rule on goods traded between two members (this has recently been reduced to twenty percent). In addition to tariff reductions, ASEAN members are required to end quantitative restrictions and remove non-tariff barriers.

10For a general discussion see Ahmad (2003) and Bowles (1997).

11Vietnam’s commitment to AFTA is generally pictured as imposing obligations on Vietnam. For a contrary view, that argues AFTA represents an opportunity consult Flatters 1997.

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ASEAN’s experience with the implementation of the CEPT scheme has generally been quite good (see Figure 1). The ASEAN six are basically CEPT compliant although ‘certain long-standing member countries have not fully complied with requirements of the CEPT scheme in spite of written deadlines’ (Lao-Araya 2003:62). ASEAN has not moved to force compliance when its members experience genuine difficulties. In May 1997, Vietnam instituted a ban on imported fans to save foreign exchange and to protect local industry. This ban violated AFTA provisions and was quietly revoked two months later (Flatters 1997). In the case of Malaysia, for example, tariff reductions on its automotive industry were agreed before the full effects of the Asian financial crisis were known. Malaysia has continued to provide protection for this industry and is involved in dispute settlement talks with Thailand, the country most affected by this delay. ASEAN has also had to back track in the situation where members first announced tariff reductions on items on their Temporary Exclusion List (TEL) only to rescind these reductions in the face of protectionist pressures. ASEAN has agreed only to permit this for goods on the last schedule of the TEL. Despite Vietnam’s initial reservations, there are a number of advantages to its participation in AFTA and the CEPT scheme. First, Vietnam’s participation in AFTA has resulted in trade creation and trade diversion benefits to Vietnam. Trade between Vietnam and the other ASEAN members has risen. Vietnam imports quality materials from ASEAN that it uses in both domestic production and export. This has benefited its textile, garment, leather and electronic assembly industries the most. Vietnam has also benefited from increased ASEAN foreign direct investment (although this has

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declined following the Asian financial crisis). Vietnam has also benefited from modest technology transfers. Vietnam’s participation in AFTA has provided it with familiarity with the norms and practices of international trade. This experience has facilitated Vietnam participation in the Asia Pacific Economic Cooperation (APEC) forum which Vietnam joined in November 1998 (Do Nhu Dinh 2003). This experience should also stand Vietnam in good stead as it prepares for membership in the World Trade Organization. And finally, Vietnam’s participation in AFTA provides it was a modest buffer against China’s economic rise and an off-set to goods smuggled from China (Vo Thi Thanh Loc 2001:7). The above optimistic picture needs to be qualified somewhat. Although Vietnam’s trade with ASEAN is increasing, Vietnam’s trade with China and the United States is increasing at an even faster rate. One economic study argues that it is ‘too soon to conclude that ASEAN is the dominant market for Vietnamese products’ due to Singapore’s role in re-exporting Vietnamese goods (Vo Thi Thanh Loc 2001:6). According to this same study: ‘AFTA does not have direct impact on import-export relations of Vietnam. Equivalently, AFTA will not create any extremely quick momentum or fundamental changes for Vietnams trade unless there are improvements in the structure of domestic production’ (Vo Thi Thanh Loc 2001:7). Vietnam has been reliant on tariff revenues for a major portion of state revenues as well as a protective device for inefficient industries (Lao-Araya 2003:59 and Vo Thi Thanh Loc 2001:9). This will now be lost as tariff reductions kick in. Vietnam has had to adopt a Value Added Tax in compensation and this will require greater capacity in the administration of tax collection. Vietnam has also protected sensitive economic sectors by including them on the General Exclusion List (GEL). 12 This is in contravention of the purpose for which the GEL was established (Flatters 1997). Finally, it may be too early to make a definite assessment of the costs and benefits of AFTA to Vietnam until Vietnam implements the last stage of CEPTmandated tariff reductions.

