ight years after Vietnam's leaders drove American capitalism out of their country, they have turned to economic reforms and profit incentives as a partial answer to the enormous problems they face.

Here in Hanoi the farmers who pedal in on ancient bicycles, weaving past speeding trucks and noisy military convoys, hawk their produce in city markets for their own profit. They find buyers galore--the younger shoppers in blue jeans and well-fitted sweaters, not the black pajamas and conical hats of old.

For Vietnam is undergoing a liberalization of economic and social rules that in its quiet way could be as significant as the more heralded changes in neighboring China.

Last Christmas there was public disco dancing in Hanoi. For this Tet, or New Year, the authorities allowed country people to revive cockfighting, wrestling and water buffalo matches. In Hanoi, color videotapes of western rock groups played to packed crowds in the capital's huge Lenin Park.

During my recent return to Indochina after 3 1/2 years' absence, it was apparent that the leadership's austere policies of the immediate past are yielding to more practical if ambiguous attempts to lift this country from dire poverty and kindle new enthusiasm for the government.

The immediate benefits may appear scant, because of ingrained political problems as well as Vietnam's miserable economy. But the change in the leadership's attitude is perceptible. Viewed a few years ago as conquering heroes by many nations, the Vietnamese finally have accepted the fact that theirs is a poor Third World country, and they are intent on finding remedies.

"Vietnam is probably the most backward, the most poor major country in the world," said Fuad Kronfol, the Lebanese director of the UNICEF program here. "It took some time for all of us to recognize this, foreigners and Vietnamese."

But while the Vietnamese are employing unorthodox political measures at home, they are sticking to their rigid colonial policies in Cambodia, or Kampuchea, as it is formally called. Vietnam's four-year occupation of Cambodia remains a major stumbling block to Hanoi's dream of a full recovery. Neither Vietnam nor its international adversaries show any inclination for compromise despite the countless meetings and plans devoted to solving the "Kampuchea question."

While Vietnam is exhibiting a new pragmatism and concern for its people's well-being, the international sanctions imposed to protest its occupation of Cambodia are blocking the western aid the Vietnamese desperately need. And in Cambodia the Vietnamese are putting political indoctrination and consolidation above the country's recovery and reconstruction. As a result, Cambodia is sinking into a dangerous new cycle of poverty.

Here in Hanoi, the new economic liberalization was first considered at a Communist Party plenum in late 1979 and gradually unfolded until it was formally adopted as national policy at last year's fifth party congress.

Now agriculture ranks as Vietnam's first priority, followed by handicrafts and light industry geared to rural development and consumer goods. To ensure the cooperation of farmers and workers, individual incentives were introduced. Factory workers are now paid on a piecework basis; farmers in state cooperatives can sell for profit anything they produce above their quotas. After-hours "cottage industries" are blossoming as people take advantage of another new policy allowing them to sell on the free market anything they make at home, from sturdy cartons to fine embroidery.

To prod the feeble economy, the government has allowed free enterprise to flourish in limited but important sectors. The expanded, legalized free-market system--not the state system--is responsible for the wider circulation of goods.

The government's modest claims of improvement mesh with the contrasts between this visit and my last trip to Hanoi in 1979. Then, despite official claims that no one was hungry, Vietnam had to import half of its food grain and even the children of Communist cadres suffered from malnutrition. This time, the tastier soups sold in cafes and the faces on the streets, no longer uniformly gaunt and dispirited, reflected last year's record 16 million-ton rice harvest.

In Hanoi's central market, huge baskets of fish attested to the fishing industry's recent climb to becoming an export earner.

Vietnam is in the midst of adapting to a new self-image.

"We have learned a lesson," said Hoang Nguyen, editor of Vietnam Courier magazine and one of the government's spokesmen. "Before, everyone thought Vietnam was a full-fledged socialist country. We were mistaken. We are only at the very beginning, in the period of transition from capitalism to socialism, a poor developing nation. That was a very important discovery."

