The determinants of a country's rate of economic growth are numerous, and there is no universally accepted method of quantifying the contribution of any particular factor to the growth rates. One of the problems of attempting to associate alternative trade strategies with growth rates is that the trade strategy it self is but one influences on the effectiveness with which other factors of production are employed.

Since mid 1960s, more developing countries have been transforming their industrialization strategy from import substitution into export promotion one. Indeed, after certain period, the contribution of import substitution to economic growth decreases, and once a number of preconditions are fulfilled exports can create new opportunities for process of industrialization. There are many economists such as Anne.O.Krueger, Torado, Dijch argue that export promotion strategy have generated higher growth rates than have import substitution. Export promotion by it's nature avoids some of the costs of the import substitution strategy.

In practice, acknowledging the role of export in industrialization and economic development, the export promotion economy has been introduced in Vietnam since late 1986. However, despite the changes and impressive growth in trade, that have been achieved, important features of the old regime still linger on the Vietnamese trade regime. Recent actions-particularly the tightening of direct controls on imports in 1997, and the resort to formal and informal restrictions on uses of foreign exchange in 1998-suggest that in some respects Vietnam's trade liberalization has been more a temporary relaxation.

Moreover, trade policy system is still manipulated with aim to provide high protection levels to a range of local production and is subject to frequent changes and inconsistent implementation. As a consequences, although Vietnam's export have rapidly increased, the import growth has been even faster (mostly used in import substitution activities) which led to increasingly trade deficits. The large trade deficits may be early warning sign-admittedly in stark contrast to the impressive record in economic growth and stabilization-calling attention to the need to further reform trade policy following the orientation of boosting the exports of processed products, and reconsidering the protectionist system which has been applied so far.

There have been many discussions on issues related to export promotion policies and their impacts on export performance of Vietnam since renovation. However, these studies have been more emphasizing the positive effects of these above policies on economic growth and export performance. There were no studies apply a multi-criteria method which was used by Green away and World bank (1987) in classifying 41 LDCs according to degree of inward and outward orientation for the case of Vietnam. Therefore, in this paper the above mentioned method will be used to prove that although export promotion strategy have been introduced in late 1986, especially in 1989, the Vietnam's economy did forward more import substitution strategy and inconsistency in it's implementation process and need to further reforms.

The thesis will attempt to apply new analytical approaches in defining the trade strategy in Vietnam since 1990. Through which the effects of the trade and foreign exchange rate policies on Vietnam's trade performance will be analyzed. In addition, the thesis also tries to analyze the distortion of protection system on domestic resource allocation and production. The experiences of successful opened economies (China, Thailand and Taiwan) also taken as the lessons for Vietnam on it's path to industrialization and modernization.

1. What are the export promotion policies ? What are the welfare effects of these policies on economy, theoretically?

2. How were these policies work in selected countries, particularly in China, Thailand and Taiwan? What are the lessons for Vietnam in it's development path?

3. How have been these policies adopted in Vietnam since 1990s? What are the effects of these policies on trade performance as well as on domestic resource allocation?

The study relies on relevant literatures and available statistical evidences to evaluate the

implementation process of export promotion policies both in selected countries and in Vietnam. The statistical description, comparative methods will be used.

The thesis uses two main sources of information. First textbooks and research papers written by various authors that discuss on implementation process of export promotion policies... Second, the officially statistical year books published by GSO, reports of international organizations like WB, UNIDO, UNDP and Vietnamese as well as foreign journals... will be used.

Chapter I: This part describes study subject and the reasons for the choice of the subject. In addition, research question and the method of the study are presented.

Chapter II: The section introduces various trade theories, including the advantages and disadvantages of export promotion in comparison to import substitution one. The fundamental methods in defining trade strategy also be drawn out.

Chapter III: The section introduces the experiences of three successful model including China, Thailand and Taiwan in implementing export promotion policies and examines lessons for Vietnam.

Chapter IV: The section introduces overall features if Vietnamese economy as well as it's export performance since 1990. The section also examines the current situation of protection in Vietnam's trade regime and evaluate the distortions of protectionism on domestic resource allocation and production.

Chapter V: The section sums up the process of export promotion policy implementation both in selected successful economies and in Vietnam. Through which some suggestions to limit the distortions of current protection in Vietnam as well as negative effects of liberalization in the coming years.

In theory, import-substitution aims at considering scare foreign exchange and promoting the development of indigenous manufacturing industries at the expense of foreign industry (Grimwade 1996, p.153). The import substitution supported economists argued that LDCs was facing the declining of their primary export market. And one of the greatest advantages of import substitution is that domestic production can take over market which are already established in the country, so they can develop in certain manner. The isolation of foreign competition is bad but lowering the domestic firm's marginal cost is good (Chenery and Srinivasan 1989, p.1211). Thus, import substitution is usually successful in the first stage of development (the stage of consumer production), of which technology level is rather low and domestic demand is determined. However, the problems with IS strategy was that industrial growth rate started slow down when the strategy of industrialization switches to the second stage promoting the production of consumer durable, intermediate and capital goods. The second stage of IS strategy becomes difficult because of rapidly increasing costs precipitated by limited economies of scale, dependence on foreign resources and expertise, and development of monopolistic controls. Consequently, it will sooner or latter taper-off the growth. Hence, the "failure" of the IS strategy strengthened the Neoclassical case for the adoption of EP strategy.

Export promotion can be deigned as the removal of bias toward import- substitution. Some economists who favor EP may advocate that EP would avoid some costs of IS and promote the growth of production of both domestic & export markets. Because EP, as it's nature, exploits the comparative advantages and factor of production more efficiently. Export promotion provides similar incentive to sale in domestic and foreign markets, leading to resource allocation according to comparative advantages, allow greater capacity utilization, and permit the exploitation of economies of scale. A wide market side will likely support for development industries, and hence for economic growth. However, in practices, we cannot put IS and EP strategies in two opposite sides. Taiwan and Thailand are typical example of applying successful export promotion strategy after having followed import substitution strategy in certain period of time. In other words, import substitution will have to give a way to export promotion if the high rate of development is to be sustained.

