With an 8 percent growth, Vietnam is the new ‘player’ from the East

Until recently impoverished, Vietnamese today buy televisions, computers, and cameras, go shopping in nearby Bangkok, and take summer vacations.

Prepared by: Vanja Figenwald

With its entry into the World Trade Organization at the beginning of the year, Vietnam has completed a journey towards full integration into global economic flows that has lasted thirty years. With a growth rate of around eight percent annually, this once forgotten and war-ravaged country is now emerging as another ‘player’ from the East attracting major companies like Intel, Nike, Ikea, and Canon, and opening up perspectives for a different way of life and development. However, Hanoi remains committed to what it calls a ‘socialist-oriented economy.’ In practice, this means maintaining the leading role of state-owned enterprises, which could frustrate foreign companies currently vying to offer everything from banking services to supermarkets and telecommunications in the young and wealthy Vietnamese market of 83 million people.

Economists warn that the Vietnamese government’s determination to maintain control over key industries could hinder their path to prosperity, create a strong protectionist impulse, and stifle the development of the young private sector, which is already facing challenges in acquiring land and credit, and government skepticism towards private capital. However, Hanoi’s leaders are not backing down.
– The state controls key economic situations. Small, artisanal capitalism is allowed that can achieve exports and provide employment, but it will not undermine the leading role of the state – says Jonathan Pincus, a senior economist at the United Nations in Hanoi – I think this is not a model that will lead them to middle-level prosperity. Either their current development will quickly slow down, or such an economic model needs to change.

Dominance of State Enterprises

The current dynamics and potential of Vietnam are indisputable. Their economy is partly driven by exports to the US, with which Vietnam signed a trade agreement that drastically reduced tariffs on Vietnamese products. This bilateral agreement, signed in 2000 after long negotiations, allowed companies like Nike, Victoria’s Secret, and Disney to capitalize on Vietnam’s most abundant resource – motivated, hardworking, and young workers. American statistics show that trade between the US and Vietnam reached $8.1 billion in 2006, of which $7.2 billion was Vietnamese exports. Six years earlier, this trade amounted to $1.1 billion, with Vietnamese exports being less than $400 million. The sudden increase in exports and employment has sparked a consumer boom.

Vietnamese are buying televisions, computers, and cameras, going shopping in nearby Bangkok, and taking summer vacations. However, Vietnam is still burdened by the legacy of an old, directed economic system. Their large, sclerotic bureaucracy has broad discretionary powers, but fortunately, it is reluctant to use them in making essential decisions. Media freedoms are limited, universities are weak, the judiciary is non-transparent and politically dependent. Corruption is widespread. Even after two decades of reforms, the economy is still dominated by large and inefficient state enterprises, which account for 38 percent of GDP, create strong anti-competitive pressure, and waste limited state resources.

Entry into the WTO should help them tackle these issues, as it commits them to long-term reform programs, liberalization, and privatization, which will modernize the economy and governance and create a level playing field for foreign companies. However, many foreign investors rushing into Vietnam may encounter a very thorny path to profit, due to existing interests that use bureaucratic and political instruments to defend their turf and resist change. Despite commitments made in the WTO, Hanoi’s communists are still divided on the extent to which state enterprises should be subjected to the pressures of open competition, let alone the need to cede some to private ownership.

Following the ‘Chinese model’

While on one hand they are ceding control over small and medium-sized enterprises, on the other hand, the authorities are injecting large amounts of money into some state enterprises in the hope of creating national champions similar to South Korean chaebols. Targeted sectors include insurance companies, minerals, oil, shipping, telecommunications, and electricity. Hanoi has established a state holding company, similar to Singapore’s Temasek, which manages their investments and maximizes revenues. In their desire to establish state-controlled development, Vietnam is following the example of its large and powerful neighbor China, whose economy has transformed into something many call ‘capitalism by central committee,’ where authorities carefully shape market forces and direct growth. Many other East Asian countries have achieved sustainable development and better living standards through such an ad hoc mix of market reforms, state policies, and protectionism, while rejecting the so-called ‘Washington Consensus,’ which demands aggressive privatization and liberalization.

Nevertheless, many economists fear that Hanoi will not be able to transform inefficient and often deeply corrupt state enterprises, which have never operated with a profit motive, into truly competitive companies. On the contrary, there is a risk that they will siphon off valuable capital that others could use much more productively. State-owned banks, which hold about 70 percent of total banking assets in the country, are already burdened with debts from failed companies. Pincus says that many enterprises do not generate profit, unlike Korean chaebols that received subsidies and preferential access to the domestic market, but on the condition that they be genuinely competitive and capable of capturing markets. However, it is unclear who will compel them to do so and how.

Bottleneck – Infrastructure

Corruption is one of the reasons for possible failure. The government agency for monitoring and studying economic management (CIEM) estimated last year that between 20-40 percent of investments were lost through ‘leakage and waste.’ Government officials say that the authorities are aware of the need to force state enterprises to raise their level of business and the dangers if they fail to do so. The problem is how to overcome various existing interests. It is not only heavy industry that has established a privileged position. In recent years, state enterprises, including some urban and provincial administrations, the military, and government ministries, have expanded into service sectors such as telecommunications, retail, hotels, and real estate development. Many of these businesses have murky ownership structures involving some private individuals, but almost all have some form of powerful political protection that will attempt to prevent the development of strong competition.

With accession to the WTO, many textile companies will ramp up production, as will furniture manufacturers, footwear, printers, and other manufacturing goods. Intel’s plan to build a semiconductor factory in Ho Chi Minh City, formerly Saigon, could be a precursor to larger investments in the high-tech sector. However, many infrastructural bottlenecks are emerging, and existing facilities are increasingly strained under rising demand. The state electricity company predicts a shortfall of 1,700 megawatts next year. Ports near Ho Chi Minh City, the country’s export hub, are already overcrowded, and new ones will not open for at least another three years. Although Hanoi has ambitious infrastructure plans, with an increasing role for the private sector, progress is slow.