With that essential readjustment of Vietnam's place in the fixed communist spectrum of socialist development, Hanoi now feels free to "mobilize all the capablities of the people" in private as well as state fields without fear of moving backward, of becoming "revisionist" as the Vietnamese say China is. It is noteworthy that Vietnam came to this realization at about the same time that Moscow began experimenting with free-market practices.

The same "discovery" also has enabled Hanoi to look at its past with fewer blinders and admit to the same wartime dependence on foreign aid that it so harshly condemned in the south.

"At the time of the war," Nguyen said, "we lived mainly off foreign aid. The state didn't manage the economy, it just distributed goods from the outside--rice, clothes, etc. Our needs for the battlefield were put above all else, no matter the cost.

"But in 1975, the south lost its $1 billion a year American aid. By 1978, we had lost the equivalent of $1 billion annual aid from China. Imagine, a Third World country that loses $2 billion in aid ! No wonder people were beginning to think peace meant hard times." IN THE FOREIGN communities there is no end to theories explaining why Vietnam made such an about-face. In the Soviet community here, it is presumed that pressure from Soviet economists forced the Vietnamese to improve the standard of living for factory workers.

"The Soviet experts couldn't continue the charade of helping Vietnam industrialize when the workers were so miserable they couldn't work," one well-placed source said.

The Soviet Union, whose reported daily aid of $3 million makes it the undisputed leading foreign voice here, apparently raised complaints to the Vietnamese that would make western nations' criticisms seem tame. According to authoritative sources, Moscow finally put its foot down, refusing to fund "nonsensical" projects, not long after the Chinese pulled out in 1978.

Soviet officials also suggested to the Vietnamese that the country's development was at roughly the same stage as Russia's when Lenin instituted his semicapitalist New Economic Policy during the 1920s. And Moscow hinted to Hanoi that those leaders who conducted a winning war may not necessarily be those best suited to devising the sophisticated economic policies needed to rebuild Vietnam.

Some western nations believe the U.S.-inspired cutoff of most West European aid, a program designed to force Hanoi to withdraw its troops from Cambodia, can take credit for making the Vietnamese face up to living on their own resources.

While Kronfol of UNICEF says the sanctions program sent the wrong message to Hanoi, punishing the Vietnamese for toppling "that genocidal madman" Pol Pot, the official acknowledges that the program has helped his work here.

"We've been able to use their political problems to our advantage by saying, 'Look, the atmosphere is bad out there. You'd better play ball.' "

"Playing ball" means Vietnam has begun to accept UNICEF criteria for its projects.

"Finally the Vietnamese understand our role is to help them with their projects at the level of their development, and not just hand over modern aid that means nothing in their country and actually impedes their development," Kronfol said. "They understand we have to make regular, prolonged visits to the projects and to monitor the programs. No more of those one-day touristic trips. We spend weeks in the countryside, and we return to the projects again and again. We're beginning to glean enough information to know how poor this country is." TO LEAVE constricted Hanoi and travel through the countryside is to feel the literal relief of broad horizons.

In the long-established Two Phoenix cooperative about 30 miles from Hanoi, a shallow new layer of prosperity sits easily in the compound of solid brick houses, community halls and well-traveled dirt side roads. There are new motorbikes, outbuildings with surplus stocks and a separate building for the cooperative's free-market agent. The new economic reforms for the countryside have been in effect for a year now, and already this cooperative has found countless ways to earn more money.

"The difference is not the free-market system," said Ta Van Thong, the 45-year-old chairman. "We have always had a free market in the cooperative and we've always sold our surplus to private dealers. The difference is in the work assignment quota system which means we have more to sell on the free market."

Now, Thong said, "nearly everyone is trying to produce their own private surplus--oranges, clothing, vegetables. They were all very happy with the changes and the question was, 'Why hadn't the government done this before?' "

The major occupation of the Two Phoenix is rice cultivation, and the quota system has led to a complicated division of labor in this labor-intensive field. The collective work team is now responsible for irrigating and preparing the fields, controlling high-yield seeds, spreading fertilizers and spraying insecticides. Individual families do the rest: transplanting, caring for the fields and harvesting the rice. Thong has calculated the monetary value of the work team's supplies and efforts. He deducts that amount from the individual family's harvest and the rest belongs to the family.