A country's policies are categorized as (EP or IS) depends on the balance between the two sets of policy measures affecting both imports and exports. And there are many ways to classify the EP & IS strategies, however, in this paper the two fundamental ways will be drawn out.

The degree of openness of an economy can be classified into four categories, namely strongly outward - oriented, moderately outward-oriented, moderately in ward-oriented, strongly inward-oriented by following four qualitative and quantitative criteria:

+ Effective rate of protection.

+ Use of direct controls such as quotas and import licensing schemes.

+ Use of export incentives.

+ The degree of exchange rate overvaluation.

The advantage of this approach is that its information content is high. No one indicator is used. The principal - disadvantage however is that an element of judgement is inevitably at work. There is no problem if all the indicators point in the same direction (for example high import tariff, pervasive direct controls, export taxes and overvalued exchange rate). Where, however, they point in different directions (for example high import tariffs, no direct controls, no exchange rate misalignment and extensive export subsidies), it may be more problematic.

The classification of import substitution and export promotion can be performed by different methods. Each method has own advantages and disadvantages. The problem with single indicators is that their information content may be insufficiently high to convey an accurate picture of development orientation. An appropriate response is to develop richer criteria and this is the direction research has recently taken. In practices, the multiple criteria method has been used intensively in different countries. However, this method has not ever been applied in classifying policy orientation of Vietnam's economy. Hence, in this paper I attempt to apply the method to prove that although export-promotion strategy have been introduced since late 1989, the features of import substitution are still existed which cause great costs for Vietnam's economic development, and the need to further trade liberalization in the coming years.

In theoretical, the export promotion strategy relies upon price incentives rather than quantitative controls. The strategy includes two main parts are exchange rate adjustment and trade liberalization or in other words the trade, exchange rate and other related policies. Hence, on following sections, these policies will be critically reviewed and just for small country case because Vietnam is a small country.

One of the most indicators for producers making decision of production is prices which not only affected by costs of materials, wages, etc., but also by taxes. Particularly, basing on export tax, the producers decide whether to sell their products domestically or externally.

1. Definitions.

c. Subsidy for imported inputs.

d. Tariff exemption or tariff reduction on exports.

e. Subsidy for export.

All though tariffs have historically been the most important form of trade restriction, there are many other types of trade barriers such as import quotas, voluntary export restraints, and antidumping actions. They limit the volumes of imports or exports to some specific quantity in a given time period. Hence, in order to push up the exports, the elimination of these non-tariff barriers is essentially.

a. Elimination of import quota on imported input: see in the main text.

b. Export quota: See the main text.

The nominal of exchange rate is the domestic currency price of a unit of foreign exchange. A currency is said to depreciate (appreciate) whenever more (less) units of domestic currency are required to purchase a unit of foreign exchange.

The real exchange rate is used to measure the rate at which goods and services are exchanged between the domestic economy and the outside world. It is given by adjusting the NER to deferential in prices at home and abroad.

The NEER on export is defined as the units of domestic currency that can be obtained for a unit of foreign exchange worth of exports. And the NEER on import is defined as the units of domestic currency that would be paid for a unit of foreign exchange worth of imports.

Real effective exchange rate is a combination of the RER and an index of nominal protection. In includes both tariff and non-tariff protection.

Government can use internal tax instruments such as turnover tax, excise tax, profit tax, value added tax and corporate income tax etc., to affect on incentives of specific industries. Indeed, when these instruments used, the costs of production for export and export-related products are changed, resulting higher or lower profits for exporting producers, and hence the export incentives.

In the sequencing policy reforms in developing countries, Governments should assign a high priority to measures that assure rational regimes for export activities. For policy reforms to have significant impact on growth, foreign demand for export products must be matched by active supply responses from exporters. An effective tool in assuring an actively supply response is export finance policy. Especially, it is very essential for small and new firms that might be well able to fill export orders and foreign contracts if financing were available.

In sum, the country's industrial strategy can be categorized as export-promotion or import-substitution depends on the balance between the two sets of policies, particularly measures of trade and foreign trade policies which affecting both imports and exports. There are no accurately answer that export-promotion is superior over the import-substitution one. However, evidences from successes of many export-promotion economies such as Taiwan, China, Thailand, etc., and failures of Latin American countries in the past decades have proved that the export-promotion by it's nature can avoid some costs of the import-substitution. Hence, in this paper the successes of typical countries like China, Taiwan, Thailand will be analyzed and taken lessons for Vietnam along with some reasons for further liberalization of Vietnam's trade system will be drawn out.

Vietnam's development strategy has been increasingly influenced by the successful development experiences of developing economies recent years, especially East Asian nations since the collapse of the former centrally planned economies of Eastern Europe and the former Soviet Union in the late 1980s (UNDP 1998, p.1) for two reasons. Firstly, Vietnam's geographical location is very near the East Asian countries secondly, these countries have achieved the impressive record of exceptionally high rates of growth and development over the past four decades which economists called "miracle".

China's trade policy reforms have been carried out as a part of the general economic reforms since 1978, when the national economy was on the verge of collapse. As an important aspect of the opening-up policy, foreign trade was required to play a more active role in the whole economy. However, like other sectors of reforms in the urban area, trade policy reforms were not formally implemented until 1984. These reforms can be roughly divided into three stages: pre-1988, between 1988 and 1991, and the years after 1991.