12According to Guina (1997:15), ‘Vietnam’s General Exclusion List (GEL) as a proportion of tariff lines is by longest among ASEAN. Vietnam’s GEL is presently under discussion since many items in the list do not satisfy the criteria for inclusion in this category. Contentious products include computers, milk, petroleum, radio, cars and other passenger vehicles, used clothing and sewing machines’.

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Since joining AFTA, Vietnam has been under constant pressure to reduce tariff barriers to meet ever-advancing deadlines (Thayer 2002a). The IMF, World Bank and donor countries have also applied their own pressures (a discussion of these institutions is outside the scope of this paper see: Painter 2003:32-34 and Clarke 2001:22). A lowering of tariffs and other barriers to trade under AFTA mean that Vietnamese enterprises will be forced to compete with their ASEAN counterparts. The positive side of this process for Vietnam will lie in its ability to import material used in export production at cheaper prices than before. Vietnam will also be able to participate in an ASEAN-wide labour chain of production utilizing its comparative advantage of cheap skilled labour. While Vietnam’s export sector has demonstrated robust growth in the years preceding the Asian financial crisis, as indicated by the increasing share of exports as part of Vietnam’s GDP, one economic study has concluded ‘there is no firm econometric evidence to suggest that exports are an engine of economic growth and development in Vietnam as they have been in other East Asian economies…’ (Phan Minh Ngoc, Nguyen Thi Phuong Anh and Phan Thuy Nga 2003:229). There are a number of factors that account for this including the static nature of Vietnamese exports (low valueadded unprocessed agricultural products and minerals), the lack of an efficient service industry to support exports and excessive concentration on too few export partners. Reform of State-Owned Enterprises Vietnam is now facing crunch time where the obligations of multilateralism intersect with national sovereignty and touch on highly sensitive issue involving political power and political economy. These issues are highlighted with respect to the SOE sector which have come under domestic and external pressure to restructure and reform. According to one study, ‘[a]s Vietnam completes its AFTA commitments in 2006, intra-ASEAN traded goods will flood the domestic market and hamper the development of domestic sectors unless Vietnam’s economy is sufficiently strong. At present, competitiveness of the Vietnamese enterprises has not yet been well established’ (Vo Thi Thanh Loc 2001:14). Although Vietnam is developing a market economy, party ideology maintains that the state sector should remain the dominant sector. Vietnam’s SOE reform process can be traced back to the early 1980s with a focus on modest changes in management and planning. Prior to the commencement of economic reforms in the mid-1980s there

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were over 12,000 SOEs operating in Vietnam, with the majority at provincial level or lower. These SOEs employed a relatively small share of the total work force, 7.5 percent in 1982, a figure that declined to five percent half a decade later. The SOEs, however, contributed significantly to state revenue – 23 percent (excluding oil royalties). As a result of the first round of reforms, the number of SOEs was reduced by half to approximately 6,300 enterprises (including 2,000 industrial enterprises) in 1992, three years before Vietnam joined ASEAN (see Table 1 for 1996 figures). Locally run SOEs made up the vast majority of closures and mergers. Approximately 1.1 million workers were affected (Quan Xuan Dinh 2000:362).

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Table 1 – The SOE Sector (1996) Geographic Area Urban

Number of SOEs 2,208

Northern mountain provinces

501

Midlands

408

Red River Delta

1,353

Central Vietnam

681

Central Highlands (Tay Nguyen)

363

Mekong Delta

812

Central State Owned Enterprises

40

Total

6,366

Source: Dang Duc Dam 1997:124-125.

In late 1991, the second plenum (seventh congress) of the VCP Central Committee approved a proposal to ‘equitize’ SOEs. 13 The SOE equitization program was promulgated by prime ministerial Decision 183 (November 20, 1991) and Directive 202 (June 8, 1992). The National Steering Committee for State-Owned Enterprise Reform was set up to take charge of the equitization program. 14 The SOE reform process involves the transformation of SOEs into joint stock companies, merger with other SOEs, public sale as single owner limited liability companies, contracting out, leasing, or bankruptcy. State policy has determined that public utilities, industries that produce for defence and other designated industries will remain under state control. During the five–year period from mid-1992 until mid-1997 the number of transformations under a pilot program was quite low. The total number of SOEs was reduced by only five hundred and 13The World Bank defines equitization as ‘a process whereby some or all of the state capital in the enterprise is sold in the form of shares at a price based on the book value of the assets’(2002:22). 14The Steering Committee was replaced in 2001 by the National Steering Committee on Enterprise Reform and Development.

