Vietnam at reform crossroads

Posted in Asia | 07-Aug-08 | Author: Long S Le| Source: Asia Times

A market in Hanoi.

In late 1997, a large number of Vietnamese peasants displaced by official land seizures struck back through widespread protests that rocked the ruling Communist Party. The demonstrations raised questions about the party's commitment to improving the lot of the rural masses and prompted intra-party soul-searching for ways to make the government more accountable to the people.

Prominent technocrats were permitted briefly to float alternative policy prescriptions for dealing with the rapid transformation from a command to a market-oriented economy. Mathematics expert Phan Dinh Dieu aired controversial opinions about the party's limitations in economic management and reasoned that without more political liberalization and privatization, the peasant protests and other economic problems would likely multiply.

Dieu was later expelled from the party for his contrarian views, but his political and economic forecasts now look prophetic. They also presaged a seminal study by Vietnam experts James Reidel and William Turley, who in 1999 predicted the country's reform program would eventually lead to "questions about the adequacy of Vietnam's political leadership and institutions". The study called for strengthened controls over fiscal, monetary and revenue matters, and more transparency and accountability, and predicted that balance of payments difficulties, accelerating inflation and revenue losses would trigger crises.

These have now arrived in Vietnam. The mounting economic woes, including an annual inflation rate of 27% in July and a surging balance of payments deficit estimated at US$15 billion in the first seven months of the year, have undermined confidence among outspoken factory workers and the middle class in the party's ability to manage the economy.

The price of rice surged 72.7% year-on-year in July, according to the General Statistics Office, which now predicts year-end inflation at between 25%-30%. Prime Minister Nguyen Tan Dung reported to the National Assembly in May that the number of families "going hungry" had doubled from last year. High inflation is also weighing against growth: the Asian Development Bank estimates Vietnam's gross domestic product (GDP)growth will drop from over 7% last year to 6.5% in 2008, while private sector analysts say growth could fall as low as 5%.

Some hope those economic woes will revive the long-dormant debate about the need for more political openness to achieve greater market efficiencies. The party's prevailing view that GDP growth will gradually lead to more openness is being called into question as growth begins to slow and social unrest rises. The idea that political liberalization is necessary to ensure sound economic management is still a dangerous one among the party's rank and file, including a conservative camp that fears even the slightest political opening could develop into a people's power-style revolt against one-party rule.

Economic shocks have previously galvanized bold reform moves in Vietnam, including the 1986 doi moi market reform program. While reform consensus frequently led to policies that favored the interests of ranking party cadres, it didn't always lead to efficient outcomes, as the current economic woes have brought into view. A new class emerged of business-minded cadres who leveraged their official positions to enrich themselves from Vietnam's fast expansion, often at the wider population's expense.

Foreign advice
The question now is whether the Communist Party will respond differently to its emerging economic crisis or instead opt for more half measures and preservation of its political and economic dominance? According to Jonathan Pincus, an economist with the United Nations in Vietnam, there "is no shortage of people in Vietnam who understand the causes of the current economic instability and the steps needed to quell price inflation and restore stability to the markets", but "these people are not in a position to do much about it".

The government has so far opted to listen to friendly foreign rather than critical local advice. Premier Dung in mid-July agreed to the creation of a board of foreign economic advisors from prestigious Western institutions to offer policy advice for dealing with the crisis. However, the foreign experts are expected to offer up mostly economic and financial prescriptions, and steer clear of calls for more political pluralism.

The government's surprise decision on July 21 to cut subsidies and raise retail petrol prices by 31% are in the spirit of the orthodox neo-liberal prescriptions many Western economists favor, even though the move will surely stoke even faster inflation. Under lobbying pressure from the Electricity of Vietnam Group, policymakers are now also deliberating whether to remove caps on electricity prices by the end of this year, another standard market-oriented reform prescription.

Behind the inflation figures, Vietnam faces a spiraling debt crisis, with the economy weighed down by the debts of state-owned enterprises. Adding to those debt woes are corporations and other party-affiliated economic actors that were allowed to set up their own banks and have invested unknown millions of dollars from their equity into businesses outside of their core competence, including securities and real estate that have recently collapsed in value.

Nor has foreign direct investment been efficiently applied to actual projects, which some say explains why Vietnam's money supply grew by over 80% while real output expanded by a mere 17% from 2004-2006, according to economist David Dapice. He estimates that the yawning gap between money spent on asset accumulation rather than raw materials and capital equipment likely widened last year and has contributed to the recent runaway inflation.

The government is now scrambling to balance fighting inflation while keeping debt-ridden and politically connected SOEs afloat, rather than undertaking more deep-seated reforms to its economic management. Indications are that rather than tightening monetary policy, the government is willing to accept inflation rates as high as 25% this year. There are also indications the government plans to cut commercial bank deposit rates, currently at about 14%, in a bid to pump more liquidity into ailing businesses.

SOEs, state corporations and other vested economic interest groups aligned with the party have made and apparently are winning their case that tighter monetary policy will not only bankrupt them, but will also cause the country to miss its targeted economic growth rate of 7% for this year. Whether the government's bid to keep businesses afloat rather than restoring broad macroeconomic stability will lead to an economic soft landing in 2009 and restore local confidence in its management is highly uncertain.

Behind the times
Vietnam's emerging economic crisis is demonstrating that more than 20 years of market-oriented reforms have outgrown the capacities of the one-party communist-led political system. Some now argue that extraordinary growth rates may be attributed to the sudden change from communism to capitalism as the organizing basis of economic life, and not to improvements in the efficiency of investment, productivity of labor or enhanced national competitiveness.

The Economist Intelligence Unit recently forecast that Vietnam's economic growth would slow from an average of 7.9% from 2002-2007 to 5.1% for the decade spanning 2011-2020 as "vested political interests may impede reform, thereby preventing the necessary restructuring of some SOEs". Slower growth will inevitably lead to more difficulty in providing jobs and potentially more social unrest, others predict.

Foreign investors and analysts had earlier predicted that Dung would speed economic reforms, based on his frequent calls for a more transparent, legal and liberal framework for doing business. But the mounting contradictions in the state-led market-oriented economy, including the fact that party-aligned SOEs account for 70% of foreign borrowing while producing only 40% of GDP, are becoming more glaringly apparent as the economy unravels.

It all means Vietnam is fast hurtling towards a moment of reform truth. The communist leadership is now trying to reach a new consensus between national and provincial leaders, as well as between conservative and progressive intra-party camps, to address the deteriorating economic and social situation while maintaining its grip on power.

But adherence to technocrat Dieu's call over a decade ago for more political liberalism and economic privatization arguably would have forestalled the crisis in confidence the party now faces.

Long S Le is the director of international initiatives for the Global Studies Program and also a lecturer of Vietnamese studies at the University of Houston in the United States.

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