The trade policy reforms before 1987, said to be at " experimental stage " were characterized by decentralization of administrative control. The key step was to change the mandatory planning system into a combination of command plans, guidance plans and market mechanisms. However, according to World Bank, in 1986, there were still 60 percent of exports and 40 percent of imports subject to mandatory plan, and 20 percent of exports and 30 percent of imports subject to the guidance plan (WB 1993, pp.10-25). Therefore, the imports and exports actually determined by market were still quite limited during this period.

Together with reform of the mandatory planning system, right to engage in foreign trade business were also decentralized by various external measures to promote & regulate foreign trade such as licenses and tariff, Agency system, trade subsidies, tax rebates, foreign exchange retention system, dual exchange rate system. And other internal measures were also added to promote export like special programs of enhanced credits, preferential interest rates on domestic currency loans to firms producing for export, subsidized domestic transport, storage, and insurance of export goods, etc. However, despite various measures, imports and exports during the first stage of reform were still largely under central administrative control.

The reform undertaken between 1988 and 1991 were characterized by a change from direct planning control to the use of commercial policies such as tariffs and licenses. During this period, the command plans for exports and imports were almost phased out. And at the same time, other non-mandatory measures became increasingly important; the official exchange rate continuing depreciated from Y4.7 in Dec.1989 to Y5.2 per USD in 1990 which created a fairer competitive environment for all industries (see more detail in the main text).

Trade policy reforms since 1991 were characterized by a lowering of trade barriers such as tariff rates and licenses. As a result, the general unweighted tariff level dropped from 42.8 in 1991 to 39.9 percent, the values of exports covered by licenses was reduced from 60 percent to about 30 percent. Addition to these, the transparency of China's trade regime was increased along with the unification of exchange rate system was firstly established at rate of Y8.7 per USD.

Thailand has experienced a high rate of growth since 1960, and the country has since become more industrialized and opened from agricultural economy. Indeed, Thailand has passed through various stages of development. All economic activities in the whole economy were directed by five-year economic development plans. Like other developing economies, Thai economy has experienced through both import substitution and export promotion periods. Although Government policy has placed great emphasis on exports since the third national economic plan (1972/76), tariff protection remain high-averaging around 30 percent. This was more or less maintained until 1982, when some changes were made to the structure of tariff, and in 1991 there was a substantial reduction in tariffs on capital goods. Hence, the trade liberalization process of Thailand can be divided into three stages: the years between 1970-80, 1980-90 and after 1990.

In the early 1970s, the gradual shift from an import-substitution policy toward an export promotion policy was brought about through a realization that the scope of further import substitution is limited, as growth of many industries slowed down due to a saturated domestic market. Further more, it was realized that the high protection afforded industries under the import substitution policy was creating economic inefficiency, a heavy reliance on imported inputs, and concentration of industrial activities around Bangkok. However, Thailand suffered a large balance of payment deficits and serious inflation in the aftermath of oil shock in 1970, which forced Thai Government to increase import tariff as the means of solving this problem especially for finished and consumer goods. As a consequences, the effective rate of protection for all industries (except food, beverages and tobacco) increased from 44.2 percent in 1971 to 90.3 percent 1978, with higher degree of protection-rate differentials across industries (see table B-3, Appendix B. in the main text).

The Thai Government and especially its planning board always realized the implicit danger of such industrial protection. Hence, in July 1981, the Government devalued the overvalued Baht by 8.7 percent; effectively reducing it's protection of domestic manufacturing industries and at the same time reducing the bias on export industries. On 15^th Oct 1982, the Government adjusted the import tariff structure with aim to neutralize its tax system by providing greater equality in the level of protection among various products. However, because of persistent budget and balance of payment deficits, the measures used for promoting export were inconsistently which caused unsuccess of Government's effort to reduce industrial protection in Thailand during 1980s.

With continuous expansion of manufactured exports comfortable balance of payment position, Thailand recently has been increasingly liberalization it's foreign trade, with more controls being removed and further reductions in tariffs. Moreover, Thailand has actively implemented CEPT and AFTA commitments. At present, there are about 95-97 percent of import commodity list has been taken into CEPT/AFTA with aim to reduce tariff rate under 5 percent in 2003.

Since the early 1960s, Taiwan has demonstrated an enviable economic performance, as rapid growth has been accompanied by stable prices, healthy trade balance, and improved income distribution. Although it is difficult to generalize about the reasons for this remarkable achievement, a key factor is certainly Taiwan's outward-oriented trade strategy, which has provided opportunities to industrialize the economy through trade.

In practice, in the decade of 1950s, Taiwan had followed import substitution in which the economy characterized by heavy import and foreign exchange controls and a multiple-overvalued exchange rate system. Starting from a small base, the economy experienced remarkable growth in the first half of the decade, reaching an annual growth of GNP per capita of 6 percent. However, as home markets became saturated in the second half of the 1950s, outputs growth slowed down dramatically, with GNP per capita growing at a meager 3.7 percent per annum during the late 1950s. In the face of economic stagnation, the Government embarked on a series of liberalization programs and export promotion measures in 1960. For a better understanding of the evolution of trade liberalization, this divides the process into two phases: the export orientation phase of 1962-1980, and the accelerated liberalization phase, beginning in 1980.

In the early 1960s, under the bottlenecks of import substitution strategy, to reap the benefits of economies of scale and sustain economic development, the Government shifted to an export-oriented strategy. The statute for the encouragement of investment was introduced in 1960, provided a major stimulus to export growth, as did the devaluation of NT dollar from 36.38 to 40.00 vis-a-vis the USD, and the augmentation of the customs duties rebate system. With the take-off exports in 1963, the economy was poised for a new round of development. The trade liberalization had been undertaken by many instruments such as revision of tariffs and import regulations, and the reforms of tax administration. In addition, between 1966 and 1969, export-processing zones were set up in Kaoksiung, Nantze, and Taichung to promote exports.

