Vietnam: rising Dragon or falling Star?

Vietnam: rising Dragon or falling Star?

Posted in Other | 14-Feb-11 | Author: Dieter Farwick

Brig Gen (ret) Dieter Farwick, Senior Vice President of the World Security Network in front of the Ho Chi Minh Mausoleum: "Vietnam has much to offer: a fascinating history, high culture, scenic panoramas both seaside and countryside and a booming economy, but will Vietnam be able to sustain this positive development or will negative factors turn the dragon into a falling star?"

Vietnam sends ambiguous signals to the world

- The positive one is the Wirtschaftswunder based upon the economy and tourism

- A dark one is corruption and inflation

- The poor infrastructure limits foreign direct investments and transport

- “Human capital” is a promising resource which should be strengthened

Touring Vietnam, it comes at no surprise that there is one booming industry: tourism. In 2010 they came in record numbers: 5 million tourists visited Vietnam from all corners of the world. Vietnam has much to offer: a fascinating history, high culture, scenic panoramas both seaside and countryside, exotic plants and trees, a varying landscape from alpine mountains down to the Mekong Delta, Christian churches, Buddhist pagodas and Cham temples, top quality hotels and restaurants offering good food and service, and – just as important - friendly people, especially in the South. The tourist highlight of the North is the gorgeous Halong Bay. In the South it is Saigon and the Mekong Delta.

The signs of a booming industry – a Wirtschaftswunder – are visible everywhere. Bill Hayton gave his book the title: Vietnam – a rising dragon. The financial and economic figures of the past 20 years confirm this assessment.

But there is another Vietnam behind the curtain. There are shadows on the wall that lead to the question: will Vietnam be able to sustain this positive development or will negative factors turn the dragon into a falling star?

Geopolitics, geo-strategy and vital national interests

Like all countries, Vietnam cannot escape its geography, demography, history nor its culture. Any geo-strategy has to take these three pillars into account.

Vietnam is the 13^th most populous country in the world. Ninety million Vietnamese live in a Southeast Asian sub-tropical climate zone. There are two densely populated areas in the North: the capital Hanoi and the Red River Delta. The South contains the ‘secret’ capital Saigon and the Mekong Delta. Vietnam covers an area of 331,688 km² - larger than Italy - and stretches from alpine mountains above 3000 meters in the North, across 1800 km to the Mekong Delta in the South. The topography is interesting: 40 per cent mountains, 40 per cent hills and 20 per cent plains. About 32 per cent of the land is arable.

Its neighbors are China to the North, Laos in the Northwest and Cambodia in the West. Its coastline runs 3260 km from the Vietnam-China border in the North to the Vietnam-Cambodia border facing the South West Chinese Sea. (Vietnamese refer to this sea as the " East Sea")

The sub-tropical climate, in combination with the yearly monsoon, allows two to three harvests of rice in the Middle and in the South. Vietnam ranks worldwide second only to Thailand in rice exports. It is the world’s largest producer of Cashew nuts and black pepper. Key exports are rice, coffee, tea, rubber and fishery products. Agricultural goods dropped as a share of GDP from 42 per cent in 1989 to 20 per cent in 2006; a sign of growing industry and economy.

The change between wet monsoon seasons and dry seasons causes problems. Water reservoirs are missing that could guarantee a permanent supply of fresh water for both population and agriculture in the long dry season.

The Mekong comes from China via Laos and is the ‘aorta’, bringing fresh water and necessary sediment. About 60 million people depend on this water supply and the fish the Mekong supports. China has already built two out of eight dams planned for the Mekong threatening the supply for Laos, Cambodia and Vietnam.

Vietnam has a very interesting history in the changing patterns of Southeast Asia. In 2010 it celebrated its millennium as Vietnam; the first millennium AD was dominated by its occupier China, which invaded Vietnam again 1979. This only strengthened long-existing animosities in Vietnam.