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only five SOEs were equitized due to various administrative difficulties and because of the unwillingness of SOE managers and workers to participate (Vu Quoc Ngu 2003a:329). 15 New directives issued in June 1998 resulted in a speeding up of the equitization process. By the end of 1999, 370 SOEs had been equitized. Then the process stalled during 2000 and the first half of 2001. By May 2002 the number of total SOEs equitized stood at 645 and rose to nearly 1,000 by the end of the year. 16 It should be noted that new SOEs were also being created but this process came to a virtual halt in mid-2001. The net result was that the SOE sector increased in absolute size. But due to the growth of the private sector, the relative size of the state sector, as a proportion of the Vietnamese economy, declined (The World Bank 2002:24). In 2002, Vietnam announced plans to restructure 2,857 of its 4,704 SOEs by the end of 2005. Of this number, 2,045 were to be equitized, 386 merged and 200 transferred or sold. 17 The ultimate goal was to reduce the number of SOEs to between 900 and 1,000 by 2007. 18 The state announced it would retain one hundred percent ownership of those SOEs involved in electricity, petroleum, cement, production related to ‘national economic security’ and public utilities. The purpose of SOEs reform was to make them more efficient in the market place and to curb the drain on state finances. Many of these SOEs were small in size, inefficient, loss-making, and indebted to state banks. In 1990, for example, it was reported that thirty-eight percent of SOEs were operating as a loss (Vu Quoc Ngu 2003b:161). In 1997, 40 percent of SOEs were classified as profitable, 44 percent as ‘temporary loss makers’ and 16 percent as ‘permanent loss makers’ (Painter 2003:26). In an effort to reduce the power of line ministries to interfere in business management and capture profits and rents from SOEs, two 15By the end of 1997, only seventeen enterprises had been converted into joint stock companies, a figure that rose to twenty-five by June 1998 (Vu Quoc Ngu 2003a:328). 16Of the total numer of SOEs equitized between 1997-2002, the industrial and construction sector accounted for half; trade companies accounted for about onethird with the remainder in transportation, agriculture and aquaculture (Vu Quoc Ngu 2003a:329). 17The future disposition of the remaining 226 SOEs was not specified. 18General Statistics Office quoted by Saigon Times Magazine, August 26, 2004.

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policy mechanisms were developed. First, the Ministry of Finance was given carriage over the state’s interests as the ‘owner’ of individual SOEs. Secondly, in 1994-95, general corporations were created to take charge of SOEs on the basis of the number of affiliated or member enterprises involved and capital holdings. In 1995, SOEs were given legal status in law and increased autonomy to determine their production and financial strategies. SOEs could now enter into agreements with foreign partners, set wages, and hire and fire employees. Eighteen national general corporations in electricity, coal, petroleum, post and telecommunications, steel, and textiles and garments were set up (Painter 2003:30). Ownership rights remain with the establishing authority while management functions are the responsibility of the Board of Management. Since 1995 competitive pressures from other economic sectors has created difficulties for industrial SOEs with a larger proportion making losses. Nevertheless, the reform process has had a positive effect on overall economic performance. One study, which examined SOEs over the period 1976-98, revealed that there was an average annual increase in Total Factor Productivity of 3.05 percent over the whole period of the study, a 4.22 percent growth during the period of partial reforms, and a 5.37 percent increase during the period of full reforms. Total Factor Productivity increases accounted for 40.9 percent of the change in SOE industrial output (Vu Quoc Ngu 2003b:168-169). As a result of the Asian financial crisis, SOE reform nearly came to a halt. Due to currency devaluations across the region imports into Vietnam became relatively cheaper and Vietnamese industrial firms faced increased competition from private and foreign–invested firms operating domestically. Vietnam’s relatively high economic growth rates, both before and after the Asian financial crisis, have been led by high growth in the industrial sector and export-orientated manufacturing industries in particular. Despite nearly two decades of reform efforts, Vietnam has still not succeeded in leveling the playing field for all its economic sectors. The state sector is privileged over the private sector in terms of preferential bank credit, tax breaks, state contracts, access to land and government services (Vu Quoc Ngu 2003a:330; Quan Xuan Dinh 2000:363; and Flatters 1997). The SOE sector is also heavily indebted. Outstanding bank debts are estimated at US$6 billion or roughly forty-fifty percent of total domestic credit (Vu Quoc Ngu 2003a:331

