Economic Potential and Modernization
By JC Collins
Vietnam has achieved a truly remarkable thing. While being a dumping ground for U.S. dollar inflation and having its own currency consistently devalued, Vietnam has managed to produce one of the fastest economic expansions and modernizations in the history of the world. It’s a model of modernization built upon the experience and lessons of China, Korea, and other Asian countries which developed before it.
The modernization of Europe and the Americas took centuries. The modernization of China was achieved in approximately 50 years. Compare that to the astonishing modernization which only began in Vietnam in the mid 1990’s. In less than 20 years, the country has turned from a destitute population on the verge of starvation to an expanding middle class that is considered by all economic indicators to be the fastest such expansion in the world.
In true Confucian fashion, Vietnam utilized the tactics of economic warfare deployed against it as a tool of economic development. The exchange rate of the dong was devalued on a continually basis to encourage use of the U.S. dollar within the country. This ensured another market for the dollars inflation to be sent to avoid a hyper-inflation situation back home.
In addition, the Vietnamese understood the economic potential of their resources and trade capability. The strategy was one of patience and long term gain for short term detriment.
Vietnam is much more than the story of an American war of aggression or gold theft. For our purposes here, we will start our brief history with the Multilateral Co-Operation Agreement made between the NATO Countries (except Ireland) in January of 1950. The purpose of this agreement was to control the type and level of trade between the western world and the communist world.
South Vietnam held the largest agricultural potential while the North held most of the heavy industry, such as coal, steel, tin, and phosphate fertilizer. The full potential of the offshore oil and gas fields was still unknown.
There were many reasons for the western involvement in Vietnam which began many years before, with the French, and later America. The threat of communism was a smoke screen for something else which we will not touch on here as the scale of it will only serve to dwarf this essay on currency revaluation. There is also the Yamashita gold theft and recovery attempt which we touched on in America’s Karma and World War Two Gold Theft. During the time period between WW2 and the dissolution of the Soviet Union on December 26, 1991, Vietnam depended on economic subsidies from the larger communist state. When these subsidies ended, trade with the United States became very important for Vietnam.
Over the years there have been many variations of the dong currency with varying exchange rates. The different forms of structure to the dong have been the following:
- Commercial Currency
- Non-Commercial Currency
- Official Rate
- Convertible Currency
- Effective Rate
- Auction Fixing (this structure becomes important in 1991)
It’s too much too breakdown and cover each currency type and its value fluctuations over the years so we will focus in on the important dates and valuations.
On December 18, 1971, after the U.S. dollar devaluation, the official exchange rate of the dong was 2.71 per 1 dollar.
On February 13, 1973, after another U.S. dollar devaluation, the official exchange rate was 2.44 per 1 dollar.
On May 3, 1978, a uniform dong was introduced at an exchange rate of 2.17 per 1 dollar. It’s interesting to note that during this time period the dong to dollar exchange rate was maintained within a narrow margin while the SDR rate for the dong was allowed to fluctuate. This SDR fluctuation was a foreshadowing of things yet to come in our present time. See SDR’s and the New Bretton Woods.
On July 6, 1981 the exchange rate was VND 9.045 per 1 dollar.
On Sept 14, 1985, the State Bank of Vietnam was authorized to issue a new dong currency and withdraw the old ones from circulation. One old dong got you 10 new dong. The new exchange rate was set at 15 dong to 1 dollar.
Devaluation of the dong continued throughout the 1980’s which was actually encouraging what little trade Vietnam participated in.
On March 13, 1989 the multiple currency structure as outlined above was ended and a unified currency structure was put in place. The commercial dong and non-commercial dong were merged and the exchange rate was set at 4500 dong per 1 dollar. This was 9 months before the Berlin Wall began its fall which lead to the eventual collapse of the Soviet Union. Remember that Vietnam depended on subsidies from the U.S.S.R. Perhaps this constitutes a slow transition from subsidies to light import and exports.
On August 30, 1991 there was put in place a method of foreign exchange auction, which was only allowed in U.S. dollars, to support banks and trade organizations helping economic interests needing such foreign exchanges. This move created the inflation dumping grounds for the U.S. dollar.
The rate of the dong today is approximately 21,000 to 1 dollar.
Back in the year 1975 Vietnam wanted to exploit its rich agricultural and timber resources in the South and develop its coal production in the North, as well as producing oil and gas from its offshore fields. Unfortunately for Vietnam they were under a trade embargo from the United States. The Export Administration Act of 1969, amended in 1979, restricted the export and/or re-export of technology which originated in America. The embargo was only on North Vietnam at first but was extended to the South in 1975.
Post war Vietnam is one of only a handful of countries that did not experience a reconstruction boom after hostilities ended. In fact, they experienced a drastic economic deterioration. Through economic sanctions, a ban on imports to Vietnam produced a shortage of foreign exchange capital required for the reconstruction process. Sanctions also lead to extremely high unemployment in the export industries and a reduced industrial capacity.
A similar ban on exports deprived the country of the essential commodities required for development and growth. It also denied Vietnam access to foreign capital markets to raise funds for building factories and other industrial facilities.