Since early 1980s, the Taiwan's Government accelerated the pace of import liberalization and tariff reduction in 1983, both to lower the cost of production and strengthen the competitiveness of domestically produced goods in the world market. As the world recovered, Taiwan experienced rapid economic and export growth, and by the latter half of the 1980s, persistent trade surplus had swollen it's accumulation of foreign reserves to an all- time high. This situation favored the development of capital and technology- intensive industries and helped advance the process of economic liberalization and further opening of domestic market.

As present above, all these economies have successfully implemented the export promotion strategy by substituting administration control measures imposed on trade activities with commercial policies. Particularly, quantitative barriers have been replaced by tariff measures and the tariff levels were also gradually reduced. As a result, the effective rate of protection has been remarkably reduced which led to substantial export as well as economic growth in the past decades. Moreover, the exchange rate policy has also been efficiently used in promoting exports in the case of Taiwan during period 1980s. However, currency devaluation is not always an efficient export promotion instrument, it depends on the implementation of other related macroeconomic policies and certain economic conditions in each period of time as in the case of Vietnam and Thailand. And we must emphasize that the outstanding feature which led to the success of these economies was " imports used for exports". Hence, the matter is how Vietnam applies specific policies on her way to economic development.

After ten years of economic reforms and renovations, Vietnam has achieved a remarkable transition. The economy has recently achieved high annual GDP growth rates of nearly 10 percent, a reduction of the inflation rate from three- digit to single- digit figures, a stable exchange rate, and a substantial expansion and diversification of external trade. According to Ari Kokko, the aim of Vietnam's leadership is eventually duplicate the development of established tigers and dragons like South Korea and Taiwan. The foundation of Vietnam success was combination of liberation, stabilization, institutional changes and some structural reform. However, there are many irrelevant feature still existing in the economy and the potential benefits of these past reforms are nearly exhausted, and these further change is needed to sustain economic stability and a high rate of economic growth.

In practices, Vietnam economy is traditionally agriculture; industry and services have led the high real output growth in 1990s with agriculture lagging behind. The industrial sector has been denominated by State-owned enterprises (SOEs) and it is notable that the growth rate has also been faster in the State-owned sector than that of the private sector. SOEs account for over two-third of industrial production in Vietnam. By contrasts, in the same period employment not only accounted for a relatively small share in total industrial employment but also decreased from 10.2 % to 9.8 % (GSO 1997 & GSO 1998), indicating that this sector is relatively capital intensive in the context of the economy.

In 1990s, Vietnam has recorded a considerable achievements in commercial activities, the domestic market has been opened, import- export activities have been bustling, the average export growth rate is 28% and that of import 30% (Luoc 1998, p.18). However, as just mentioned, although Vietnam's export has grown rapidly and become diversified, import growth has been faster in recent year, resulting in growing trade and current account deficits which called for more attention on recent industrialization strategy.

Considering the structure of Vietnam's imports, present in table 4-3 of the main text, one would expect that Vietnam has been carrying an ambitious development program. The bulk of import is made up of capital goods and raw materials used for investment and production. The most important individual import items are fuel, steel, and fertilizers, but the imports of semi- finished products, such as electronic components and textiles have also grown rapidly in recent years, consumer goods import have been remarkably small, representing only around 10 percent of imports in 1996 and smaller in 1997 and 1998.

Hence, a question was raised, whether the import boom has been used to finance investment in import- substituting or export- oriented industries. Some economists argued that the structure of Vietnamese imports appears to not "healthy" was in the sense that imports have been used to finance investment in import substitution but not export-oriented sector which can be manifested in the structure of Vietnam's exports.

Considering the structure of Vietnam's exports (in the table 4.4 of the main text) revealed that the major export products such as rice, coffee, marine products, and light industrial goods are intensive users of local raw materials and labor rather than imported inputs and capital goods, it is unlikely that the export sector has been the main destination for export boom.

Although Vietnam's export has increased, export turnover is only equal to one- third of GDP, reflecting the low outward- looking level with regard to a small country as Vietnam. Moreover, the large trade deficits may be early warning sign- admittedly in stark contrast to the impressive record in growth and stabilization, which calling attention to the need to further reform trade policy following the orientation of boosting the exports of processed products and reconsidering the protectionist system which has been applied so far.

In practices, since 1989 Vietnam's Government has repeatedly declared that trade liberalization is a central element of the country's continuing economic reforms and several important steps in the direction of increased outward orientation have been taken in recent years. However, in spite of these reforms and reform commitments with AFTA and WTO, it is no exaggeration to claim that the Vietnamese trade regime remains complex and highly restrictive. Hence, A detailed description of Vietnam present trade and foreign exchange policies is a necessary starting point for discussing why further trade reforms are needed and how these reforms should be designed.

As presented in chapter II (see the main text), the degree of exchange rate overvaluation is an important criterion in defining the form of a country's industrial strategy. In practice, since 1989, the fixed exchange rate regime has been gradually replaced by the floating and managed regime. Under this regime, the VEND is pegged to US through which the exchange rate of VEND vis-a-vis other trading partner's currencies can be determined. Hence, in order to evaluate the degree of exchange rate overvaluation of VND against USD and other trading partner currencies, the real effective exchange rate indicator can be used.

As calculating in table 4.5 of the main text, although Vietnam's nominal exchange rate have been continuously reducing with aim to closer the official exchange rate with prevailing market rate and promote export activities, the VND has increasingly overvalued against with it's trading partner's currencies and reach peak to 34.7 percent in 1998, due to recently Asian financial crisis. As a consequence, the competitiveness of Vietnamese's goods has continuously declines as compared to its main trading partners resulting in large trade deficits.