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and The World Bank 2002:23). 19 In the period 1991-2000, Vietnam’s gross domestic product (GDP) growth rate averaged 7.6 percent while industry grew at an annual rate of 13.7 percent. SOEs grew at a rate of 12.3 percent and contributed nearly half of the industrial output (Vu Quoc Ngu 2003b:158). In 1999 it was estimated that SOEs accounted for thirty percent of Vietnam’s GDP (Clarke 2001:2), a figure that increased to 38 percent in 2002 (The World Bank 2002:22). The ninth national congress of the VCP, which met from 19th-22nd April 2001, endorsed a five-year program of SOE reform involving the transformation of about 1,700 enterprises by 2005. 20 At the end of this reform period it is projected that the state would retain control over 2,700 enterprises (The World Bank 2002:26). The ninth congress reforms laid out ambitious plans for the future roles of SOEs including provision of public utilities and catering to the needs of national defence and security. The new party Secretary General, Nong Duc Manh, made SOE reform one of his top priorities (Thayer 2003b). A government decision the following year (No. 58/2002/QD-TTg) set out the criteria under which an SOE would be retained or equitized. In sum, the state would retain one hundred percent ownership of large and profitable general corporations in ‘strategic’ areas, such as public utilities and state monopolies in explosives, toxic chemicals, and radioactive materials. The third plenum (ninth congress) of the VCP Central Committee in August 2001 adopted a detailed SOE reform plan. Only 150 SOEs were restructured in 2002, and 365 SOEs were restructured in 2003 out of a target of 1,646. 21 Seven hundred SOEs were slated for

19Another source estimated SOE debts at US$13.6 billion of which nearly 72 percent was owed to commercial banks and credit organizations; the remainder was owed in taxes. See: Vietnam Investment Review quoted by Xinhua News Agency, January 18, 2004. 20In March 1991, the government adopted a five-year SOE reform plan that included annual targets. During 2001-03, for example, 1,800 of nearly 6,000 SOEs were to be subject to transformation 1,400 through equitization, 140 through divestiture, and 220 through liquidation. These targets were not met due to resistance by those with vested interests. 21Vietnamese figures are often inconsistent. A second source states that 945 SOEs were restructured in 2003 (Nong Thon Ngay Nay, March 9, 2004), while a third source claims that 537 SOEs were equitized in 2003; Thanh Nien, February 16, 2004, 11. There is a distinction between restructuring and equitization.

