West leaps to fund Vietnam's march to market economy: Infrastructure improvement is vital, reports Raymond Whitaker

VIETNAM'S Communists have returned to the international economic fold and the next stage in their long march from rigid socialism to market economics is about to begin.

This week the International Monetary Fund approved a dollars 223m loan to Hanoi from a fund to help centrally planned economies switch to market policies. About dollars 17m will be disbursed immediately for balance of payments support.

The loan, the first in 12 years, was made after Vietnam repaid dollars 140m of arrears to the IMF. With dollars 13.6m of arrears owed to the Asian Development Bank cleared at the same time, Vietnam can expect to receive up to dollars 1bn a year in standby finance, project aid and commercial lending over the next five years. The only limit is likely to be the country's capacity to absorb the funds.

If Hanoi had had its way, its outstanding debts to international institutions would have been repaid long ago. The obstacle was the United States, still aggrieved at losing the Vietnam war and maintaining an economic embargo until 2,200 servicemen missing in Indochina are accounted for.

In July, however, President Bill Clinton finally withdrew the American veto on Vietnam reaching a settlement with the IMF.

The delay, if frustrating, has at least meant that there has been plenty of time to identify priorities and ensure that the wave of money about to come in does not produce harmful distortions.

There is no shortage of projects: Vietnam, for all the progress it has made since the leadership decided to change course in 1986, remains desperately poor.

Virtually nothing has been spent on the war-shattered infrastructure since the fighting stopped in 1975, and until a few years ago pockets of famine were not unknown.

Foreign companies venturing into the country have found that the advantages of a cheap, literate workforce are eroded by cratered roads, power shortages and primitive port facilities.

The World Bank is about to disburse dollars 335m for three projects - dollars 70m on primary education, dollars 145m for repairing highways around Hanoi and Ho Chi Minh City (formerly Saigon) and dollars 120m for increasing crop yields.

Other priorities identified by the bank include rehabilitating road and rail links between the two main cities, building power stations in the south and bringing the country's two principal ports, Haiphong and Ho Chi Minh City, up to scratch.

The ADB has its own list of 10 infrastructure projects requiring dollars 600m in foreign loans up to the end of 1994: this month it will approve dollars 76.5m in soft loans for an irrigation and flood protection scheme south of Hanoi.

Although some commercial and government debt remains outstanding, an aid conference in Paris next month could see as much as dollars 1bn in pledges.

A World Bank official warned against getting carried away: 'Commitments are likely to be well ahead of disbursements for the next year or two, due to a lack of capacity to absorb the money.'

But for a foreign banker in Ho Chi Minh City it meant the end of the American embargo in any meaningful sense.

'The main thing was the rescheduling,' he said. 'The trade ban doesn't hurt anyone except American companies.'

He dismissed suggestions that European and Japanese banks might be wary of commercial loans in which there could be no American participation.

At one stage Britain was the leading foreign investor in Vietnam, thanks to the early arrival of BP, British Gas, Lasmo and Enterprise Oil to explore for offshore oil. Now, however, the competition is getting tougher, and the British are down to eighth place.

A few months ago the Japanese government became tired of waiting for the US embargo to end. It opened a soft loan facility for Vietnam.

When the infrastructure contracts are awarded, American companies will be there too: in renewing the embargo last month, President Clinton made an exception for projects funded by international institutions.

A high-level delegation of American businessmen, led by the former Chase Manhattan chief David Rockefeller and including the heads of American Express, Levi Strauss and the international arm of Goldman Sachs, has just arrived on an exploratory visit.

Nguyen Xuan Oanh, a former central banker and prime minister of South Vietnam who has been advising the Hanoi government since 1979, admits that the sudden rush of development money could be as tempting and harmful to the country as rich food to a starving man.

'The government will have to make the best use of it,' he said. 'Sometimes I get nervous that they won't know how.' His worries are shared by many foreign diplomats and businessmen, and by some officials themselves.

'We are still too bureaucratic,' said an economist at a government- sponsored institute. 'Many officials have learnt all the documents about economic reform by heart, but still act the way they have done for decades. Others are obstructive because they are corrupt, and want money to sign the document.'

Some dollars 6bn in foreign investment has been licensed since the doors were opened in the late 1980s, but doing business in Vietnam will require strong nerves for some time to come.

Apart from bureaucratic and infrastructure shortcomings, and the growing problem of corruption, the country is only beginning to create a legal framework for matters such as bankruptcy and land title. The financial system is rudimentary and smuggling is rife.

But Vietnam has come a long way in a short time. Even selling vegetables in the street was illegal five years ago - something one would never guess from the volume of trade now.

Output grew 6.5 per cent a year between 1989 and 1992, and exports rose 35 per cent. This week the IMF applauded Hanoi's 'major progress' in opening up its economy.

If the country could achieve this with next to no help, say its advocates, imagine what it will be able to do with access to foreign capital.

Even its critics admit that a nation that drove out the French and the Americans, and gave China a bloody nose when it tried to march across the border in 1979, is likely to succeed when it turns its energies to economic growth.