Vietnam’s Economic Reforms to Continue Under New Leadership

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After a dramatic week-long power struggle in a country where politics are normally carefully scripted, Vietnam has finally decided that Nguyen Phu Trong will remain as the Communist Party’s general secretary, the country’s supreme leadership post. Much has been speculated about the departure from power of Prime Minster Nguyen Tan Dung, an ambitious pro-business reformer who was widely anticipated just two months ago to become the new general secretary.

Some ruminate that the ascendancy of the more conservative and historically pro-China Trong – who has frequently butted heads with Dung — could lead to lessening support for market-opening reforms with worrisome implications for Trans-Pacific Partnership (TPP) ratification and a cooling of the recently strengthening U.S.-Vietnam ties. These concerns are misplaced.

It is no longer accurate to paint Vietnam’s leadership as riven by deep divisions over ideology or economic development approaches. There is little evidence that there is in fact any meaningful dissent about the country’s direction among the senior ranks of the country’s leadership.

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The Party is keenly and broadly aware that it needs to continue delivering high growth rates and rising prosperity if it is to forestall rising domestic dissent and challenges to its authority. Notwithstanding wholesale personnel changes at the top, Vietnam is set to continue its path towards a more open, competitive economy and a more “diversified” (read: less China dependent) foreign policy posture.

The reasons for the sudden fall in fortunes for former Prime Minister Dung are subject to a good deal of social media gossip. Prior to the closed-door, once every five years Party Congress which concluded on January 28, Dung’s name was excluded from the official list of nominees. His supporters mounted an eleventh-hour challenge to include his name, but Dung, an unofficial candidate by that point, abided by party rules and withdrew from the race.

A credible theory for Dung’s demise centers on the Vietnamese elite’s historic aversion to strongman rule and any weakening of the bonds of collective leadership. With Dung in the dominant general secretary role and a protege as prime minister, he would have been able to operate largely free of the checks and balances that have been an integral part of Vietnam’s leadership structure in the past. Many in the elite would not be keen to experience a local version of the anti-corruption house-cleaning China’s powerful President Xi Jinping has been undertaking in Beijing.

While the horse-trading over the top four spots in Vietnam’s political hierarchy – Party general secretary, prime minister, state president, and National Assembly chairman – has grabbed most of the headlines, the economic messages coming out of the Congress are clear and consistent. Vietnam’s 2016-2020 economic blueprint laid out plans for “favorable conditions” to support the private sector – including creation of a level playing field with equal access to credit, land, and other resources. In his opening speech, Trong highlighted that the “private sector is an important engine of the economy” and urged more supporting policies.

The blueprint targets an average annual 6.7 percent GDP growth and a rise of GDP per capita to $3,750 by 2020, an increase of 83 percent from 2014 levels. Furthermore, the Party communique was filled with unusually clear and critical language on the need to do more to combat corruption, and to open the democratic space, albeit not to the extent of threatening the Party’s monopolistic hold on power.

As a country that stands to benefit most from the 12-nation TPP trade deal, there is also almost across-the-board alignment on the view that the pact is necessary for Vietnam to stay competitive as a manufacturer, to attract higher rates of foreign investment and to integrate more deeply into the global economy. The Party’s Central Committee had fully endorsed ratification of the TPP a week before the National Congress.

Trong stated that 30 years of doi moi have readied the country to “seize opportunities afforded by the TPP agreement for rapid and sustainable development.” A special committee was further established to ensure that the pact is formally signed come February, with a ratification tentatively set for mid-2016.

Vietnam was one of the best performing ASEAN economies in 2015, posting a growth rate of 6.6 percent. Inflation and the currency were stable, and foreign direct investment – especially in export-oriented manufacturing – soared. However, there was little sense of complacency at the Party’s conclave. Party leaders, with an anxious eye on China’s slowing, debt-burdened economy, sent out clear messages on the need for an acceleration of reform.

Economists agree that there is much to be done. Around 90 percent of bad debts under the Vietnam Asset Management Company still need to be resolved. Equitization of troubled SOEs, which use almost 50 percent of Vietnam’s public investment while contributing to just a third of GDP, has been slower than expected. Most transactions to date involve only minority share divestment of smaller SOEs and the government seems hesitant to dilute SOE ownership in sectors it deems too sensitive for foreign ownership.

On the international front, the Party seemed to emerge from the Congress with an equally robust consensus that Vietnam needs to take a stronger stand to protect its sovereignty, most urgently in the ongoing South China Sea dispute with China. Vietnam’s Central Committee took the unusual step of issuing a statement recognizing the International Tribunal for the Law of the Sea’s (ITLOS) recent ruling on Philippine’s claim against China.

The statement will have little practical impact, but the symbolic gesture won’t be appreciated by Beijing. Earlier this month, Vietnam lashed out against China’s towing of a $1 billion oil rig into disputed waters, with Vietnam’s Ministry of Foreign Affairs demanding that China remove the rig.

Vietnam’s new leaders will undoubtedly take some time to learn the ropes in their new positions, and that may well cause some reform slowdown. But the clear message coming from the Party Congress is that both Vietnam and its ruling Communist Party have little choice but to continue down the path of market-opening reforms and to build closer relationships with a broader range of countries.

Adam Schwarz is CEO of Asia Group Advisors, a Singapore-based advisory firm.

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