A part from exchange rate overvaluation, formal access to foreign exchange in Vietnam is still subject to considerable restriction. There is no general right of conversion of VND into foreign currency, and there are restriction on the availability of foreign exchange for payments and invisible transfers. Moreover, in 1998, the State bank introduced surrender requirements, requiring enterprises with foreign currency accounts to sell holdings in excess of "normal requirements" to their banks, also illustrate discretionary and unpredictability of foreign exchange policy.

2. Foreign trade policy.

Despite the changes and the impressive growth in trade have been achieved by trade reforms, the important features of the pre- reform trade regime still linger on. And in many areas, trade liberalization has been achieved through selective relaxation rather than through removal or dismantling of trade restrictions. This recent trend and the fact suggested that there is considerable scope for discretion in the interpretation and application of existing rules, which illustrated that reforms so far are fragile. Remaining trade distortion stemming from the current tariff structure, control on entry into international trading and control on the volume of trade need to be deal with.

2.1.1. Import tariff.

The formal import tariff structure of Vietnam in 1998 concludes about 3,200 tariff lines and 26 different nominal rates ranging from 0% to 100%. The highest rates apply for cars, beverages, household appliances, and other consumer goods. While tariffs for raw materials, capital equipment and intermediate inputs are generally much lower; typically below 5% which mostly used for producing consumer goods to supply for domestic market. Moreover, the use of an excessive number of rate of tariff and change frequently creating considerable uncertainly which discourages long term investment by the private sector.

As a consequence, due to this bias in the tariff structure, it is obvious that Vietnamese producers of consumer good often enjoy every high rates of effective of protection. Moreover, according to Ari Kokko, although the nominal tariffs for most of the products were reduced on 1st January 1996 as a part of Vietnamese commitment to lower the maximum tariff from 200 percent to 60 percent, the tariff cuts were neutralized by the introduction of special taxes, leaving the level of real protection unchanged at best, but less transparent.

The domestic market bias in Vietnamese trade regime is enhanced by export taxes that are presently levied on 58 product groups (see table A- 3, Appendix A of the main tax). There are 11 different export tariff rates ranging from 0 to 45 percent, applied mainly on primary products and "strategic goods" such as rice, cashew nuts, coffee, scrap metal, steel and wood products. Moreover, the Government imposes a surcharge on exports of cashew nuts and coffee, and export quota on rice. The effects of some of the export taxes imposed in Vietnam are rather more complex because they are often accompanied by controls on imports of the same products-for example, cement. The taxes and control on imports and exports are manipulated with a view to stabilizing prices and supplies.

2.2.1. Import quota and license.

The import quota are set by ministry of trade in consultation with other line ministries and the quantities are adjusted annually (or more frequently) to reflect supply and demand in the economy. Quotas are allocated to firms mainly on the basis of past performance, which obviously favors the large established SOEs. In addition to this, despite the import licensing system has recently been reformed, the import legislation remains cumbersome, and requires permits or licenses at several different levels. All consumer imports are included among the product groups that require permits for each separate shipment and it appears that these shipment authorization are also the main instruments for upholding the maximum limits on consumer goods imports. However, we have not been able to ascertain exactly what considerations determine the allocation of import licenses and how much of a trade restriction this system implies.

All of these above import quotas and licenses adding to high domestic production protection by tariff which can be illustrated through ERP for products facing quantitative restrictions. As shown in table 4.10 of the main text, the ERPs for several products are substantially higher when the quantitative premiums (tariff equivalents) are added to tariff protection.

Expert quotas are exporting obstacles set by foreign importing countries, so it is difficult to increase the quota volumes. However, problems arisen in handling of the quotas> Quota distribution is usually in favor of SOEs and quotas transfer are prohibited. In fact, there are cases that some enterprises having quotas seem unable to export all the amount of quotas entitled to them. On the contrary, there are other cases; quotas are allocated a fixed quantity of export while production capacity has increased substantially beyond the quota level. Thus unreasonable in handling quota is one impediment for producing and exporting activities.

As discussed in theoretical framework section, the Government can use domestic tax instruments in intervening trade activities, especially on exports. Hence, it is essentially to evaluate how were these tax instruments work in Vietnam since 1990 by examining several typical tax instruments such as turnover tax, tax on special consumer goods, profit tax, value added tax, and corporate income tax.

The turnover tax of Vietnam was designed for multiple economic and social objectives. In one hand, the primary objective of turnover tax is revenues. In another hand, Vietnamese turnover tax is also used as instrument to promote regional development through tax reduction for investment in rural and remote areas; to influence industrial production by providing tax incentives for import substitution projects; and to promote equity by imposing higher tax rates on goods and services that are likely heavily consumed by income individuals. These multiple objectives have been criticized as complicatedly, cascading etc., which leads to unpredictable effects because level of turnover tax on final goods and services not only depend on level of tax imposed on these goods but also on its inputs. Therefore, the turnover tax discouraged export activities and reduced the competitiveness of Vietnamese goods in the world market by raising the production costs of these business.

Excise tax or tax on special consumer goods was enacted in 1990 levied on some specific commodities. The critical of excise tax come from using the tax as protection measure for domestic industries which inappropriate with GATT. In fact, the effort in cutting tariff of Vietnamese Government was neutralized by excise tax which make even heavier protection which illustrated by cutting of maximum tariff level in 1996.

The profit tax was enacted in 1990 and amended two times in July 1993 and October 1995. The tax was designed to meet the requirement of transforming economy to the market one. However, when market economy is developing over time, the Vietnamese profit tax has revealed some limitations.

First, the profit tax rates is imposed on domestic enterprises are higher than these tax rates imposed on invested enterprises with aim to attracted foreign direct investment capital. However, the preferential treatment of FDI is not proper in market economy because it discourages domestic investment and saving on comparison to foreign companies with higher financial capacities and is one of the least influence on foreign investors.

