Pacific Money

Can Vietnam Maintain Its Economic Success?

Recent Features

Pacific Money

Can Vietnam Maintain Its Economic Success?

In order to keep up it remarkable progress, Vietnam will need to grapple with pervasive corruption.

Can Vietnam Maintain Its Economic Success?
Credit: Flickr/ Weijie~

On Hanoi’s Dien Bien Phu Street, an unmarked door and a flight of stairs bounded by walls painted green with pink flowers leads to a branch of Cong Coffee. Its low benches and spare tables are lit by oil lamps. Through gaps in the plants growing from its balcony, customers can watch the traffic ease past restaurants and bookshops. The décor – replicated at other Cong Coffee branches across Vietnam – is designed to evoke the atmosphere of its founder’s childhood in the 1980s. Its aesthetic would not be out of place on London’s trendy Brick Lane.

The café, which like other nearby venues caters to a growing number of middle class Vietnamese, is located in Old Hanoi, the historic center of the city, which boasts well-kept public squares, tree-lined avenues, and grand buildings from the French occupation. Many of the latter have since been repurposed as headquarters of national ministries and state businesses. Australian tourist parties pass in and out of the Metropole – an imposing colonial-era hotel – whose bars and cafes now see a large amount of business from local consumers, and restaurants and boutique shops crowd out the numerous street food stalls. A short distance away is the Hoan Kiem lake, where crowds gather every evening to take the air and enjoy the views out over the water.

Hanoi’s prosperity reflects the country’s dramatic change of fortune over the past three decades, which has been driven by the socialist government. Since 1990 – when it was considered to be one of the world’s poorest countries – Vietnam’s economy has grown by an average of 6 percent per year. It is now defined by the World Bank as a middle income country. The next step is to meet emerging market conditions set by indexes such as the MSCI and S&P Dow Jones, a step which would see a rapid increase in foreign investment and the inclusion of equities listed on its stock market in major commercial fund offerings.

Vietnam’s economic success partly reflects circumstances. The end of the U.S. trade embargo in 1994 and the renewal of diplomatic relations in 1995 was a highly significant event for the country – the United States is now Vietnam’s largest export market. Its proximity to China is also a key asset. Vietnam has begun to be marketed as a cost-effective alternative manufacturing base to its larger neighbor, helped by its easy integration into existing supply chains planned around southern China.

But to focus on the advantages of Vietnam’s geographical location would be to downplay the commitment of the ruling Communist Party’s investment in its own people, with the backing of international development organizations. Since the 1990s the country has borrowed more than $14 billion to revolutionize its national infrastructure, creating the conditions for rapid and sustained growth. This has included rural electrification schemes ensuring that more than 97 percent of households in the countryside have access to mains power – up from less than 50 percent in 1998 – and the extension of the nation’s road transport network. These innovations have supported the huge expansion of the country’s industrial base, powered by workers who have benefited hugely from the government’s investment in education. In standardized math and science testing, Vietnam’s youth now outperform those in the United States and United Kingdom.

At the same time, the government has sought to open up the country to trade and investment. It has lifted restrictions on the holdings foreigners can have in Vietnamese equities and encouraged its 63 provinces to compete with each other to attract investors.  This strategy is already meeting with success – foreign direct investment in Vietnam hit a record high in 2016 of $24.4 billion, following a previous record year in 2015. While there has been some disappointment at President Donald Trump’s decision to abandon the Trans-Pacific Partnership free trade deal – under which Vietnam would have seen greatly increased access to U.S. and regional markets – the country continues to break down export barriers for its goods. It recently concluded a free trade agreement with South Korea, one of its most important foreign investors, and is working on one with the EU. The relationship with the United States also remains strong – it is one of Vietnam’s most important export markets and its primary source of foreign investment.

The challenge for Vietnam is to sustain this momentum while dealing with some difficult structural limitations, a task made harder by the withdrawal of certain forms of development funding designed for poorer economies. The foremost issue is corruption, which is consistently ranked as a major problem facing companies doing business in the country. In its 2016 annual provincial competitiveness index, a survey of business conditions in the country, the Vietnam Chamber of Commerce and Industry announced that 49 percent of the firms consulted had admitted paying bribes within the last year – with many other companies choosing not to respond to the question. This is borne out in successive Corruption Perception Indices produced by Transparency International, which consistently rank Vietnam among the worst performing countries.

An awkward fact for the Communist Party of Vietnam is that the most prominent areas of corruption risk – payments to local officials to ensure the timely provision of basic administrative services, the illegal privatization of state property, and the misallocation of state resources – appear at the intersection of government and the private sector. What is more, there is huge variation in the prevalence of such rent-seeking behavior from region to region – a by-product of the decentralization of government, which has been in many other areas a great success.

Regional analysts note that one of the major challenges for the government in tackling graft is that the primary beneficiaries of such activity are members of the Communist Party, sometimes in very senior roles. Legislative efforts to combat their activities, such as the imposition of financial disclosure laws for public officials, and successive high profile prosecutions – including cases calling for the use of the death penalty – have failed to make significant inroads into the problem. The major challenge for the Party in combating corruption strikes at the root of its successful mixture of socialist and capitalist policies: it must demonstrate to the public, and to foreign investors, its ability to deal with graft, without alienating or undermining its own officials or significantly damaging the system which has delivered sustained success over recent decades. Having overcome many of the problems which hold back developing countries, Vietnam’s ability to resolve this issue will likely have a profound effect on its rate of growth.

James Birkett is an Associate Director at Alaco, a London-based business intelligence consultancy.