HANOI, Vietnam -- At the height of the Vietnam buzz, the dealmakers were all over town.
"It was like a scene from Casablanca -- people huddled on street corners making handshake deals. Every major company in the world was here," recalled Tony Salzman, who heads V-Trac, the sole distributor of Caterpillar heavy machinery in the Southeast Asian nation. "We all felt Vietnam was the next big thing. It was a question of when, not if."Five years later, Salzman is still waiting.
International investors flooded in when the United States lifted the embargo against its former wartime enemy in 1994. Yet the tantalizing potential of a largely untouched market of 76 million people, cheap resources and a young, well-educated labor pool has yet to be realized.
Vietnam remains a work in progress. Blossoming potential is being threatened by a faltering economy, slowed reforms and a frustrating business climate that has left foreign investors wary.
The last decade brought strong economic growth, a huge drop in the poverty rate and strong agricultural output that transformed Vietnam from a rice importer into the world's second-largest exporter. But the new gains are fragile, dependent on foreign investment and continued growth in the private sector. And both those factors are being stymied by the slow pace of reform.
Analysts say Vietnam has made the easy reforms but has balked at the tougher ones, like revamping its tangled legal system and debt-ridden state banks.
Vietnamese leaders have held up finalizing a bilateral trade agreement with the United States after tentatively approving it last summer. The pact would bring in an estimated $800 million in trade. But it also would put Vietnam's inefficient state-owned industries -- most already running in the red -- in direct competition with powerful U.S. companies. The deal has yet to be signed.
Also, a long-promised stock market, which would require businesses to be more competitive and transparent, has yet to open.
"Vietnam is in reform limbo. They want the benefits of reform but they're not willing to pay the costs," Salzman said.
What has held the country back is a conservative leadership that is reluctant to change and isolationist at heart. Despite Vietnam's public pledges to change and integrate into the global economy, reforms have slowed to a crawl over the last several years as the leadership agonizes over the merits of opening up to global trade and competition.
Officially, the government has professed its commitment to continuing the path of economic reform begun in 1986 with doi moi, Vietnam's version of perestroika. But during celebrations marking the Communist Party's 70th anniversary earlier this year, Secretary General Le Kha Phieu, the most powerful of Vietnam's ruling troika, peppered his speech with warnings against the dangers of "imperialism."
"We are renovating, but we are determined not to change color," Phieu said, speaking against a backdrop of portraits of Karl Marx and Vladimir Lenin overlooking a bust of revolutionary hero Ho Chi Minh.
The reform slowdown has been mirrored by comparatively lackluster economic growth the last two years -- about 5 percent annually. During much of the 1990s, it ran at 8 percent to 9 percent.
Unless the pace of change picks up, economic growth could drop to 3.5 percent this year and 3 percent thereafter, the World Bank has predicted.
The delay in implementing reform has led many foreign companies to question Hanoi's commitment. Foreign investment has plummeted to a seven-year low, with cash inflows of only $600 million in 1999, compared with a peak of $2 billion a year in 1995-97.
Turned off by government red tape, lack of transparency and corruption, investors are flocking to other spots in Southeast Asia, including Thailand and Malaysia, where labor is cheap, infrastructure is in place and the government offers business incentives.
"Vietnam's problem is that it compares its progress with itself," said Ron Kiel, chairman of the American Chamber of Commerce in Ho Chi Minh City, the country's economic hub. "A decade ago, they were falling apart, so in comparison, they look at today's situation and congratulate themselves on how far they've come.
"But the reality is that Vietnam is competing against other Asian countries. And it's still pretty far behind," he said.
The country stands at a pivotal point. Unless Vietnam accelerates the reform process, analysts say, it will continue to lag further behind its Asian neighbors.
"There is no country where the gap between its reality and its potential is so enormous," said Dennis de Tray, chief representative for the International Monetary Fund.