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Is Vietnam swimming naked?

David Dapice / Share:

Vietnam’s economy has benefitted from a redirection of FDI from China due to a combination of rising wages in China, a shrinking domestic labour force and trade tensions. With US$1.5 billion entering Vietnam every month, employment is full, poverty is declining and growth sits at a brisk 7 per cent. This could spark further reform aimed at addressing the low value-add still in many exporting industries and a weak domestic private sector. But cross-currents make deep reforms more difficult, in spite of a reform-oriented prime minister.

One factor at play is the uncertain future of the strict anti-corruption campaign, given the health problems facing Communist Party Secretary and President Nguyen Phu Trong. He may not be able to prosecute corruption with the same energy and effectiveness as before. This would give space to those who prefer a more closed system in which privileged officials can convert power into substantial wealth.

Corruption is a chronic problem in any system but especially in one where the press and online discussion is heavily controlled and sanctioned. The recent Internet Law makes it more likely that only intra-party discipline will be used to control corrupt Party and government members, leaving the Party leadership itself with the discretion to decide internal discipline.

A second factor is the current political economy of taxes and transfers within Vietnam. Vietnam’s Central Committee is more like the US Senate — one state has two senators regardless of the size of its population. This makes redistribution from rich to poor provinces very popular — Ho Chi Minh City transfers 82 per cent of its tax collections to the central government. This is so that poor provinces will have more to spend, even though most of these provinces are exporting younger workers to thriving areas that need more infrastructure.

Binh Duong, a poor rural province not long ago, spent less per capita in 2016 than Thanh Hoa. Binh Duong’s population growth rate was eight times higher in the last decade. Binh Duong collected 21 million Vietnamese dong (US$897) per capita and spent only 6.5 million dong (US$277), while Thanh Hoa collected 5.8 million dong ($247) per capita and spent more than 9 million dong (US$384).

While some transfers are needed, the absence of meaningful mass transit in either HCMC or Hanoi is a bad sign for reform. Starving the healthy and feeding the slow is not a growth strategy.

The future of Vietnam’s growth will probably be in higher value-added activities, particularly services or highly-skilled manufacturing. These activities depend on individuals who are internationally mobile. If Vietnam’s cities offer pollution, congestion and flooding, they are not likely to attract or retain those who have the choice. Cities provide about four-fifths of the economic growth and virtually all of the population growth in Vietnam. If their development is starved of funding and available funds are ill-spent, the private sector will not grow and FDI will subside as wages rise.

Third is the unease with which the Communist Party views the domestic private sector, especially small and medium domestic firms. FDI is needed.Inefficient state enterprises are part of a system that provides funding for state priorities. Oligarch firms that rely on political connections are growing, resulting in a crop of billionaires that understand the need for good standing with the Communist Party. While acceptable to most, small and medium private firms may form interest groups to challenge the Community Party. Some at the top recognise the importance of these firms, but further down they are sometimesseen as a source of revenue.

The share of private, non-household output in GDP was less than 9 per cent in 2017, compared to 20 per cent for FDI and 29 per cent for the state sector. These small private firms would benefit from reforms in access to land, credit, contracts and a fairer legal system. Vietnam is ranked 69th out of 190 countries in terms of the World Bank’s Ease of Doing Business index but is in the bottom half for starting a business, paying taxes, trading across borders or resolving insolvency. Unless the private sector is given legal space to organise and present its concerns more effectively, reforms will not address these problems.

The questions posed by Party Secretary Nguyen Phu Trong to the recent Party Plenum suggest the elite are questioning current policies. He asked whether state enterprises were necessary, whether calls for political reform mean calls for regime change and whether there is a need for a change of Party regulations, its charter or rules.

The Party Secretary knows how much corruption and waste there has been in the state sector, adding weight to his question. It could presage a shift to greater reliance on private companies. But Vietnam always has to keep China’s stance in mind. It is unclear if China could oppose an outcome similar to Taiwan, where state enterprises’ share shrank and the private sector jumped ahead without much government oversight.

Warren Buffet famously said that ’you see who is swimming naked when the tide goes out’. In Vietnam, the tide is currently high and many problems in the economy can be ignored. If, or when, the influx of FDI slows down, the inefficiencies and private sector weaknesses will weigh heavily on the country’s economy. Debate continues about what needs changing and the outcomes of these conversations are still unclear. Reform will run into stiff opposition but if the Party can focus more of its resources on people and less on slower provinces, while at the same time allowing truly private firms to prosper, it will renew its legitimacy.

Dr David Dapice is a Senior Economist at the Ash Center for Democratic Governance and Innovation, John F. Kennedy School of Government, Harvard University. This first appeared in East Asia Forum.

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