Exports to communist countries were considered a violation of America’s strategic interest. The embargo even blocked aid from the International Monetary Fund and the World Bank. Vietnam, to its credit, did the only thing it could do by focusing on exporting natural resources and cheap labor to a handful of countries that stood in violation of the embargo. This was a bare sustenance strategy by Vietnam which did not eliminate starvation and destitution in the country.
Throughout this time period Vietnam was subjected to typhoons, floods, and droughts which served to severely hinder its attempts at food grain production. This weather caused considerable damage to Vietnam’s agricultural lands.
It brings into question the use of weather manipulation weapons which may have been used against the country. For those who doubt the reality of such weapons, I suggest you ask yourself why Defense Secretary William Cohen stated the existence of weather and earthquake causing weapons in his speech given at a 1997 Conference on Terrorism in Athens, GA. I will leave this area to the reader for further exploration.
When the Cold War finally ended many American business interests wanted the sanctions lifted immediately so as to capitalize on the virgin market. But the U.S. would not lift them.
But with the low exchange rate of the dong to dollar, other countries couldn’t resist the lure of doing business in Vietnam and making the windfall on the other end. Countries that began investing in Vietnamese imports and exports were:
- The Netherlands
- South Korea
- Hong Kong
- Japan (unofficially)
It got to be that the United States was the only country that still imposed sanctions on Vietnam. The U.S. dollar was being side stepped in trade by the above countries in areas such as:
- Seafood Processing
- Garment Making
It wasn’t long before the United Stated used its influence and power within the International Monetary Fund to devalue the dong even further while lifting the sanctions. The intent of this move was to ensure that Vietnam’s trade would be balanced in dollars and that the value of the dong would stay low encouraging the Vietnamese people to use the dollar instead of their own currency. This is the blueprint for dollar inflation dumping throughout the world.
The sanctions themselves were lifted in stages:
- December, 1991, travel to Vietnam was allowed.
- October, 1992, allowed for telecommunication links with Vietnam, commercial sales for necessities, as well as lifting restrictions on non-profit organizations and authorized the signing of pre-embargo lifting contracts. (read back door deals for American companies)
On January 27, 1994, the U.S. Senate voted to lift sanctions by a vote of 62 to 38. Clinton officially ended the embargo on February 4, 1994. The reason given was the 2238 MIA soldiers from the war. This was an absurd position as Vietnam itself had over 100,000 missing in action and the country itself was left bombed and destitute.
On October 14, 1994, forex markets began trading the dong against 6 other currencies within a range set by the State Bank of Vietnam. This in essence is the structure that the dong trades within today.
It was a combination of events that lead to the dropping of sanctions. First the collapse of the Soviet Union created an opportunity for Vietnam to get off subsidies and begin real trade. This process was painful but the end results lead to the rest of the world recognizing Vietnam’s true economic growth and development potential, which in turn forced America to lift the embargo for the purpose of ensuring that the dollar wasn’t left out of the trade balancing.
Vietnam in turn accepted the devaluations of the dong as a tactic to attract the foreign investment in its exports and imports. Vietnam’s number one goal was development, modernization, and integration into the world economy.
Today, Vietnam is one of the fastest growing economies in the world. It has the fastest growing middle class and its GDP to debt ratio has been maintained within the 30% to 35% range for years. Its oil and gas fields are being developed, it’s the second largest exporter of rice in the world, Samsung is moving its factories into the country, Starbucks is opening locations, and in fact McDonald’s just opened their first location in the country just last weekend.
The list of economic milestones for Vietnam is growing by the day. The amount of U.S. dollars held in the country’s foreign reserves has been decreasing for the past few years and the import of gold is staggering. As we presented previously, the Shanghai Gold Exchange through agreements with China will increase the gold holdings in many Asian countries by way of gold vault storage and trade agreements. The Vietnamese government itself is making known its intent to monetize all the private gold in the country to support the value of the dong.
The hard working Vietnamese people will require a strong and stable currency to ensure reliable labor energy wealth storage. It’s only a matter of time now before the I.M.F. 2010 Code of Reforms are passed through the U.S. Congress and the Executive Board of the I.M.F. is restructured to reflect the economic reality of the world today. When this happens the dollar will lose its reserve currency status and the dong will be released from it peg. When this happens I would suspect that the value of the dong, not officially recognized today as it has been stretched like elastics, due to the economic growth and develop, and will snap back to its true economic value, which is reflected in those very same growth and development indicators.
What will the rate be? Based on the upcoming SDR composition and allocation system of the International Monetary Fund, who can say with any measure of reliability, there are too many factors which need to be considered and weighed against others factors.
There is one other area where Vietnam has far advanced on the United States. And that is in limiting the rent seeking abilities of the small ruling elite within the country. Trade and business between the provinces within Vietnam have been cleared of corruption for the most part and a system of contested politics is in place. This system of contested politics is very real and not the side show circus of the western world’s political buffoonery. At the end of 2013 Vietnam executed two of the top bankers in the country for corruption and crimes against the people. – JC Collins