Vietnam: reformist urge softens

Through what has been described the "middle income trap", economic experts warn the Vietnamese leadership that much-needed reform should be pursued or else cracks will soon begin to appear in what has been (often rightly) acclaimed as unprecedented economic growth in the ambitious Southeast Asian nation. In our first Regional Matters piece for 2011, Vaughan Yarwood reveals some statistics that paint a much less rosy picture of a country that was once seen as the next "Asian Tiger".

On 11 January 2011 Vietnam’s governing Communist Party (CPV) convened its five-yearly congress: a gathering of the country’s political elite to renew leadership and affirm legitimacy in the one-party state.

Policy pronouncements take second place to applying varnish to the regime itself at such congresses. As retired United States diplomat David Brown noted, writing in Asia Times Online on the eve of the congress: “Chiefly they [the party congresses] concern people and patronage: who goes up, who goes down, and how that ripples through the system. It is not a winner-take-all event, but rather one aimed at updating the CPV’s internal balance among factions and interests while retiring former leaders bloodlessly”.

Nevertheless, in his opening address to the 2011 congress in Hanoi, outgoing party leader Nong Duc Manh was able to reflect on some flattering statistics. The country’s economy had grown at 7.2 per cent in 2010, he told delegates. GDP posted a 3.4-fold increase over 2000 to reach US$1,168, while exports rose five-fold over the decade.

Photo: Vincom City towers shopping centre, Hanoi

The job now, he said, was to lift the pace of modernisation in order to meet Vietnam’s aim of becoming an industrialised nation by 2020.

There is no doubt that since the missteps of Ho Chi Minh’s successors in the 1980s — which included attempts to collectivise land ownership and to discourage private business — Vietnam has enjoyed two decades of impressive (and equitable) growth, thanks to market-oriented reforms known as doi moi (‘renewal’). Similar to measures introduced by Deng Xiaoping in China, the liberalisation embodied in doi moi dismantled aspects of Vietnam’s command economy and encouraged entrepreneurialism.

There are signs, however, that the road is about to get more rocky.

As early as 2008 the World Bank’s representative in Vietnam, Ajay Chhibber, warned of the “middle-income trap”, in which countries tend to lose their appetite for reform as they become richer with a consequent faltering of economic growth. His message amplified that of the Vietnamese Academy of Social Sciences which two years earlier cautioned that ongoing poverty reduction would require higher growth rates because the remaining poor were significantly below the poverty line.

The country’s economic challenges are no secret. Since it joined the World Trade Organisation in 2007, the pace of reform has indeed slowed as the government focused instead on fiscal stimulus to avoid job losses as a result of the global economic downturn. In 2009 the World Bank’s country director Victoria Kwakwa asserted that the government should resist being “sidetracked” by engineering a short-term recovery and instead turn its attention to “the fundamental constraints to the economy’s competitiveness”.

Above all, that meant reining in corruption, exposing local industries to foreign competition, oiling creaky bureaucratic processes and streamlining the ponderous and ubiquitous state-owned enterprises.

The danger of reliance on SOEs as a fundamental instrument of socialist economic policy was highlighted by the collapse of one of the Vietnam’s largest state companies, the shipbuilder Vinashin. The sprawling corporation sagged under debts totalling US$4.5 billion and in December 2010, after defaulting on a loan to overseas creditors, was humiliatingly driven to ask the government for financial support.

Photo: Ho Chi Minh Museum, formerly known as Gia Long Palace

Yet the Economist reported on the eve of the 2011 congress that documents already agreed upon confirmed that SOEs would “continue to play the economy’s ‘leading role’, as they always have done”.

The paper cited David Koh of the Singapore-based Institute of South-East Asian Studies as saying that outside the party congress, however, the government had taken steps to avoid a repeat of the Vinashin spectacle, including the issuing of directives that place restrictions on how SOEs operate. To go further would require the CPV to relinquish political control of the economy – something that the party to date has determinedly resisted.

Writing in the online newspaper VetNamNet Bridge in January 2011, Pham Huyen drew attention to one unwelcome effect of Vietnam’s current economic climate. Hampered by a lack of capital, said the journalist, Vietnamese investors were often forced to swallow a “bitter pill” – resorting to low-interest Chinese loans which were ringed with conditions, including an obligation to employ Chinese contractors and use “low-quality” Chinese technology.

Though China does not rank among the top ten foreign direct investors in Vietnam – in 2010 it invested just US$365 million – the capital flow resulting from such loans has been significant. Among the projects funded by Chinese money, Huyen lists four of nine power projects developed by the Vietnam Coal and Mineral Industries Group (Vinacomin) and five of those developed by Electricity of Vietnam. In December 2010, funding totalling US$300 million was secured for a tenth power project from China Eximbank, which also underwrote a loan of US$500 million to Vinachem for a fertiliser plant and 50 million yuan to the Vietnam Plastics Corporation.

Huyen claims that the conditions attached to the Chinese loans explain, among other things, why Vinacomin’s Cao Ngan thermal power plant, continues to be plagued by faults long after commissioning.

Such woes exacerbate the ills of Vietnam’s inadequate infrastructure, which all too often sees the capital plunged into power blackouts. It is symptomatic of this state of affairs that on the very page covering the congress opening, the national English language daily Viet Nam News announced that the country faced power shortages totalling 3 billion kWh due to water shortages in reservoirs.

Add to this large trade and current-account deficits, inflation which in 2010 hit 11.8 per cent, a credit-rating downgrade, a currency which has been devalued three times since November 2009 and what has been called macroeconomic management “ad hoc-ery”, and it is clear that some form of course correction is needed.

It is yet unclear how the government intends achieving its declared seven percent growth target, given its reluctance to effectively tackle structural change rather than merely talking talking about it. But early indications from the congress are that the CPV is unlikely to undergo any profound change of heart.

Photo: Propaganda posters for a previous CPV congress

“To the chagrin of diehards in the Vietnamese diaspora and radical idealists inside Vietnam, there are no indications of impending upheaval”, wrote Brown. “Prospects are good for a smooth handover to a new set of leaders intent on sustaining the country’s rapid economic modernisation and the party’s tight grip on the levers of power.”

Whether they can in fact do both is, he adds, another matter entirely.

The ABC of National Renewal

•    The Communist Party of Vietnam is the country’s only permitted political party. It has three million members in a population of 87 million people.
•    The CPV’s 10-day congress is held every five years and is preceded by months of local party discussions, public consultations and declarations by senior party members which through a desire to appeal widely and to avoid offence often give little indication of the actual course to be taken.
•    The process reveals the mood of the country and of party members to its new leaders who, nevertheless, are not obliged to follow a particular course of action.
•    The congress elects a central committee of about 180 members, some half of whom are new to the post and replace retiring or disgraced former members.
•    The new central committee then convenes to elect the CPV’s politburo (at present 14 members) from its own ranks.
•    Several months later the 493-member National Assembly is elected.

- by Vaughan Yarwood. Images sourced under a Creative Commons licence.