Developing Vietnam with whom?

Restoration 2.0 for the Resurgence of Modern Vietnam

By Mia Ji Sørensen

”Wouldn’t you define Vietnam as a middle-income country?” I was asked this rhetorical question last week. Despite its emerging economy status, with a growth rate of approximately 7 per cent during the past two decades, it is still one of the poorest of the ‘Next 11 Countries,’ and even though Vietnam has been in vibrant development, it is now faced with stagnant economic growth. There is a lot of potential for Vietnam to move up the ladder, as it has a vast young workforce, 50 per cent of the population being younger than 26. In addition, Vietnam has gone through a gradual shift from the agricultural sector towards an industrial sector that has attracted a great amount of Foreign Direct Investment (FDI). FDI has been the primary focus of many developing countries over the past decade, as most host countries have liberalised their FDI regulations. FDI has been the primary source of the buoyant economic growth in the Southeast Asian economies, and in contrast to other regions, which over the past years have experienced a decline in their FDI inflows, Southeast Asia increased by 2 per cent annually ($110 billion)[1]. Here, Singapore is the leading host destination for FDI, which also improves FDI levels in the lower-income countries in the neighbourhood such as Vietnam, Myanmar and Cambodia.

According to the IMF, Vietnam is defined as a lower-middle-income country (also referred to as a developing country), as its GNI per capita falls in the range between $1,026 and $4,035. Developing countries are regularly stimulated by aid from developed countries, and this is also true of Vietnam. Before the end of the Cold War, the Soviet Union was one of the central donors to Vietnam. After the conquest of South Vietnam in 1975, and the strain between the Chinese and the Vietnamese, the elimination of Chinese aid in 1978 compelled Hanoi to look to Moscow for economic and military assistance. This made the Soviets the largest contributors of aid, in addition to being a pivotal trade partner. But frequent occurrences of distrust between the two, in the context of Sino-Soviet contemplations, entailed that the Soviet resented their enormous aid burden in the beginning of the 1980s, as they perceived it a wasted investment. As a consequence of the Soviet experience, Vietnam is uneasy about dealing with its donors.

Developing interaction with developed countries

The European Union (EU) is by far the largest donor to Vietnam; 2013 disbursements are measured to be EUR 743 million, and the Union is also the second largest investor of FDI, surpassed only by Japan.  Nevertheless, there has been a vibrant wave of European donors shifting their relationship with Vietnam from disbursing millions of euros for Overseas Development Assistance (ODA) towards developing their respective partnerships into a more strategic manner. This goes hand in hand with more EU member states gradually phasing out donations.

In fact, during the past decade, Vietnam has conducted more than ten partnerships. Of these, four are European: Italy (2013), Germany (2011), the UK (2010) and Spain (2009). France is currently negotiating one, and two European member states have contracted sectoral partnerships that focus on climate change. Deepening relations with external partners is clearly an important aspect of Vietnamese foreign policy. The partnership agreements with the European countries should match the strategic importance in regard to the security, prosperity and international standing of Vietnam. Strategic partnerships are established to diversify the external relations of a country and for proactive integration of it into the world, by helping to develop the country and make it more resilient to external shocks. From this point of view, a partnership with real potential to create prosperity for Vietnam is the one with Germany. Germany is one of the most important EU members when it comes to economic relations, as it accounts for more than one-fourth of the overall two-way trade between the EU and Vietnam. Germany is also the second largest contributor of ODA, subsidising 8.4 per cent of overall EU grants. In 2012, the EU market became the largest export market for Vietnamese products, overtaking the United States, which had until then been the central export market ever since the trade-embargo was lifted between the two partners in 1995. It is not just because of Germany’s economic strength that Vietnam draws a great deal from this European partner. The common history of the two Germanys and the two Vietnams has connected the former DDR and North Vietnam in the framework of socialist solidarity; also, a German-Vietnamese University will be established in order to promote sustainability in the relationship between the two countries.

In April this year, a conference between Vietnam and Germany was held in Hanoi in order to discuss the process of developing a social market economy in Vietnam, utilising Germany as an example. Social Market Economy stands for an ideal compromise between two ideological ways of organising and coordinating an economy: social democracy and economic liberalism. Soziale Marktwirtshaft was an idiom introduced by former German chancellor Konrad Adenauer, and the Konrad Adenauer Foundation in Hanoi was thus the host of this event. Several prominent academics were invited to the conference to elaborate on the importance of reaching this ideal compromise.

