Vietnam's Political Transition: Economic Implications

 
 

The congress of the 13th National Assembly that ended on April 13 brought to a close the rule of Prime Minister Nguyen Tan Dung after 10 years in power. Dung has been praised for his role in transforming Vietnam into one of the most attractive emerging economies in Asia through a series of sweeping liberalization reforms, including the lifting of restrictions on foreign investment and the negotiation of several trade deals, notably the prospective U.S.-led Trans-Pacific Partnership (TPP) and free-trade agreement with the European Union. Foreign direct investment (FDI) in Vietnam reached record levels in 2015, rising more than 40 percent in the first three quarters of the year compared to the previous year.

Although Vietnam is still set to enjoy 6.5-7 percent growth and maintain strong rates of FDI, particularly in manufacturing, the rising influence of Secretary General Nguyen Phu Trong could usher in a period of more conservative economic reform. Trong and new Prime Minister Nguyen Xuan Phuc have both committed to changes required for TPP membership but the pace of reform witnessed in recent years could slow, especially if seen to test particular vested interests in the country. Trong effectively prevented Dung from taking on the secretary general position and consolidated his authority when the National Assembly voted to appoint three of his close allies to the key positions of prime minister, president, and National Assembly chairperson in early April. Though Phuc was a deputy prime minister under Dung, he is perceived to be a more politically neutral technocrat who favors a cautious approach to policy-making.

State company privatization  

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

The ascendance of a more conservative party leadership introduces uncertainty over the future of the reformist agenda. Trong has long been suspected of being at odds over foreign and economic policy with the western-oriented Dung, and is known to be a member of the ideological old-guard of the ruling Communist Party. During a speech in January, he set the tone for the coming term by defending the country’s tight one-party rule and emphasizing the need for balance between democratic aspirations and law and order. Moreover, while the Politburo, the country’s top regulatory body, was expanded in January from 16 to 19 members to accommodate younger, reform-minded members, such as State Bank of Vietnam President Nguyen Van Binh, a strong majority of the members belong to the Communist Party’s conservative wing, including five former generals. Phuc himself, speaking in March, stated that Vietnam would maintain its “socialist-orientated” economy and warned against embracing market reforms too quickly.

Progress in the planned privatization of state-owned enterprises will therefore remain slow under the new administration. In March, Phuc said at the National Assembly that he aims to gradually restructure state-owned enterprises (SOEs,) but cautioned against taking such liberalization steps too quickly amid “risks in international markets”. The program faced delays under the Dung administration amid opposition from vested interests and a lack of will both within the SOEs and in the ruling party; the government sold stakes in 182 SOEs in 2015, failing to meet its target of 289 for the year. Vietnam’s 3,000 SOEs dominate almost all sectors of Vietnam’s economy, including telecoms, shipping, manufacturing, transport and banking. They contribute about one-third of Vietnam’s GDP, and provide the state with significant influence over the economy as well as lucrative postings for political allies or family members.

Investors have been only offered minority stakes in companies and have been deterred by concerns over their large amounts of debt, a lack of transparency, and unclear company valuation after decades of government ownership. For example, telecommunications giant VMS Mobifone has been slated for privatization since 2005, and nonetheless remains state-owned today despite it having the highest profit margin of any Vietnamese SOE. Vietnam Airlines sold only 3.48 percent of its equity in its 2015 IPO, failing to fulfill its planned 25-35 percent privatization. Moreover, most of the 3.48 percent equity sold was purchased by two Vietnamese banks, with no participation by foreign investors. Failure to reform the system could slow prospective growth and wider investment in Vietnam, with private investors long complaining that state entities receive preferential treatment, especially in loan arrangements and land agreements.

Labor union reform 

Labor laws and union activity pose another key consideration for investors in Vietnam, and effective reforms could also stall in coming years. All unions in Vietnam are controlled by the state-run Vietnam Confederation of Labor umbrella group. This tight control imposes significant restrictions on collective bargaining which have undermined the arbitration process in labor disputes and led to an upsurge in disruptive wildcat strikes. According to official figures, Vietnam experienced 303 strikes in 2014, though non-official sources claim the country sees nearly 1,000 wildcat strikes per year. The U.S. State Department claims that about 68 percent of strikes in Vietnam target foreign firms, presenting a major business continuity consideration for investors.

The liberalization of Vietnam’s union laws is a fundamental TPP requirement, which the country’s new leaders have pledged to fulfill. However, labor leaders in Vietnam believe such reforms are only likely to be superficially implemented as they threaten to undermine the state’s control on its workforce. One major international law firm’s partner in Hanoi has said to the New York Times that it is likely the requirements will be abided by on paper, but in reality unions will continue to be informally controlled by the confederation. The TPP has no enforcement mechanism for a member state’s commitments to labor or environmental requirements.

President Barack Obama has said that if Vietnam and other countries do not meet the TPP’s requirements, they will face “meaningful consequences.” However, labor activists have warned that as Vietnam is one of the fastest growing economies in the trade deal and the second largest apparel exporter to the United States behind China, there is a high chance such requirements will be overlooked in order to ensure the deal’s implementation. Moreover, the TPP will only be ratified by the United States after the elections in November 2016, meaning Vietnam is unlikely to be pressured into implementing the labor reforms in the coming year.

Outlook 

Despite faltering on bolder reforms, Vietnam is still slated to be one of the fastest growing economies in Asia in the coming years. According to the World Bank, the TPP is expected to add a cumulative 8 percent to GDP by 2035, while other economists estimate double-digit growth. Both Trong and Phuc have promised to continue efforts to implement and abide by the terms of the TPP as well as the World Bank’s “Vietnam 2035” plan. Smaller but important reforms to be expected in the coming years include banking sector liberalization to ensure equal access to credit, land, and other resources for foreign investors and operators, reducing the perceived favoritism for state-owned firms. The government is also planning to improve land acquisition procedures and mechanisms to resolve land disputes, which could boost Vietnam’s infrastructure development. Nonetheless, the bolder reforms of SOE privatization and changes to labor laws that were unfulfilled in the Dung era are now less likely to be completed, upholding some commonly cited investor complaints about the Vietnamese market in the year ahead.

Jack Wagner is an Asia analyst at Protection Group International (PGI), a London-based risk management firm. Sign up to the PGI Risk Portal for free geopolitical monitoring and analysis.

Newsletter
Sign up for our weekly newsletter
The Diplomat Brief