"Today small and medium private enterprises form the backbone of the Vietnamese economy. The money should go to them, not into an ocean of corruption, bribes and inefficiency. But is the party willing and capable of loosening its grip on the economy?"

During the second millennium, the French occupation - French Indochina - ended with Vietnamese victory in 1954 at the battle of Dien Bien Phu. Roni Alasor had the unique chance to interview the legendary Vietnamese General Vo Nguyen Giap, mastermind of the Vietnamese guerilla warfare. For the General, two factors were decisive in the Vietnamese victory: "The cultural identity of Vietnam and the patriotic tradition were decisive in winning.”

The war resulted in the partition of the communist North and the capitalist South Vietnam. The war between South Vietnam, assisted by the U.S., and North Vietnam, assisted by Russia and China, started at a low level in the 1960s and ended in 1975 with the defeat of South Vietnam and its main ally the USA. This led to the creation of the one-party Socialist Republic of Vietnam, which was politically isolated for many years. Millions of Vietnamese fled the country in the aftermath of the war, causing a brain drain with long-lasting consequences.

Some war memorials, like My Lai, the Vietcong tunnel system at Cu Chi and numerous war cemeteries, are reminders of the war. It comes as a surprise that the power and influence of the Vietnamese military in Vietnam's politics seem to be modest.

The Ho Chi Minh mausoleum in Hanoi attracts thousands per day, giving them the opportunity to pay homage to the Grand Old Man who brought independence to the Vietnamese people. Surprisingly, there is no significant hatred of Americans and America. Americans travel to Vietnam and American Vietnam war veterans meet their former enemies. Even ordinary people regard America as an umbrella against China, which is disliked because of the thousand years of occupation and their politics of today. In 1978 Vietnam invaded Cambodia to fight the Khmer Rouge, which is still a strain on the relationship between both countries.

After a first phase of socialist collective economy and a near-crash of the economy the communist leadership started a cautious reform towards market economy in the 1980s. This opening initiated entrepreneurship in small companies and the start of the Vietnamese "Wirtschaftswunder" in spite of the many inefficient state owned enterprises. The Economist calls the Vietnamese "ardently capitalist communists."

Even under the communist regime, religious freedom has been more or less respected by the government with the exception of a Christian movement to fight against illegal land grabs. Churches, pagodas and temples are in good shape and open to the public. The government has also generally left the 54 ethnic groups living in Vietnam unmolested. Minority group living standards remain below the national average –however, especially in the mountain areas bordering Laos and Cambodia.

Geography, history and political and social culture form the basis of Vietnam’s vital national interests. A list might read as follows:

- To form a harmonious Vietnamese society, narrowing the huge gap between the rish 20 percent and the poor 80 percent and flattening the cultural North-South divide

- To find allies and partners, primarily the USA, in resisting offensive Chinese politics in the South East China Sea over some disputed islands

- To fight alongside Laos and Cambodia against Chinese plans to build more dams in the Mekong

- To maintain good relations with Cambodia and Laos

- To play an active role in ASEAN, the WTO and the UN, where Vietnam held a seat in the Security Council in 2008/2009

- To stay in the CIVETS group formed by Columbia, Indonesia, Vietnam, Egypt, Thailand and South Africa, which global investors see as emerging just behind the BRIC states (Brazil, Russia, India and China)

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"In order to build domestic stability and legitimacy, Vietnam’s political leadership must come to grips with three major challenges: bauxite mining, the struggle with the Catholic Church over illegal land grabs, and the treatment of dissidents and bloggers. The hardliners in the Central Committee and the political bureau must eventually lose influence and power."

To improve the environment for Foreign Direct Investment

- To attract more tourists

- To improve environment protection

- To fight negative effects of climate change

- To reduce corruption and bureaucracy

- To improve education and vocational training for young people

- To advance law and justice

- To support small businesses

- To privatize State Owned Enterprises

- To improve transport infrastructure - air, land and sea

- To increase oil and gas production

What are the major stumbling blocks ahead?