A slightly different system operates for those who bake bricks, weave baskets and embroider satin bedcovers for export. The cooperative provides the material and sets daily quotas. For every 500 bricks baked by a worker beyond his quota he earns 10 kilograms (about 22 pounds) of rice, or the equivalent in Vietnamese currency or in fish, meat or soybeans. The cooperative then takes the bricks for sale or barter.

The same is true for embroidery. The 200 young women who sit behind wooden frames in a drafty, ill-lit outbuilding are compensated for their extra labor in rice, currency or their equivalents but the cooperative keeps their delicate handiwork.

"If the women invest their own money in cloth and thread and work at night, then they can sell their goods on the free market," Thong said.

Everything changes and remains the same.

"The government likes to say they are following the Hungarian model in their new agricultural policy," one diplomat in Hanoi said, "but in fact what they've done is accept long established Vietnamese practices, hoping to modify them with some middle path. How much prosperity this can bring over the long run is questionable. They can squeeze just so much out of the work force. What they will need shortly is large-scale investments--and the only people coming up with new capital are the Chinese traders." THE HEART of Ho Chi Minh City is quiet after 10 p.m. Motorcars disappear, shop grills are shut and locked, restaurants and bars are expected to close or at least mask what goes on inside. A sensible socialist lifestyle proscribes late-night carousing.

But across town, in the Chinese quarter still called Cholon, the rush of people, cars and motorbikes at the same hour is so thick that side streets are impassable. The noise from the crowds adds to the sense of chaos as children dash from shop to shop, old men in their underwear stand outside storefronts and others meander through the maze.

This Chinatown is no less exotic in Ho Chi Minh City--the old Saigon--than those in San Francisco or New York. Seemingly beyond the laws of the state, it is considered a threat from within. The sharpest, most ambitious, most capitalist businessmen live and operate out of Cholon. They were the first to take advantage of the new economic reforms and now they are the first targets of government countermeasures aimed at stemming the most disruptive results.

"There are two parts to the economy--production, and distribution or circulation," Hoang Nguyen, the magazine editor in Hanoi, had explained. "Saigon has good production but the state cannot control distribution there. If we can't stop their black-market habits and trafficking, then we are in trouble."

The government newspaper Nhan Dan underlined the point in a recent editorial. "Distribution and circulation is now the most complex and hottest battleground of the 'which will win' struggle between the two roads of socialism and capitalism," the paper announced, calling for renewed efforts to "resolutely punish speculators, smugglers, manufacturers of counterfeit goods" and "resolutely eliminate the exploitative practices of the bourgeois traders."

Vietnam's Communist rulers are facing the problem any number of governments have grappled with for decades: how to reap the rewards of capitalist enterprise while curbing its unwanted side effects. "Bourgeois trader" is the official code word for the Chinese businessmen who found the loopholes in Hanoi's new economic policies as fast as Washington lawyers find them in American tax laws.

Examples are on everyone's lips. In one southern province, businessmen apparently bought up the surplus coffee production, raised the prices to make a profit and sold the coffee to neighboring provinces. Inflation was fueled and the farmers were so impressed with the prices offered by the businessmen that they sold them coffee that had been promised under contract to Soviet Bloc countries.

To curb such practices, the government is banning most private trade between provinces and is setting up checkpoints to monitor traffic. But the more endemic problems lie in overseas trade and in manufacturing, problems the government will be hard pressed to resolve without destroying the profits it desperately needs.

The new economic reforms gave autonomy to Ho Chi Minh City and other localities to trade overseas and to companies to write their own contracts for some goods manufactured for export. The results have been impressive: about $100 million worth of trade from Ho Chi Minh City last year, according to calculations made by the French news service Agence France-Presse. But the capital earned from that high volume is plowed back into the trading firms or used to import tools, machinery, synthetic materials, spare parts or other items unavailable in Vietnam. The government only benefits through taxes--on reported income.

A Southeast Asian firm lays the credit for Ho Chi Minh City's trading success to the expertise of the Chinese traders with which that firm works. But the firm's manager has already come under pressure to shift business from the private Chinese firm called Cholimex to official state import-export companies.