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equitization in 2004 and one thousand in 2005. 22 If the current SOE reform program is successfully implemented up to half a million SOE workers stand to be retrenched. They will need to be provided with social welfare benefits (Clarke 2001:8). Vietnam must race to complete SOE reforms in order to be able to compete with ASEAN products that could flood Vietnam’s market and damage its domestic industries. One study singles out as particularly vulnerable SOEs producing petroleum, steel, chemical fertilizers and cement (Guina 1997:14). Meanwhile, State commercial banks continue to pour credit into industries that are most at risk from ASEAN competitors (Nguyen Manh Hung 2004:301). Detailed studies of Vietnamese SOEs and the SOE reform process reveal a complex picture of the state in Vietnam (Fforde 2004a 2004b and 2004c; Painter 2003; Clarke 2003; and Quan Xuan Dinh 2000). SOEs are ‘owned/controlled’ at national, provincial or district level by line ministries and various local government departments. As a result of equitization, one analyst has argued that SOEs have become ‘virtual stockholding companies’ in which the lines of ownership and control are overlapping and blurred between state and party (Fforde 2004c). A Vietnamese scholar notes ‘[f]rom the owner’s point of view, it is still unclear who is going to represent the government in firms where the government holds shares. Before equitization, the ‘line ministries’ or ‘people’s committees’ being the establishing agencies owned the entire firms and the Ministry of Finance was charged with the responsibility of controlling financial matters Another scholar has argued that the state in Vietnam should be viewed as ‘strong’ because of its ability to navigate between these competing interests in order to achieve policy objectives (Painter 2003:23). The above analyses raise serious questions of what constitutes ‘the state’ in Vietnam. It is clear that the prime minister, other office holders at central level and their advisers in state-run institutes, support SOE reform and equitization as essential to Vietnam’s larger process of economic renovation. Outside agencies such as the IMF, World Bank and donor countries play an important role in strengthening the position of those pushing for further SOE reforms. The reformist component of the state is opposed by conservative party officials at national and local level, as well as managers and ‘owners’ of SOEs, who wish to maintain control over the capital 22Voice of Viet Nam News, August 3, 2004.

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funds and other assets of their enterprises (for an analysis of events during 1995-1999 see Quan Xuan Dinh 2000:365-375 and Flatters 1997). Managers and workers also oppose equitization out of fear they will lose guarantied wages and retirement benefits. This later group still clings to protectionism to ward off external competitive pressures and domestic resistance to transform. Indeed, it is the resistance by ‘insiders’ including SOE directors and workers that partly accounts for the slow pace of transformation at present (The World Bank 2002:25-26 and Vu Quoc Ngu 2003a:230). 23 Conduct of Parties in the South China Sea Six states have territorial claims in the South China Sea. China, Taiwan and Vietnam claim the entire area, while the Philippines and Malaysia claim specific features. Brunei’s Exclusive Economic Zone overlaps with a feature occupied by Malaysia. Chinese assertiveness in the South China Sea in 1992 and 1995 prompted ASEAN to issue public statements of concern. After Vietnam’s membership in ASEAN, the issue of overlapping territorial claims in the South China Sea became a matter of discussion between ASEAN and China. ASEAN senior officials first raised it at a bilateral meeting of senior officials held in Kunming in April 1999. Both sides also engaged in protracted negotiations for over a decade on a ‘code of conduct’ for the South China Sea (Nguyen Hong Thao 2000 and Thayer 2000a). Vietnam argued for the inclusion of the Paracel Islands and supported defining the geographic scope of the proposed code. The Philippines sought the inclusion of Scarborough Shoal, located to the north of the Spratly archipelago. China opposed Vietnam on both counts; China also opposed a ‘code of conduct’ on the grounds that it was too legalistic. In the end a compromise was reached in 2002, China and ASEAN agreed to a watered down document entitled ‘Declaration on the Conduct of Parties in the South China Sea’. According to one analyst, this declaration ‘is a first steps towards the establishment of a code of conduct’ (Nguyen Hong Thao 2003:279). Article 5 of the ‘Declaration on the Conduct of Parties in the South China Sea’ calls on the parties ‘to exercise self-restraint in the conduct of activities that would complicate or escalate disputes and affect peace and stability’. This article has been honoured in the breach. Chinese nationals have been resettled in the Paracels. 23Until the promulgation of the Enterprise Law there was no adequate legal framework to convert SOEs into companies.

