TUNE-UP TIME FOR VIETNAM: Beyond Doi Moi
The country faces a make-or-break moment 30 years after its Doi Moi reforms |
Phuong Nguyen: Vietnam's reformers struggle to find the right way forward
Communist government faces challenges to extend markets and sustain growth
Nikkei Asian Review | 12 January 2017
The International Labor Organization estimates
that 86% of the 2 million jobs in Vietnam's clothing and footwear
industries are at risk over the next decade.
© Reuters
HO CHI MINH CITY Amid the gleaming
skyscrapers and traffic clogged boulevards of Ho Chi Minh City, it is
difficult to imagine the hardships that faced Vietnam's people four
decades ago, as the country emerged -- devastated but united -- from
what is known here as the "American War."
Now one of the
world's biggest agricultural exporters, a vibrant manufacturing hub and
an increasingly attractive investment destination, Vietnam has come a
long way since the war ended in 1975.
However,
the communist government faces daunting challenges in its professed aim
of transforming Vietnam into a "basic industrialized country" by 2020, a
goal enshrined in the Doi Moi policy, launched in 1986 to revitalize a
centrally planned and isolated economy.
Many of these challenges were set out in blunt terms in 2016
in "Vietnam 2035: Toward Prosperity, Creativity, Equity, and
Democracy," a report produced jointly by the Vietnamese government and
the World Bank that offered the first long-term vision for the country
since Doi Moi began.
Vietnam could become an upper
middle-income society by 2035, with gross domestic product per capita of
$18,000 and a largely market economy, the reported stated -- but only
if far-reaching socio-economic and governance reforms are implemented.
A
key feature, according to the report, would be an "effective and
accountable" rule-of-law state, with checks and balances on the
government's role. The government has said it will consult the ideas
offered in "Vietnam 2035" in setting policy over the coming decades. At
the same time, the ruling Communist Party has emphasized a "rules-based
socialist state," with party chief Nguyen Phu Trong labeling any calls
for checks and balances as a sign of "self-evolution" -- an indication
of the fear among Vietnamese leaders of supporting any changes that
mirror Western-style democracy from within.
Vietnam has
achieved remarkable results, transforming itself from one of the world's
poorest countries into a lower middle-income country. GDP per capita
went from $100 in 1990 to $2,200 in 2015. The official poverty rate has
fallen from 50% in the early 1990s to 3%.
Yet that growth
has been largely fueled by agriculture and low-wage manufacturing.
Garment and electronics exports, the two main engines of Vietnam's
export-led economy, have provided much needed revenue but added little
value to the small industrial base.
About 90% of
electronics exports -- which in 2016 earned more than $30 billion,
making the sector the biggest source of export revenue -- are generated
by foreign-invested enterprises. Global companies with sizable
operations in Vietnam, from Nike to Samsung Electronics, source their components primarily from suppliers in mainland China or Taiwan.
Steadily
rising wages are putting Vietnam at a disadvantage in the garment
sector compared with Bangladesh and Myanmar. The International Labor
Organization estimates that 86% of the 2 million jobs in the clothing
and footwear industries are at risk over the next decade due to
automation and disruptive technologies.
The
state-owned sector, meanwhile, soaks up the majority of resources like
land and credit; yet it produces 40% or less of economic output while
being rife with inefficiency, save for a few large, profitable
enterprises.
STRIKING CHANGE
Alongside the shifting economic landscape, social attitudes are also
changing. More than two-thirds of the population of nearly 100 million
was born after the war and came of age in an increasingly open and
prosperous Vietnam.
A survey by the Vietnam Chamber of
Commerce and Industry in 2014 found that 89% of Vietnamese preferred a
market economy, while nearly 40% believed the pace of market-oriented
reforms had been "slow or very slow." Few young people now grow up
yearning for lifelong employment in the state sector. Instead, they are
inspired by successes like homegrown IT conglomerate FPT -- a modest startup founded by young computer technicians that has expanded globally.
High
expectations and a more informed urban populace raise new questions. In
2015, 90,000 factory workers staged a peaceful strike to protest legal
reforms they believed would hurt their retirement options. The
government eventually relented.
When citizens in Hanoi
grew concerned in 2016 that thousands of trees lining the city's streets
were being cut down unnecessarily, they organized a social media-driven
movement that prompted the government to backtrack.
TURNING THE PAGE
For the leadership, which has mostly opted for pragmatism through the
Doi Moi years, this new reality poses unprecedented challenges. Trong,
widely seen as a conservative, nonetheless seems to understand that
Vietnam cannot afford to conduct business as usual.
The
party chief and his supporters believe that further reforms will be
hampered as long as the so-called vested interest groups, a loosely
defined network of economic opportunists and rent-seekers, control
important levers of power. Since starting a second term in early 2016 he
has unleashed an anti-corruption campaign targeting a dozen loss-making
state-owned enterprises, as well as high-level personnel appointments
made under former Prime Minister Nguyen Tan Dung.
The
stark reality facing the government is that restructuring Vietnam's $190
billion economy will be costly. The Ministry of Planning and Investment
estimates that 10,000 trillion Vietnamese dong ($440 billion) will be
needed over the next five years to reform SOEs and financial
institutions, settle bad debts in the banking system, invest in critical
infrastructure, boost social services and build up the fledgling
domestic private sector. Lacking transparent and effective mobilization
and allocation of resources, the plan might just fall short of
expectations.
This partly explains the urgency and speed
with which the state has recently been divesting its remaining stakes in
profitable or otherwise attractive SOEs such as Vietnam Dairy Products,
known as Vinamilk, and flag carrier Vietnam Airlines. The government
hopes to raise up to $20 billion to finance the reform agenda through
such divestments.
Administrative and investment reforms
that met resistance several years ago have also gained momentum. For
instance, the government last July oversaw one of the largest-ever
reductions in red tape, removing around 3,500 business requirements
deemed obstructive to investment.
Prime Minister Nguyen
Xuan Phuc told foreign investors in Hong Kong in 2016 that the
government was considering increasing the foreign ownership cap in banks
from 30%, a proposal it had previously discarded. A 49% cap on foreign
ownership in publicly listed companies has already been removed, except
in sectors deemed vital to national security.
Until
recently, Hanoi had hoped to use the U.S.-led Trans-Pacific Partnership
trade agreement, along with more than a dozen other "new-generation free
trade agreements" it has signed, to anchor the next phase of
development.
According to various studies, Vietnam was
expected to be the biggest beneficiary of the TPP. But pledges by U.S.
President-elect Donald Trump to withdraw from the pact have dashed
Hanoi's hopes.
Even so, Vietnamese officials have avoided
criticizing Trump's anti-TPP rhetoric. Some warn it would be
counterproductive to argue for the deal when Trump and his inner circle
so strongly oppose it. Others believe that Hanoi must show willingness
to work with Trump on his trade agenda before pushing for anything in
exchange.
Whatever becomes of the TPP, Vietnam will
continue to strive for U.S. investment, technology and market access for
its own development. An agreement concluded in 2000 with the U.S.
launched a new phase of Vietnam's economic development, leading to
membership of the World Trade Organization. Some in the leadership have
said Hanoi should welcome talks on a new bilateral trade agreement with
Washington "with open arms."
Many surveys have shown
strong public support for capitalism and free trade -- a 2015 report by
the U.S.-based Pew Research Center, for example, found that 95% of
Vietnamese support capitalism, the highest level among countries
surveyed. But whether Vietnam and its leadership can fully harness this
desire for economic openness remains the biggest challenge of all.
Phuong Nguyen, based in Washington, is a WSD-Handa Fellow at the Pacific Forum CSIS.
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