Second, the profit tax is complicated with multiple tax rates with multiple objectives, the tax rates changed depending on the types of business and ownership. The highest tax rate is imposed on services and lowest rate is imposed on heavy industries. Therefore, the investors are encouraged to invest in heavy industries, especially on import substitution industries even they yield lower social returns.

In sum, the domestic tax regime of Vietnam during the period of 1990-98 has been inefficiently and complicatedly due to complicated rate system with multiple objectives. The most serious problem is that tax incentive has been distorting economic structure which harmful to export promotion activities and economic development. Realizing the danger of these limitations of domestic tax system, the Vietnamese Government has promulgated several new tax instruments with aimed to meet the requirement of development process of market economy and neutralize the protection caused by domestic tax system so far such as value added tax and corporate income tax.

The value added tax law was passed on 10^th May 1997 and has come into effect from 1^st Jan 1999. The main objective of enacting VAT is to eliminate the problems raised from turnover tax. However, the multiple tax rate which created for various social and political ends still existing in Vietnamese VAT that would caused the traditional problems related to the administration deficiency and tax evasion.

Moreover, the complexity of Vietnamese VAT is also presented by tax exemptions. There are 26 groups of goods and services exempted from VAT. Along with traditional exemption of difficult tax goods such as postal services, insurance, low income business, exemptions that are given to public goods, positive externality goods and services are seem to be necessary like exemption for education and training, irrigation services, but passenger transportation … However, there are unnecessary and unclear exemptions. For example, although exemption of technology transfer is a measure to promote transfer technology, the criteria of technology transfer are not given in the law. This may create incentive to investors trying to lobby the exemptions.

The corporate income tax has been passed to replace the former profit tax since Jan 1999 with a unified tax rate is an important improvement toward a more efficient tax system. However, the new corporate income tax law still contains two main limitations inherited from former profit tax. Firstly, the discrimination between foreign investment and domestic investment has not been eliminated yet which mostly supporting investment in production supply for domestic market. Secondly, the large number of tax exemptions and reduction which likely to reduce revenues and make the tax become complicated.

In order to implement the export promotion strategy, Vietnam's Government has enacted several decisions including interest rates preferences and establishment of export reward funds. These decisions aim to support enterprises which have difficulties in export production and business, to stimulate high operating efficiency of export enterprises. However, like many developing countries, heavy collateral requirements by commercial Banks are major impediments to wider access (especially by small and new exporters) to export financing in Vietnam. Moreover, an instrument that are involved in a number of successful export countries to substitute for collateral requirements is export financing guarantee scheme which not common in Vietnam. Therefore, although the Vietnamese Banking system have been reformed and several instruments to promote export were introduced, the export financing conditions still in favor of large exporters mostly are SOEs.

The important role of "open-door" policy and trade liberalization has been recognized in Vietnam over time which made Vietnam actively participating in the regional and international organizations such as ASEAN, APEC, AFTA, WTO etc.,. In particularly, Vietnamese AFTA commitments recently require very comprehensive liberalization and industrial restructuring, there is however also an ambition for self-sufficiency in many key industries as well as investment plans that seem to require continuing protectionism. And when the long adjustment period and the lack of firmly schedule notification for realization of Vietnam's AFTA commitments, it is unavoidable to create uncertainty and may provide incentives that are inappropriate and inconsistent.

Since 1986, changes in trade and foreign exchange policy, along with liberalization of controls on foreign investment, have been emphasized as key features of the opening up the Vietnam's economy. The trade regime and trade performance have undergone a significant transformation. However, defining the trade regime by multi-criteria method indicates that typically important features of import substitution such as high degree of exchange rate overvaluation; high effective rate of protection, prevailing use of direct controls like quotas and import licensing schemes, weakening use of export incentive are still remained; suggesting that Vietnamese industrialization strategy still follow import substitution. As a consequence, although the export values have rapidly increased, the import growth has been even higher which led to intolerable level of trade deficits which is a sign of fundamental structural imbalance in the economy. In this context, if export not boosted the economy will face major obstacles relating to the balance of payment, and the growth rate may be decreased and sustainable development in the future will find it difficult to be attained.

In a market economy, import restrictions typically influence resource allocation through their effect on prices. Investor and producers base their decisions on expected profitability, and respond to the impact of restriction on the prices of imports, and hence on the price that can be charged for local products. In Vietnam, resource allocation decisions are still often made with less immediate concern about profitability, and trade restrictions are then imposed and calibrated to ensure acceptable financial returns to investment. Either way, the trade restrictions allow the protected activities to operate at higher cost to the economy than would be possible without intervention. As a consequence, the allocation of scare resources are highly distorted and inefficiency. Instead of focusing on areas where the country has natural comparative advantages, human and physical resources are channeled to the production of goods that would "normally" have been imported, i.e. to sector where the country has comparative disadvantages.

In the case of domestic investment, especially that of public sector, a residual central planning approach might mean the pattern of investment is more heavily influenced by other factors. What seems to be happening, however, is that trade policies are adjusted to projects and ensure acceptable level of profitability. According to Vietnamese domestic plan period 1996-2000 shown in table 4.11 of the main text, about 17 percent of proposed investment capital to be directed into industry and energy sectors. Of which, 20 main industrial projects belong to heavy industry sector are accounted for approximately 40 percent on total investment planned for industry suggesting that the investment capital are distributed bias toward heavy industry.

As mentioned above, resource allocation is driven by net incentives, and the most appropriately criterion to reflect incentives is effective rate of protection (EPR). Therefore, to obtain the picture of relationship between FDI and ERP, each foreign investment project is allocated to an I-O industry, which allowing a mapping the relation between the level of foreign investment capital and ERP is essentially. As shown in chart 4.2 of the main text, there are some 14 percent of the value of FDI in sectors with ERPs of less than or equal to zero- most of which is accounted for investment in oil and gas projects. However, the majority of foreign investment capital are allocated in sectors with high EPRs- around 65 percent of investment occurs in sectors with ERPs above 60 percent.