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Vietnam has initiated a tourist visit to Truong Sa Lon and announced that it would commence flights to the island after the 600 metre runway was repaired and tourist facilities constructed. The Philippines and China, without prior consultation with other claimants, have agreed to conduct joint seismic tests in the South China Sea. Taiwan, a non-signatory, has constructed a bird watching station on a feature. China responded to Vietnamese actions by dispatching a naval flotilla to the area. In a development which is not unrelated, Hanoi approached the United States to arrange the first official visit of its Defence Minister, Politburo member General Pham Van Tra, to Washington, D.C. General Tra announced that the purpose of his visit was promote mutual understanding and ‘joint efforts to build a framework of friendly cooperative ties for peace, and long-term stability in the Asia-Pacific region’ (Vietnam News Agency, November 12, 2003). Shortly after Tra’s visit, the USS Vandegrift made the first American naval port call to Ho Chi Minh City since the end of the Vietnam War. The Myanmar Issue From the very moment when ASEAN signaled its intention to include Myanmar among its members, the organization came under pressure from the United States and several European states who opposed the move on the grounds of human rights violations arising from the suppression of the pro-democracy movement led by Aung San Suu Kyi. Thailand pursued a policy of ‘constructive engagement’ towards Myanmar in the expectation this would lead a reduction in the illicit flow of drugs across the border, a halt to border clashes and an improvement in human rights. In 1997 when Myanmar joined ASEAN, there had been a worsening on all three issues. In 1997-98 ASEAN was affected by a series of crises: the ‘haze’ problem in Indonesia, the Asian financial crisis, and a violent upheaval in Cambodia leading to the collapse of the coalition government. These inter-related developments provoked a debate in ASEAN over its cardinal principle of non-interference in the internal affairs of its members. The Thai Foreign Minister, Surin Pitsuan, and the Deputy Prime Minister of Malaysia, Anwar Ibrahim’ both advocated ‘constructive intervention’ in cases where the domestic problems of a members state spilled over and affected regional peace and security. Due to opposition from other ASEAN members Thailand’s proposal for ‘constructive intervention’ was altered to ‘flexible engagement’ (Thayer 1999b). This issue was considered informally at an ASEAN meeting in Manila in 1998 and watered

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down to ‘enhanced interaction’. A year later ASEAN approved guidelines for an ASEAN Troika to offer its good offices in such cases provided all parties to the issue consented. As noted above, Vietnam expected membership in ASEAN to provide some insulation from external pressures on its domestic affairs including human rights (Adam Schwartz, Far Eastern Economic Review, March 16, 1995). Vietnam was unpleasantly surprised by ASEAN’s internal policy debate at this time. Vietnam supported the admission of Cambodia at the 30th ASEAN Annual Ministerial Meeting held in Kuala Lumpur in July 1997. But ASEAN foreign ministers took the decision to postpone Cambodia’s membership. When Vietnam, acting as host of the Sixth ASEAN Summit in Hanoi, attempted to use its position to prematurely push for Cambodia’s inclusion, it suffered the embarrassment of having to back down in the face of opposition from other members. In ASEAN’s unique style of diplomacy it was left to Vietnam to determine when conditions were ripe. Cambodia was admitted on 30th April 1999 only after it held ‘free and fair’ national elections. 24 Vietnam was put on the spot again in 2000-01 when, as chair of the ASEAN Standing Committee, its foreign minister was required to visit Myanmar on behalf of the association to determine Yangoon’s willingness to adopt political liberalization measures. According to diplomatic sources, Vietnam did so in a perfunctory manner. Vietnam reported back to ASEAN that Myanmar was not willing to make any concessions at this time. In 2004, Vietnam was placed in a similarly difficult role as host of the 5th Asia-Europe Meeting (ASEM) in Hanoi. According to one source, Vietnam ‘conveyed the arguments of both sides and really made a lot of efforts’. 25 ASEM 5 was almost postponed due to disagreement between the Europe Union and ASEAN over Myanmar’s attendance. Vietnam played a key role as interlocutor with Myanmar, dispatching no less than retired prime minister Vo Van Kiet to Yangoon to extract a concession on its participation. Vietnam has been extremely wary about over-riding ASEAN’s principle of non-intervention, a key component of ‘the ASEAN Way’. It is clear that triple crises of 1997-98 caused friction within ASEAN 24This was the twenty-fourth anniversary of the fall of Saigon to communist forces. 25Didier Lauras, Agence France-Presse, Hanoi, October 6, 2004. For an overview of Hanoi and the ASEM process consult Luong Van Tu (2004).

