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Economy

Phuong Nguyen: Vietnam's reformers struggle to find the right way forward

Communist government faces challenges to extend markets and sustain growth

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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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