"When I was last in Ho Chi Minh City," the manager said, "my driver said he couldn't take me to an appointment at Cholimex because he didn't know the address. The hotel manager said Cholimex wasn't listed in the phone book. I finally had to call a cyclopousse pedicab and of course the poor man knew exactly where Cholimex was. Then, when I returned I was informed that I shouldn't deal with the Chinese--they weren't honest, they couldn't be trusted."

The government is now trying to "encourage" these successful businessmen to drop their private ventures and join state trading firms by reminding them that many of their business practices could be considered illegal.

"We're asking the good merchants to work for us in the trade service, to give up their black-market practices," editor Nguyen said. "It's better to work for the state than live in prison." "YOU DON'T think I live on my wages?" a bureaucrat asked in astonishment. "I have to make petty trade like the rest of the world if my family is going to eat."

With the pendulum swinging fiercely in favor of the countryside, the white-collar workers in the city are being reduced to penury. They are the immediate victims of Vietnam's decision in 1980 to become part of the international financial system and devalue the dong to nine per dollar. The result has been inflation running at 100 percent during the past two years.

Although the government doubled civil servants' salaries to 300 dong a month, they remain so low as to be "ridiculous" in the eyes of a foreign expert. On any given day at Hanoi's markets, a pound of chicken costs 40 dong, a pound of oranges 12 dong, a pound of carrots 5 dong.

"It's presumed that many of the people live on the theft of Soviet aid projects," the foreign expert said. "Theft is one of the biggest problems in Soviet projects. A crucial piece of equipment for a power plant, for example, was broken just so a few small pieces could be extracted and sold on the black market."

While UNICEF officials and other foreigners working in the countryside report few problems of theft, those involved in more urban and particularly expensive infrastructure projects are discovering the opposite. At the Swedish-built Bai Bong paper mill north of Hanoi there have been reports of a new wave of thefts, from factory parts to household furniture. Two foreign embassies in Hanoi lost thousands of dollars in thefts in recent months.

Those who do not steal as a way out of white-collar poverty are finding that more legitimate ways to shore up family income exact a harsh price. Husbands and wives both have to work full time and, if possible, moonlight in addition. Grandmothers and older children are called upon to sew at home or set up sidewalk stalls. An expert who works in a Hanoi office described the rat race waged just to put food on the table:

"Women in the offices have to dash to a state store when they know something is available at subsidized prices. Then they'll trade it for something else they need. Then they have to contact some uncle who has a friend who works at a factory where there is a surplus of something else . . . . It is endless. They rarely see their family relaxed, they rarely sleep."

The government recognizes the hardships placed on its bureaucrats but its only answer is to hope they can bear up until prices stabilize and the economy improves.

"The civil servants are the only strata that doesn't live very well," editor Nguyen said. "The peasants, 80 percent of the population, have had great improvements in their lives after the economic reforms. So have the state workers and private traders."

One way out for the police and low-level administrators is to solicit bribes from those increasingly prosperous traders and private businessmen, a practice officially frowned on but allowed to flourish--especially in Ho Chi Minh City.

The problems of those employed exist alongside the vast unemployment that stems from the failure of the early attempts at industrialization. Nearly one-fifth of the country's work force, mainly educated youth, is without jobs.

Universities, as a result, are sharply cutting back enrollment. No longer does the government send young people to get advanced technical training for jobs in such fields as computer technology, which the country never had and probably will not have in the near future.

Many young people reportedly are paying bribes to be sent as workers to the Soviet Union and Soviet Bloc countries. It is the reverse of recent charges that Vietnamese are being deported as slave laborers.

"The story of Vietnamese slave labor in the Soviet Union was quite astonishing to us in Hanoi," said one foreign diplomat. "We were all asked by our home offices to look into it and now we know enough to give you their order of preference: Czechoslovakia--the Vietnamese all bring back their excellent bicycles; the Soviet Union; Bulgaria, and then East Germany--at the bottom, because the Germans make them work very hard."

NEXT: Cabodia's stalled recovery.