Politics

The opening of the economy in the late eighties/early nineties was officially called "renovation" and enabled an economic boom with an average of 7-9 percent annual GDP growth. Even the global financial and economic crisis hit Vietnam less than most countries in Asia. Now growth is up again at 7-8 percent. The budget deficit for 2011 is forecast at about 7 percent.

Unemployment is a social burden. Adam J. Fjorde, an Australian expert on Vietnam: "unemployment is very high, and in reality must be over 20 per cent".

The 11th party congress deserves one label: continuity. The top brass of the central committee and its political bureau of General Secretary, Prime Minister and President have been elected or re-elected as expected. In its five year plan the party called for ongoing yearly growth of 7 percent. That will be easier said than done.

After the dramatic near-bankruptcy of the huge Vietnam Shipping Industry Group (Vinashin) with losses of about $4.5 billion, Vietnam’s State Owned Enterprises (SOE) have been heavily criticized in the media, as have the political leadership – indirectly. Mismanagement, corruption, bureaucracy, lack of an audit system and inefficiency led to huge losses. The SOE have been tools for the ruling party to remain command and control over the economy. But nowadays the government is forced to pour money into the SOEs without knowing where it goes. This money eats into the growth rate.

Today small and medium private enterprises form the backbone of the Vietnamese economy. The money should go to them, not into an ocean of corruption, bribes and inefficiency. But is the party willing and capable of loosening its grip on the economy? The newly formed "political bureau" is not homogeneous. There are hardliners who defend the status quo and good relations to China, and modernizers who want to push faster towards deregulation, decentralization, and better relations with the West – especially the USA. This will hopefully build a middle class which is missing so far. To signal this, the communist party has allowed private entrepreneurs to become members.

The renowned Vietnam expert, Carlyle A. Thayer from Australia, notes three challenges for the political leadership, which will have an impact on the Vietnamese society and its future development: broad opposition to the mining of Bauxite in the Central Highlands, the mass protest by the Catholic church over land ownership issues, and the revived political dissent by pro-democratic activists and bloggers. These three major challenges threaten the legitimacy of the government. As long as the leaders continue to follow the current hard line the political objective of a harmonious society will remain under threat.

Another obstacle is inflation, which at 11-15 percent is higher than the annual GDP growth rate. Inflation goes hand-in-hand with increases in living costs, hitting primarily the have-nots and an emerging middle class.

Another issue is human capital. Vietnamese society is demographically very dynamic. Following a "two children" policy one million newly born children per year will bring Vietnam up to 100 million people within the next decade. But many young people under 25 are poorly educated without professional skills and therefore unemployed. Only from the ages of 6 to 11 is school free and mandatory. Lower class families cannot afford to send their children to school. That is especially true in rural areas where children are used as cheap labour. Even foreign investors blame the unskilled work force as an obstacle to investing in Vietnam and starting joint ventures there. If the government can enhance education and vocational training, Vietnamese human capital could become a driving force of growth.

Transportation is an area of concern, too. There is only one national road running from the North to the South. During and after floods, that road often cannot be used. It is in bad shape, reducing the speed for vehicles drastically. To drive more than 40 km per hour is the upper limit in some places. The only railway running from North to South is no substitute. There are plans to build a 1630 km high-speed railway in cooperation with Japan by 2015. With 17 national airports - including three international airports - some limited transportation is possible, but the costs are higher than transport by rail or land or sea. The sea offers less expensive transportation, but harbour capacity is limited.

Affordable and reliable transportation is a key factor in future economic development. Vietnam itself lacks the money to tackle all problems simultaneously. They must prioritize between numerous expensive projects. Foreign investment is in urgent demand. To gain the trust and confidence of foreign investors the political leadership has to mitigate the deficits and weaknesses mentioned above.