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between old and new members. Vietnam has responded by shoring up its bilateral ties with Laos, Myanmar 26 and Cambodia and by developing multilateral ties at the sub-regional with Cambodia and Laos (Thayer 1999a and 2000c). Vietnam initiated the first summit of the Indochinese members of ASEAN in 1999. The second summit of the three Indochinese states, which met in 2002, proposed the idea of a ’development triangle’. The most recent third Indochinese summit, has refined this proposal for approval by ASEAN ministers at their Tenth Summit to be held in Laos in November 2004. 27 In sum, Vietnam has created a ‘caucus’ of politically closed states within ASEAN to protect unwanted political intrusion into matters of domestic sovereignty. Part 5 — Conclusion This overview of Vietnam’s regional integration through membership in ASEAN has generally borne out the main contention of the conference organizers that state authority in Vietnam has come under challenge as a consequence of its twin policies of domestic renovation (doi moi) and ‘open door’ foreign policy. The findings of this paper are not conclusive, however, on the question of whether the state’s vertical power and sovereignty has been weakened. ASEAN represents a weak form of multilateralism, one found at the minimal end of the minimal-maximalist spectrum. ASEAN does not have any mechanism to force its members to comply with agreed economic and political policies. The ASEAN process of multilateralism ‘positively discriminates’ in favour of the newer less developed members (rather than uphold strict non-discrimination). This is not only the case with AFTA and the CEPT scheme, but also with the proposed Free Trade Agreement between ASEAN and China (Wattanapruttipaisan 2003). ASEAN has been flexible in its application of the criterion of indivisibility particularly with respect to CEPT commitments. ASEAN does pursue diffuse reciprocity as part of the long-term objectives of AFTA.

26Burma and the Democratic Republic of Vietnam extended diplomatic relations in 1947. Prime Minister U Nu visited Hanoi in November 1954; President Ho Chi Minh reciprocated in February 1958. More recent visits include: Secretary General Do Muoi (May 1997), Prime Minister Phan Van Khai (May 2000), President Tran Duc Luong (May 2002), Marshall Than Shwe (March 2003), former Prime Minister Vo Van Kiet (August 2004), and Prime Minister Khin Nyunt (August 2004). 27 Vietnam News Agency, July 21, 2004, Viet Nam News, July 23, 2004.

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AFTA and the CEPT scheme provide only a limited test of the extent to which external pressures challenge state authority in Vietnam. This is so for two main reasons. First, Vietnam has not reached its final CEPT deadline and so it is too early to measure the impact of CEPT compliance on state authority. Second, the impact of external pressures on Vietnam from the IMF and World Bank are probably more decisive at this stage than AFTA. A much better test case of the impact of external pressures on state authority is Vietnam’s trade agreement with the United States but this is bilateral. A better test case of the pressures arising from membership in a multilateral body will be the World Trade Organization when Vietnam becomes a member (Dinh Trong Thinh 2004). Vietnam’s participation in AFTA has brought repeated pressures on state authorities to advance the deadlines for tariff reductions and to restructure state revenue from import taxes to the collection of VAT. It remains to be seen if Vietnam will be able to meet its final tariff reduction commitments or whether ‘special circumstances’ will be invoked for delays in specified areas. State authority will be weakened to the extent that Vietnam is compelled to remove goods wrongly placed on its General Exclusion List. These goods were initially placed on the GEL in order to afford domestic industry some measure of protection against competition. ASEAN’s weak form of multilateralism has also led to particular foreign policy challenges to Vietnamese sovereignty and hence state authority. Vietnam joined ASEAN, inter alia, to be able to deal more effectively with a rising China and to insulate itself from external pressures on its domestic political arrangements. ASEAN has not been able to function as an effective buffer in its dealings with China on the question of overlapping territorial claims in the South China Sea. ASEAN failed to negotiate a ‘code of conduct’ and individual members have pursued activities designed to advance their territorial claims. Vietnam also joined ASEAN in the expectation that the norms included in ‘the ASEAN Way’ – non-interference in particular – would strengthen state sovereignty. Yet the debate over this very norm within ASEAN has served to undermine this expectation. It is Myanmar, however, not Vietnam that is in the hot seat on this issue. But Vietnam has been placed in the difficult position of having to represent the ASEAN consensus to Myanmar when plainly Vietnam’s national interests run parallel to the regime in Yangoon. The case study of SOES reform has thrown up light on an internal