Avoid the middle-income trap

In this regard, and in numerous other international gatherings between European partners and Vietnam, the Vietnamese rhetoric of what Europe can do for Vietnam focuses on avoiding the middle-income trap. The middle-income trap refers to a situation in which a middle-income country fails to transition to a high-income economy due to rising costs and declining competitiveness. A situation only a few developing economies have managed successfully, as seen in East Asia where South Korea, Taiwan, Hong Kong and Singapore have made a transition to advanced economies. Domestic forces drove the transitions on a political and bureaucratic level for each country, albeit with different national obstacles. For Vietnam, there are several detrimental challenges; one is the correlation between growth, public governance and corruption. This is a challenge when aiming for a less closed and dynamic Vietnam, because the government maintains austere control. As the legacy of Stalinism remains, the Communist Party of Vietnam and its one-party structure largely determine the outcome of any reform and proceeding. The government maintains strong control over land ownership and enterprises of the most influential sectors, which is why the State Owned Enterprises (SOEs) remain powerful, and thus impedes private enterprises in becoming more competitive. In the current context of booming free trade agreements taking place in Asia (more than 30 were completed in the Asia Pacific in the past two decades), the SOEs and their influential presence in the Vietnamese economy is a factor crucial to the lack of sustained economic growth. As the SOEs in Vietnam are a pivotal income source for public officials, these officials are hesitant in negotiating free trade agreements.

Since the economic reform, the doi moi introduced in 1986, Vietnam has recorded impressive growth rates. Doi moi means restoration in Vietnamese and was intended to push forward a much-needed renovation process in order to reshape the regional and international agenda of the country. The Vietnamese restoration process has contributed to a successful escape from the poverty trap into the emergence of a middle-income country. Notwithstanding, there is still a long way to go; the economy is now characterised by slow growth and frail international competitiveness. For seven years, the average GDP growth rate was recorded to be 8.7 per cent (from 2000 to 2007) whereas in 2012, the growth rate has dropped to 5 per cent[2]. In the latest investment outlook conducted by The Economist (2013), Vietnam’s macroeconomic troubles have taken the shine off the country’s once strong appeal as investments and growth have a cohesive and reciprocal effect (investors are more attracted to invest in countries with a high growth vis-à-vis investments help to create growth). One of the main challenges to economic growth in Vietnam is the SOEs, and in order to continuously sustain growth, there is a demand for restructuring them.

The asymmetrical relation between private and public enterprises is a paradox because of the significant performance of the private sector in Vietnam. After the doi moi, private enterprises gained legitimacy, and their contribution to economic growth has been remarkable. According to the General Statistics Office of Vietnam, the private sector accounted for 50 per cent of the total industrial output in 1989, whereas 15 years later, this figure nearly reached 73 per cent. The private sector is also responsible for creating the majority of new jobs in this period.

By contrast, the SOEs are challenged with debt, while the public authorities, the owners of SOEs, give favourable conditions to the SOEs. The government’s mismanagement also entails a society with incomplete domestic supply chains, creating dependency on other supply chains (such as China’s) to provide the necessary components, which in turn leads to wage inflation and less attractiveness for investments. Subsequently, before we can start talking about a competitive state circumventing the middle-income trap, there are domestic obstacles that have to be dealt with by the government – obligating the public officials in showing true strength. This will require a new model of thinking within the Vietnamese government and public officials, who are rather rigid and still bound to traditional socialist ideologies.

Obviously, the German model of a social market economy seems appropriate for Vietnam because of the shared ideologies about market and state, but it will only function in practice with true political determination of adapting to it, particularly in relation to market reforms. The central idea of a social market economy is to protect the freedom of the market participants, on both the demand side and the supply side, while securing social equity. If the country is to avoid falling into the middle-income trap, there are domestic challenges that have to be solved, as there is restricted freedom for private enterprises, which creates a gap in social equity. If the officials are serious about a social market economy, one of the key responsibilities for the government is to establish a policy framework which is effective for competition. This will require openness and transparency and a serious alternative to ingrained public preferential treatment. This is the challenge in a one-party state and the process is now in a reactive phase, rather than a proactive one; hence a significant demand for change has already arisen. Ultimately, if the Vietnamese politicians and public officials want to put Vietnam in focus, overcome stagnant growth and middle-income traps, it all begins at the core of the one-party system.

What is necessary is a new doi moi, a restoration process 2.0 in order to make the essential shift from rhetorical promises to action taken to start/create a structural reform that can renovate and renew the notion of a modern Vietnam.

Mia Ji Sørensen,

MA Student in International Studies and Social Science, Aarhus University,

Affiliated Workplace Student at Nordic Institute of Asian Studies Political Science, University of Copenhagen

Bibliography:

• Freedom House: Countries at the Crossroads 2012 freedomhouse.org
• United Nations Conference on Trade and Development UNCTAD STAT Database
• General Statistics Office of Vietnam (GSO)
• East Asia Forum – Economics, Politics and Public Policy in East Asia and the Pacific: Developing Asia and the middle-income trap http://www.eastasiaforum.org/2013/08/05/developing-asia-and-the-middle-income-trap/
• EUROSTAT Comext Statistical Database HS2,4
• International Monetary Fond, imf.org 2013
• The Economist Corporate Network 2013: Investing in Accelerating Asia
• Vietnamnet.vn: article published April 26, 2013 “How many strategic partners are enough for Vietnam” by Le Hong Hiep
• Nguyen, T.T. & Dijk, M.A. (2012). Corruption, growth and governance: private vs. state-owned firms in Vietnam. Journal of Banking and Finance 2012.
• Kokko, A. (2011). EU and Vietnam: From a Parental to A Competitive Relationship. Retrieved from academica.edu