A special experience is the traffic in Hanoi, with 1.5 million registered motorbikes, and Saigon’s 4.5 million. For Vietnamese, motorbikes are a multipurpose vehicle: riding to work well-dressed, transporting the nuclear family, and carrying huge baggage or even refrigerators. Even in their limited leisure time they drive through the cities to meet peers. For tourists, crossing streets with ten motor bikes approaching as the first of ten rows is quite an adventure. Traffic lights are not helpful.

The rapidly developing economy has one high price: pollution. The lack of fresh drinking water is serious. Pollution of the sea and rivers is already causing problems for marine life.

Rising demand for energy is of concern too. The construction of a second refinery should lower both costs and Vietnam's dependence on foreign energy supplies.

What are the major driving factors for a better future ?

As mentioned, the Vietnam’s human capital could be decisive in a positive way.

The Vietnamese are very hard working. Work starts in the very early morning and ends very late in the evening - for many, seven days a week. This is especially true for the owners and employees of small and medium enterprises.

There are many young, well educated and well trained young people who have studied and worked abroad, mainly in the West. In most cases they speak good English. When I asked one young man about his dream job, his answer was surprising: he most desired a job abroad, preferably in the U.S. or Australia / New Zealand. Second came a job for a foreign company in Vietnam; then in a private start-up; fourth, a job in an NGO. Finally came jobs in government or an SOE. If and when Vietnam provides this emerging elite with good opportunities, they may well stay in Vietnam’s private sector.

Married women with solid education and professional skills could add momentum to a favourable development.

In foreign policy, a closer partnership with the United States - rarely blamed for the Vietnam war - Japan, South Korea, Australia, Singapore, New Zealand and Australia would strengthen Vietnam's position towards China. This would strengthen Vietnam's position in the struggle over islands in the South East Sea and, in cooperation with Laos and Cambodia, in the struggle with China regarding the dams planned for the Mekong. China’s increasingly aggressive tone towards its neighbours makes it easier for Vietnam to find allies and partners.

One area of great potential is tourism. Vietnam should avoid building large hotel complexes which spoil their coast and countryside. The language capabilities of hotel and restaurant staff should be improved.

Vietnam’s already remarkable exports of agricultural products can be increased through improved fresh water management, improved storage, and improved transportation infrastructure.

"Other key issues include Vietnam"s high inflation rate, its vast human capital potential and education, infrastructure, especially transportation and domestic economic attractiveness.

Andreas Bauschke, a German expert with more than a decade’s experience in Vietnam and across Asia, is optimistic about Vietnam's future: "The pragmatic Vietnamese leadership will enforce the path to modernisation of the country. The young people will get the chance to be better educated and better equipped with professional skills than in the past. They will enhance trust and confidence in their country, attract foreign direct investment, start private companies or start joint ventures with foreign companies."

Goldman Sachs is even more optimistic. They forecast that Vietnam will rank ever higher in the world’s economies with yearly GDP growth of 10 per cent.

Outlook

Vietnam faces both opportunities and risks. They have to exploit remarkable strengths and clear major stumbling blocks.

In order to build domestic stability and legitimacy, Vietnam’s political leadership must come to grips with three major challenges: bauxite mining, the struggle with the Catholic Church over illegal land grabs, and the treatment of dissidents and bloggers. The hardliners in the Central Committee and the political bureau must eventually lose influence and power.

If Vietnam’s pragmatic leadership can improve grassroots development of democracy and transparency while improving education and vocational youth training, they have a good basis from which to tackle the negative factors like corruption, inefficiency in SOEs, and poor infrastructure.

In sum, it is more likely that Vietnam will continue a rising dragon than become a falling star.

WSN recommendations

Vietnam’s political leadership should prioritize the many tasks ahead:

- invest in human capital, offering youth hope for a better future

- ensure affordable energy supplies

- find a fair settlement with the Catholic Church, dissidents, bloggers, and minorities

- improve infrastructure

- create the conditions for middle class of private entrepreneurs to thrive

- improve environmental protection

- fight corruption and inflation

- invest more in SMEs and less in inefficient SOEs

- improve Vietnam’s tourist attractiveness

- reduce living costs

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