As a consequence, Vietnam's recent growth has been characterized by increasingly capital intensive industrialization and growing investment in inefficient, low return activities. Capital-intensive industry has expanded more rapidly than labor-intensive industry: real output of capital-intensive industry (except oil) grew by over 15 percent annually as compared with 10 percent of labor-intensive industry. Consequently industry has not only become a larger share of GDP but it has also shifted toward import-substituting, capital intensive production (as show in table 4.14 of the main text).

To sum up, Vietnam's trade policies create distorted incentives, which support higher gross returns in certain sectors. The distribution of these gains favors those sectors producing goods with high nominal rates of protection and whose inputs are face relatively low rates of nominal protection. In practices, while tariffs are the main policy instrument, quantitative restrictions on the importing of certain competing imports also distort incentives. Quotas restrict competition from foreign competitors and allow domestic producers to supply more to the domestic market at higher prices than world prices. Consequently, domestic production has been inefficiently, both domestic and foreign investments directed toward import-substituting and capital intensive industries. Hence, the nation's comparative advantages have not brought into full play, which led to many obstacles to Vietnam's economic development sustainability.

As presented in chapter III of the main text, all these above countries had many similarities in main macroeconomic conditions in comparison with Vietnam's economy at the beginnings of export promotion period. And all these economies have achieved many success in their trade liberalization process through which promoting exports and sustaining high economic growth over the past four decades. Hence, detailed analysis and take out the positive lessons for Vietnam in its development path is necessary. In brief, the success of the economies due to following main factors.

• Most countries have used exchange rate policy to bolster the impacts of trade liberalization and to support exporters. Especially, in the case of Taiwan in the 1980s, currencies have deliberately been undervalued to boost exports.

• Exporters have been granted access to imports at international prices, which has been an absolute requirement for success in world market through several instrument such as duty drawbacks, various programs for tariff exemptions, and free trade zones, or export processing zones.

• The quantitative restrictions have been rapidly substituted by tariff and tariff rates have been gradually reduced or eliminated.

• Exporting companies have generally been granted preferential access to credits, often at subsidized interest rates.

• The prospective exporters have also been supported by other public policies to overcome the large initial costs involved in entering foreign markets. These policies have included a variety of measures such as direct income tax incentives, subsidies for the creation of international trading companies, exporter associations and other institutions, and public investment in infrastructure and education (Kokko 1997, p.50).

In sum, the experiences of some selected successful economies suggest that Vietnam would be well advised to introduce an explicit export promotion, that is should probably be general rather than selective. In particular, it seems difficult to create competitive industries in sector that do not coincide with the country's initial comparative advantages. This suggests an approach where tax exemptions, credits, and infrastructure investments are accessible to as many industries as possible. Moreover, we have to emphasize here that all these countries have followed strategy "Imports used for exports" which a golden key for their past success.

Since 1986, the Vietnam's trade polices have been remarkably reformed which led to substantial economic growth and low level of inflation. However, according to Ari Kokko, the potential benefits of past reforms are nearly exhausted, and that further change is needed to sustain macroeconomic stability and a high rate of economic growth. In addition, using the multiple criteria method in defining the trade strategy, the paper suggested that the typically important features of import substitution are still linger on:

• First, although Vietnam's Government has continuously devalued Vietnam Dong (VND), the exchange rate still overvalued against USD and other it's main trading partner's currencies in real term, which led to many adverse effects on Vietnam's commodity competitiveness and trade performance. As presented in section 1 of chapter IV the VND has increasingly overvalued against it's trading partner's currencies. Especially, under impacts of recently regional financial crisis, the VND overvalued of 34.7 percent vis-à-vis other currencies. The more flexibility in Vietnamese exchange rate management in past years reflected a more response to market conditions rather than a proactive policy effort.
• Second, comparing to nearly ten years ago, Vietnamese tariff system has been significantly developed. However, the system was criticized by traders and foreign investors for complex, unclear and inefficient. The tariff structure reflects a goal to protect import-substituting domestic production rather than for promotion of exports, the high level of tariff was imposed on imported consumer goods and low rate (typically below 5%) imposed on equipment and materials for domestic production. Understanding this tariff bias, the domestic producers often enjoy very high rates of effective protection, which led to many distortions and costs for export producing activities. In addition to this, although the nominal tariffs for most of the products were reduced on 1st January 1996 as a part of Vietnamese commitment to lower the maximum tariff from 200 percent to 60 percent, the tariff cuts were neutralized by the introduction of special taxes, leaving the level of real protection unchanged at best, but less transparent.
• Third, in addition to these formal tariff and excises taxes there are some import prohibitions, formal import quotas on several products such as petroleum products (excluding lubricants), fertilizers, cement, sugar and steel, and export quotas on rice, textiles and garments. The quotas are set and annually adjusted by ministry of trade to reflect domestic demand conditions. Moreover, quotas are allocated to firms mainly on the basis of past performance, which obviously favors the large established SOEs. Besides, import-licensing system are also remained used for upholding the maximum limits on consumer good imports. All of these above import quota licenses adding to high domestic production protection by tariff which are illustrated through ERP for products facing quantitative restrictions. As presented in chapter IV, section 2.2.1, undering impacts of quotas & licenses the ERPs for some products like cement and sugar... increased remarkably.

