Vietnam is tested

Posted in Other | 21-Dec-04 | Author: Philip Bowring| Source: International Herald Tribune

Vietnamese women work at Duc Giang garment company in Hanoi.
HANOI The lack of stories about Vietnam in the international news media attests to the country's glacial politics, low-key collective leadership, cautious foreign policy and healthy, undramatic economic growth of 6 percent to 7 percent. But though Vietnam may be comfortable with its combination of growth and social stability, three facts show that continued steady progress is by no means assured.

For one thing, Vietnam's income gap with China is increasing. For another, its performance lags behind what countries such as Thailand achieved at a similar level of development. And external conditions in the future may be less favorable than over the past few years, when Vietnam has become a factor in global markets for rice, coffee, seafood and garments.

Vietnam needs to ratchet up the rate of domestic change if it is to maintain current progress, let alone accelerate the pace. But could the price be too high for a country where, despite the dominance of a one-party state, consensus is highly valued and power is less centralized than in other Communist systems?

The hinge of change now is membership of the World Trade Organization, with all that implies for further opening of the economy to market forces and nonstate ownership. But having made the decision to seek membership as soon as possible, the government has limited power to make it happen by the deadline it has set itself of the end of 2005. Vietnam has a bilateral agreement with the European Union, but the United States and other countries - perhaps including China - are likely to drive harder bargains, testing willingness to make big concessions to open up an economy that is still small and poor.

Vietnam is being encouraged to join the WTO with sticks and carrots. The main stick is the ending next year of textile quotas: Staying out of the WTO would put Vietnam's garment industry at risk and choke off foreign investment in other export industries. The carrots are continuing high levels of external assistance, and the eagerness of foreigners - particularly from Taiwan, Korea and Japan, who are the bulk of investors - to put in much more money once they are confident of WTO membership.

WTO-linked reform commitments should speed up the currently slow equitization (as partial privatization is known here) of state enterprises. That should lead in turn to more efficient use of the high level of savings, a redirection of bank credit to market-driven companies, and a reduction in the very high level of corruption stemming from state enterprises and local and central bureaucracies. According to Transparency International, corruption in Vietnam is worse than in China - though the party is trying to respond by charging minister-level officials and allowing the media do some dirt digging of its own.

There are reasonable fears, however, that too fast a rate of economic change without increased transparency could easily lead to an investment and inflation bubble such as seen in the mid-1990s, which would be socially destabilizing. Already credit is expanding far too rapidly for the likes of the International Monetary Fund; optimism about the WTO could lead to a further surge, which would make financial-sector reforms more difficult.

Equitization needs to go faster and the companies need to submit themselves to the discipline of public accountability through a stock market listing. Meanwhile, investment in key infrastructure is lagging.

A different fear is that, as in China, market-driven reforms will increase urban-rural income gap to socially divisive levels. So far, the success of Vietnam's export agriculture has helped limit the gap. But, as China found, raising rural productivity is a slow process. A China-style surge in export-oriented industrialization, of which Vietnam is capable, could be upsetting for a society where, because of the war, socialist principles of sharing may be more deeply ingrained. Others are concerned that WTO requirements will undermine the provincial autonomy that is a feature of Vietnam and a partial antidote to the authoritarian instincts of a one-party state.

So there are risks in speeding up change to meet the WTO deadline. But the bigger risk is not moving faster. Having committed itself to joining, the leadership needs to deliver before the next party congress in 2006. Failure could cause a reaction to reform within the party at a time of leadership change. And if Vietnam misses its chance, the WTO option could close. So while Vietnam has reason to be pleased with itself, it cannot rest on its laurels.