What Economic Crisis?
Vietnam needs faster reform but it's set to apply the brakes instead

Far Eastern Economic Review
December 18, 1997
By Faith Keenan in Hanoi

The voice was strong and assured, the posture rigid. But the hand quivered as the man with grey hair parted straight down the middle pointed a finger at reporters gathered around him. "There are limits,"

Communist Party Secretary-General Do Muoi told them, in reply to a question about whether Vietnam should pursue deeper economic reforms. "If your stomach is full, you shouldn't eat any more."

It seems enough is enough for Muoi and the conservative party members he represents. The 80-year-old party chief appears to think his country has had its fill of market reforms and wants to call a cooling-off period. But reform-minded government officials and economists insist that stopping or even slowing down reforms at this juncture will stall Vietnam's growth, increase its isolation and possibly even threaten its stability.

Clearly, after a decade of economic reform, Vietnam has reached a crossroads. Circumstances are forcing a choice between the fast road to reform and the slow one, a choice with profound implications for the country's future. The direction it takes should become evident after a key meeting of the party's central committee, scheduled for late December.

Choosing the path of further and faster reform is the only option if Vietnam is to maintain robust growth rates, many economists say. Now more than ever, they argue, Vietnam must abandon the emphasis on heavy industry, focus on labour-intensive manufacturing, restructure state-owned enterprises, liberalize trade and attract foreign investment. And it will have to compete even harder as currency devaluations in Southeast Asia make its neighbours more appealing to investors and their goods cheaper.

"Vietnam has nearly exhausted its potential to grow at present rates" of about 9% annually, says William Turley, a Vietnam specialist at Southern Illinois University in the United States. "It must now bite the reform bullet again, hard, if it is to avoid what its leaders most fear: lagging further and maybe forever behind its neighbours."

But Muoi and his backers seem to fear something worse than the prospect of lagging behind--the anger of peasants who make up 80% of the population. Continuing, sometimes violent, protests against corruption in Thai Binh province (about 100 kilometres southeast of Hanoi) in the past several months have strengthened the hand of the conservatives as well as the military.

Their candidate to succeed Muoi, who is expected to retire soon as party chief, now appears to be in ascendance. He is Gen. Le Kha Phieu, the army's political commissar, who is responsible for ideological training. He is also head of the party's Commission for Internal Political Protection, in charge of coordinating internal security matters.

Phieu, 65, is widely regarded as representing the party's traditionalists, who place party supremacy ahead of economic growth and consider state enterprises the bulwark of socialism. Little is known about the general, although his rhetorical skills have been displayed in Nhan Dan, the party paper. A quote of his from early 1996: "Capitalism will definitely be replaced as it is backward in satisfying the people's desire for happiness."

In the latest indication that he's now in favour, Phieu appeared on the front page of newspapers on December 6 and again on December 8. Most significantly, on the second occasion he was shown greeting his visiting counterpart, Li Ruihuan, a member of the Chinese Communist Party's politburo standing committee.

If Phieu replaces Muoi at the forthcoming party meeting, Hanoi will once again show how out of step it is with much of Asia. In China, Thailand, even Pakistan, the military have stepped back from the political arena. Only a few months ago, Hanoi appeared to be following this trend: Defence Minister Doan Khue lost his post and party sources said Phieu couldn't muster enough support within the party.

At the time, more-liberal party members seemed to have a chance to tip the ideological balance within the all-powerful politburo. The name of Nguyen Van An--the 60-year-old head of the party's personnel commission--surfaced as a potential, moderate successor to Muoi. It seemed possible that a new, more outward-looking generation might be allowed to fill party ranks. Instead, the unrest in Thai Binh and other provinces has allowed the military to revive its political fortunes by capitalizing on a perceived threat to stability. It has also given Muoi and his backers a reason to slam the brakes on economic restructuring, regardless of the warnings of the reformers who now dominate government posts.

"Putting a military person in the general secretary's position would be Vietnam's way of saying we're going to hold very, very firm and move cautiously," says Carl Thayer, a Vietnam expert at the Australian Defence Force Academy in Canberra. "It's a Vietnamese characteristic par excellence: They're not risk-takers."