¨ Fourth, considering the Vietnamese export incentives the paper suggested that, Vietnam's export policies reflect a legacy from the days central planning, unresolved ambiguities in the nation's approach to industrialization. Consequently, policies or incentives for promoting exports contained a number of contradictions. Moreover, the Vietnamese export incentive system also criticized by some experts that the system still slows, complex and discretionary in its application for two reasons. First of all, although like many other countries Vietnam has applied a number of measures aimed at compensating exporters for some of the costs which Vietnam's own import barriers impose upon them such as duty drawbacks, duty suspension, preferential access to credits etc., the number and scale of initiatives to directly promote exports have little compensating them for the cost raising effects of import barriers. At last, the implementation process of these incentive instruments is still slow and facing many administrative obstacles.

All these above features like high degree of exchange rate overvaluation; high effective rate of protection; prevailing use of direct controls like quotas and licensing schemes; weakening use of export incentive are still remained; suggesting that there are many typical features of import substitution still remained in Vietnam's trade strategy. Further more, the Vietnam's trade environment is also characterized by a large degree of uncertainty. The Vietnamese Government has repeatedly declared that trade liberalization is a central element of the country's economic reforms, and through it's membership in the AFTA, Vietnam has made a commitment to eliminate most tariff and non-tariff barriers vis-à-vis the ASEAN member countries within the next decade, Vietnam has also applied for membership in the world trade organization and introduced some unilateral trade reforms with support from the IMF, the World Bank, and other members of the donor community. However, relatively little trade liberalization has taken place to date, and there is no exact time schedule for the tariff reductions that have been promised. As a consequence, although the export values have rapidly increased, the import growth has been even faster which led to intolerable level of trade deficits which is a sign of fundamental structural imbalance in the economy. In this context, if export not boosted the economy will face major obstacles relating to the balance of payment, and the growth rate may be decreased, and thus sustainable development in the future will difficult to be attained.

Besides, in a market economy, import restriction typically influence resource allocation through their effects on prices. In Vietnam, trade policies create distorted incentives, which support higher gross returns in certain sectors. The distribution of these gains favoring those sectors producing goods with high nominal rates of protection and whose inputs are face relatively low rates of nominal protection.

Moreover, priority given to import substitution is mainly relating to state-owned enterprises and sectors having foreign capital. In other words, the present protectionist system is maintaining the privileges of state-owned business, and this may hinder the process of liberalization. Consequently, domestic production has mostly been inefficiently, both domestic and foreign investment directed toward import-substitution and capital-intensive industries. It will hinder the rational distribution of various resources and bringing into full play of the country's comparative advantage in the international division of labor.

As presented in previous sections, protection policies may help local producers make profits but these margins are generated on the domestic market only, and only due to such policies. In the international arena, there is no such free ride. An argument could be made for state assistance if it could be shown that producers took advantage of the opportunity to increase investment in new technology and boosting exports. In practice, however, the opposite seems to occur. The majority of protected enterprises become more, not less, dependent on government's handouts. The more protected the producer the blunter its competitive edge becomes on both domestic and international markets... Import substitution is a child of an economy of "high costs of fast growth but low efficiency". The effect is a growing trade deficit. This problem must be addressed not merely by adjusting exchange rates or providing "export finance" as some suggested. It is necessary to take a radical and comprehensive renovation of trade policy to create an efficient economy that can be compete according to comparative advantage. Hence, the paper suggests several issues, which should be taken into account for further reforming recent trade and other export promotion instruments.

• The first, is issue of trade policy and export promotion. In fact, Vietnam has launched an ambitious industrialization program with the hope to bring quickly the country out of poor and backward situation and to be industrialized nation in 2020. However, the trade policy, especially in the past few years, has been very much in favor of capital intensive, import substitution industries, those are dominated mostly by SOEs (possibly in joint-venturing with FDI such as cement, steel, paper, sugar, electronics, plastic, automobile industries). Several consumer products have also been under high protection. While the tariff system is still unnecessary complex with the large and selective dispersion, the import substitution policy may be reflected most obviously in the more intensive uses of most NTBs. Perhaps, the abolishment of trade licenses is only a remarkable progress. The former protection mode should be replaced by new internal and active mode in creating favorable conditions for the development of domestic industries. For such industries which need support for development, the state should give priority in terms of capital and land taxes to help these industries to reduce production costs, consume products, and reduce income taxes, rather than use instruments which harmful to other industries.

• The second issue is an optimal option for Vietnam to integrate itself into the regional and world economy. As shown in chapter IV, Vietnam has several problems in meeting its AFTA commitments. In general, the trade measures undertaken recently by Vietnam have not been consistent with WTO principles. Hence, Vietnam should implement its international obligations; the time frame for maneuver will be reduced. However, the costs of trade reform-in terms of unemployment, lower budget revenue and slower growth-will be unacceptably high if the export sector is not able to employ some of the capital, labor and entrepreneurial skills that will be released from shrinking import substituting industries. Some recent studies have argued that the best for Vietnam is to multilateralizing the commitments to AFTA as a part of WTO accession.

• The third and perhaps the most difficult thing is the problems in implementing trade liberalization. The trade liberalization will only be successful in conjunction with other decisive reforms such as the reforms of the SOE sector and financial system. A complex package of reforms means also the involvement of many participants with different motives. There is the asymmetry in incentives for supporting, opposing reforms among the groups, depending on whether they will be winners or losers. Obviously, consumer will be benefit from the reduction of import restriction and the inefficient and highly protected enterprise will hardly to service in the new market environment. But the benefits for many would be potential and some what uncertain, whereas those who would be lose due to trade reforms, tend often to be in position to influence the decision. In this situation, the role of leaders, policy makers, and institutions is very important in supporting or opposing reforms. But may be they would be not convinced of the huge benefits of trade liberalization, while concerning very much about the short-term costs. For Vietnam, the participation in the international trade organizations has put pressure to accelerate the process of trade other reforms. At the same time, Vietnam's policy manipulation and discretion has shown that Vietnam still lacks a clear strategy for opening the economy and worries about the short-term costs, especially social costs associated with the trade liberalization.