Like other would-be tiger economies, Vietnam faces a trifecta of new threats: a crisis-paralysed Europe, a faltering US, and a newly spendthrift Japan. Yet the biggest risk to the nation’s future may be old-fashioned nostalgia.
It has been 27 years since Hanoi launched the “Doi Moi” reforms that allowed private companies to participate in the economy and opened key sectors, such as agriculture. The rapid growth that followed pushed Vietnam toward the realm of middle-income nations, changing the one-time war zone into a case study for development and poverty reduction. Now, though, Vietnam’s blueprint for a “socialist-oriented market economy” is looking dated.
Recent data show the strategy that got Vietnam this far – a China-like reliance on state-owned enterprises and top-down planning – is now holding the nation back. Vietnam is losing ground on global competitiveness while growth has slowed to about 5 percent, the lowest since 1999. To recover, the country needs to do precisely what it has avoided thus far: build a truly vibrant and innovative private sector that can diversify growth and create prosperity.
“A complete recalibration of the economy would be necessary to achieve stronger growth,” Royal Bank of Scotland Group economist Vaninder Singh said. “This is not guaranteed as it will require a significant change in the corporate structure and improvements in productivity.”
Does Prime Minister Nguyen Tan Dung’s government have the political will to modernise the economy? The International Monetary Fund appears to have its doubts. The fund recently cut its 2014 Vietnam forecast by more than it did for any other Asian country, to 5.2 percent. For an economy at Vietnam’s stage of development, it’s nothing short of a crisis.
Chinese model
When they launched their reforms, leaders in Hanoi believed they were following a Chinese model that had already worked wonders. Vietnam’s approach was more gradual and cautious than China’s, but the broad thrust was similar and has now begun to breed the same problems.
Like China, Vietnam suffers from a distorted credit allocation system dominated by state-owned companies. Their reckless lending decisions have fuelled dangerous property bubbles and buried banks under non-performing loans. The gap between rich and poor is growing rapidly; so are tensions between workers seeking higher wages and industries built on cheap labour. Dodgy land seizures and privatisations that enrich the politically connected have sparked public outrage. Rampant corruption is undermining the ruling party.
The country must restructure state-owned enterprises, which account for almost 40 percent of gross domestic product. Economists at McKinsey, for example, estimate that Vietnam must boost labour productivity by more than 50 percent to maintain healthy growth. Only a thriving private sector can do that.
In February, Deputy Finance Minister Truong Chi Trung promised that the government would unveil a plan to overhaul 52 state-owned groups by June. Yet based on past experience, there is ample reason to believe the reforms will lack specifics or teeth. This government has already missed a target to create an asset-management company to address bad debt in banks..
The question is whether Dung’s team can credibly implement any of these improvements, never mind all three. One should not downplay the role of corruption. Dung faces a uniquely un-communistic problem: too many party bigwigs getting rich from Vietnam’s current model. Those spoils deaden the impetus for change.
Graft has risen in inverse proportion to the economy’s standing. In Transparency International’s 2012 corruption perceptions index, Vietnam fell to 123 out of 176 nations from 112 in 2011.
Vietnam’s challenge is in some ways more manageable than China’s: its state-owned companies are smaller, its vested interests less pervasive and powerful. But gradualism is no longer an option. It is time for the country to develop its own model, one that roots out corruption, invests more in education and key growth sectors such as technology, and empowers businesses to move up the value-added ladder.
Vietnam can become a role model again. It just needs to look forward, not back.
William Pesek is a Bloomberg View columnist. The opinions expressed are his own.