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contestation within Vietnam on the very structure of the political economy of the state and state power. This case study has exposed the nexus between external and domestic pressures on the state to alter policy in conformity with international norms and practices in economic matters. The above instances do not conclusively demonstrate that the ‘current dynamics operating at the national and supranational levels have, in fact, weakened the vertical power of the executive and called into question, to some extent, the sovereignty of the Vietnamese party-state.’ Recall the observation made in the introduction that no state has ever exercised absolute sovereignty and Krasner’s view that the concept of interdependence sovereignty is historically inaccurate. Krasner also argues that Westphalian sovereignty is a form of ‘organized hypocrisy’ because states have always experienced some form of external intervention in their internal affairs. Quite clearly the nature of the Vietnamese state is being contested by domestic groups. Vietnam’s membership in ASEAN can be viewed as a mechanism that puts pressure on Hanoi’s policy makers to push through with reforms (Guina 1997:11). At the same time, state authorities have used Vietnam’s membership in ASEAN to strengthen their position by binding Vietnam to economic policy changes and thus acting as a constraint on backtracking or even policy reversal. Vietnamese state authorities have used both domestic reform and an open door foreign policy to strengthen the state. For example, major SOE reforms were carried out before Vietnam joined ASEAN. Many SOEs, mainly in the textile and garment industry, were able to restructure without direct cash subsidies from the state. They are commercially profitable and able to successfully export. When tariffs are lowered these SOEs will undoubtedly face competitive challenges but this does not necessarily mean they will all perform badly (The World Bank 2002:27). Vietnam has been able to prevent the erosion of state authority with respect to its dealings with the major powers, the policy debate over ‘constructive intervention’ and the Myanmar question. As noted above, Vietnam has shored up its bilateral relations with both China and the United States. Vietnam has not only developed robust bilateral ties with the CLM states, but has initiated cooperation among the three states of the former Indochina. Vietnam has played a blocking role in trying to prevent any modification of the principle

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of non-intervention. 28 These efforts have resulted in an informal caucus of politically closed states within ASEAN designed to uphold juridical sovereignty in sensitive political matters. Multilateralism tends to work well when the external environment is stable. Economic set backs and other strains, such as were experienced in Southeast Asia in the late 1990s, have taught Vietnam that the principles of non-discrimination, indivisibility, and reciprocity can be manipulated to shore up state sovereignty. It is only to a limited extent that Vietnam’s external commitments have required it to accept norms and principles of behaviour that are not of its making. Vietnamese state authorities have proved particularly adept at maneuvering around these constraints when it suits their purpose. Vietnam continues to emphasize the importance of relations with individual Southeast Asian states as well as ASEAN as an organization. Vietnam has been at the forefront of ensuring that ASEAN adopts socio-economic policies designed to reduce the development gap between new and old members. In sum, Vietnam has adopted a more realistic view of ‘the ASEAN Way’ and the benefits of multilateralism in a weak institutional setting. Vietnam is now more adept at pursuing multilateral and bilateral foreign policies in tandem.

28Ironically, blocking unpalatable policies within ASEAN in effect keeps ASEAN from developing into a more effective multilateral organization. For example, the perception that ASEAN was weak and lacking in cohesion in failing to respond adequately to the triple crises of 1997-98 may have contributed to a decline in foreign direct investment to the region including Vietnam.

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