Easy Part Over for Vietnam

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Easy Part Over for Vietnam

The optimism during Vietnam’s pre-2008 economic boom is over. The Communist Party knows it must take action. But it doesn’t seem to know what.

At one side of the large concrete Hoa Binh Market in Ho Chi Minh City’s District 5 sits an “illegal market,” where vendors set up small light bulbs over their produce and meat and loop wires over the large umbrellas. On special occasions like public holidays, police may chase away or even arrest the several dozen of these vendors. Sometimes, goods are confiscated. But that’s not their only problem now.

“Since last year our family’s income is down 40 percent, it’s almost half what it was,” says Phan Thi Khanh as she adjusts the iceberg lettuces rolling around loose in a shallow bamboo basket.

Khanh works 16 hours a day and says she takes home between 100,000VND to 200,000VND (about $5 to $10). She says her husband helps her out at work, while their sons work at local factories. They still live at home, she says, because rent is too expensive for them to afford their own places.

“Most of the buyers here are factory workers or people from outside provinces. Rich people don’t shop here,” she says. “The prices have gone up, but the salary of workers hasn’t, so they buy less.”

Official figures are vague, but locals say strikes have been an increasing at factories over low wages and poor working conditions. Worries over wages have been exacerbated by spiraling inflation in recent years. Inflation peaked at 23 percent last August, before dropping to 18 percent at the beginning of 2012. But it was still stuck at more than 8 percent last month. Economic growth, meanwhile, has dipped again and is unlikely to surpass 5.2 percent this year, according to the government.

The government is responding with plans for major reforms in three key sectors: the sluggish state-owned enterprise (SOE) sector, the banking sector and public investment. SOEs have lost money hand over fist for years. Indeed, state-owned shipping company Vinalines, which was said by state-owned media to have “wasted” a billion dollars, is only the most glaring example of many. Three of the firm’s executives have been arrested in a sector estimated to make up as much as 40 percent of the economy.

Vietnam’s national shipbuilder Vinashin, meanwhile, has flirted with bankruptcy after years of mismanagement. One of the problems identified was movement into “non-core” sectors, such as hotel management.

In a recent report to the country’s main legislative body – the National Assembly – the government said SOEs cut spending by close to $660 million over five years, ending late last year, according to local news.

However, government officials are increasingly concerned at the massive losses of state money. Ho Chi Minh City NA representative Do Van Duong, for example, told Thanh Nien News: “It’s time to investigate investments that cause huge losses of state money and hold accountable those responsible.” He said that the recent Vinashin and Vinalines cases were indicative of poor management of the sector.

Companies are now supposed to be required to publish earnings, though the plan is in its initial stages. But whatever the government says, it seems doubtful that real reform will happen anytime soon as SOEs resist change, foreign investment or restructuring. In addition, many (quietly) complain that government regulations ensure a large workforce in the state sector and free services for the poor, a problem, they lament, when trying to improve efficiency.

Last year, a number of local economists called the proposed changes the biggest since doi moi, the policy begun in 1986 that reopened the isolationist communist nation’s economy, and a move that has been credited by many analysts as the real driving force behind the rapid economic growth of the past two decades.

Some observers, though, are skeptical about such talk. “Oh I’d love to see that,” says former U.S. ambassador to Hanoi, Douglas “Pete” Peterson as talk of the comparisons with doi moi are broached in an interview. Peterson, who was a prisoner of war during the Vietnam War, was the first post-war U.S. ambassador to Vietnam, serving from 1997 to 2001. “Doi Moi was a one-off, a massive decision, but it paid off in just about every way.”

And there were, he says, some immediate gains from the policy. “It stopped people starving. It gave farmers back land, productivity surged overnight and you had food security. People were starving to death in the street [before the reform],” Peterson says.

Yet a quarter of a century later, consumer confidence is low. Indeed, according to market research company Cimigo, confidence dropped to an all-time low in October 2011.

“[October’s numbers] were the lowest I’ve ever seen,” says Richard Burrage, a managing partner with the firm, adding that such falls usually follow quickly after a hike in petrol prices. From last April to March of this year, both the food consumer index and petrol prices have climbed steadily.

“With inflation levels, they’re earning far less than they were,” Burrage says, noting that there was “much greater optimism” during the pre-2008 economic boom.

But gas prices aren’t the only indicator that analysts keep an eye on – cell phone sales are seen as another unofficial way of gauging consumer confidence across the country. Vietnam has a large number of cell phone users; most young people own several of them.

Truong Thi Ai Chau, 30, has been managing the same cell phone shop in Ho Chi Minh City for six years. But she says things are getting harder, and not just because supermarkets are now undercutting smaller retailers.

“It’s much more difficult now,” she says. “Before, they could buy expensive brands, but now they just buy one for necessity.”

Jonathan Pincus, a Harvard economist who has taught in Vietnam for more than eight years, believes that though the Communist Party has accurately identified the three areas in need of serious reform, the problem of what to actually do remains.

“There’s a lack of consensus on how to proceed,” he says. “I don’t think its ideological disagreement,” among party members. Rather, he suggests, it’s competing special interest groups that are creating the divisions.

Party dealings range somewhere on the scale from opaque to impenetrable for many outsiders. However, in the past, what has leaked out has suggested rifts in the party and government between old school hardliners and modernizers.

This time, though, it may have more to do with differing commercial interests between SOEs and others. Certainly, after highly visible government announcements last year, some press reports were critical of “special interests” for resisting major reforms in the SOE sector.

“They need to do something, but they don’t know what,” Pincus says.

Vietnam’s economy had been rushing ahead in the decade that followed the Asian Financial Crisis in the late 1990s, a crisis that threatened to derail the advances under doi moi. For the past five years, though, the economy has been spinning through cycles of boom and bust.

“The problems now are serious. We’ll be stuck in this boom-bust cycle until things are fixed,” Pincus says. “The easy stage of development is over.”