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Vietnam has only recently emerged as a participant in the rapidly growing Asia Pacific economy, having rejected central planning in favour of a market driven economy by the late 1980s, and is now poised to become Asia’s next economic “dragon”. Its economic performance during the 1990s has been truly remarkable, with the growth of real GDP, consumer price inflation and export growth showing considerable, and sustained, improvement over tha t of the 1980s. This contrasts starkly with the experiences of other economies in transition, central and eastern Europe in particular, whose transition process has been considerably more difficult, with severe downturns in GDP growth and, in most cases, ruinously high rates of inflation. However China, another transition economy, has performed in general better than Vietnam in terms of both of these macroeconomic variables.

What makes this performance even more remarkable is tha t it has been achieved against a background of loss of foreign assistance from the former Soviet Union, a loss of cheap imports and the need to re-orientate its foreign trade due to the demise of the CMEA (Council for Mutual Economic Assistance), no substantive multilateral or bilateral assistance from the west until late 1993, and the US trade embargo, in existence since the end of the Vietnam war, which only ended in February 1994.

A crucial factor behind this recent economic resurgence of the economy has been the decision by the government to implement major economic reforms, in 1986 and later reaffirmed in 1989, which would transform the economy from being centrally planned to a market economic system. A key objective of this paper is, therefore, to identify the major economic reforms which have already been instigated and the macroeconomic performance of the economy since 1986, as well as its future economic prospects and challenges emphasising, in particular, the crucial contribution of foreign direct investment and overseas development assistance (ODA) in this process.