But what the country needs is risk-taking, say local and foreign economists--especially in the face of the region's current economic trauma. Although Vietnamese officials had initially assumed their country would be immune to the contagion, they now realize that the absence of a stockmarket and a convertible currency will not insulate them. Most worryingly, the troubles in the rest of the region will worsen the prospects for foreign investment, which fell 18% last year.

Of the nearly $30 billion of approved investment to date, one-third comes from South Korea, Taiwan and Japan, which are now more preoccupied with fixing their own economies.

Any serious decline in foreign investment could derail Vietnam's growth plans for the next several years. Hanoi's five-year plan (1996-2000) envisages $13 billion in foreign direct investment. Another $14 billion was supposed to come from local sources and $7.5 billion from overseas aid.

The country isn't close to meeting any of these targets. And it won't unless it introduces "substantial additional reforms to further improve the environment for foreign direct investment," states a World Bank report. In other words, Hanoi must dismantle the obstacle course that drives many current investors mad and potential investors to look elsewhere.

Doing less would not only be economically disastrous, but could have political implications, analysts warn. "An economic crisis signals the end of political stability," said IMF representative Erik Offerdal at a recent seminar in Hanoi. "It's a basic mistake to think taking small steps will maintain stability. The opposite is true. The less you do, the more will happen to you."

Muoi and others, however, see the regional debacle as a warning to slow reform and keep out the capitalists, lest they gain the ability to control Vietnam's economy and undermine its stability, say political analysts.

Economic advisers to the party cite mounting evidence that the secretary-general wants to scale back the pace of reform. They say he demanded major revisions in a draft of the economic plan to be considered at the forthcoming party plenum. The original, says one official, "was very open-minded. It emphasized globalization and how to compete successfully in the world market. It emphasized economic issues rather than political stability." The draft also contained references to China's 15th Party Congress in September and party chief Jiang Zemin's calls for faster reform of state enterprises.

Not any more. Muoi insisted that criticism of Vietnam's economic situation be deleted, as well as the references to China. He called for a more cautious approach without mention of faster economic integration, privatization of rice exports or a level playing field for private firms.

Political analysts also point to the fact that Muoi did not attend the inauguration in September of new President Tran Duc Luong--a possible indication that he was not enthusiastic about Luong's reformist leanings. And he has supported Phieu despite opposition to him within the party, and even within the military.

Why is Muoi shying away from his previous support for gradual reform? Analysts say that for starters, Muoi genuinely thinks the socialist way is the right way and that state firms must be protected. They also suggest that he is simply an ageing leader unwilling to give up the revolution. Advisers say he was offended by local press reports praising President Luong and Prime Minister Phan Van Khai as younger and better educated than their predecessors. The implication was that party veteran Muoi is old and uneducated.

At 80, Muoi admits his body is old, then playfully adds that his mind is young, "like that of a 25-year-old." But his body language betrays his attitude: He moves in a stiff, quick shuffle, seemingly unable to bend joints but clearly determined to get where he's going. Apart from Muoi's personal ambiguity about pushing ahead with reform, there are the vested interests that stand in its way. These are mainly state firms and inistries that have benefited from the reforms so far. But they also include foreigners who have linked up with state enterprises and want to preserve their monopolies.

"The government is coming under increasing pressure to adopt protectionism and other policies aimed at benefiting special interest groups at the expense of the national economy," writes economist Ray Mallon in a report for the Swedish embassy. "Alliances between state enterprises and foreign investors will, in some cases, present a particular threat to the development of sound economic policies."

To reform-minded members of the government, sound economic policies mean reforming state firms and improving the investment climate. These measures were among those called for by Khai in his first speech as prime minister in September.

The reformers have also called on outsiders to bolster their argument.

One is Lee Kuan Yew, the senior minister of Singapore, who visited Vietnam in late November at Khai's invitation. As an authoritarian Asian leader who transformed a fishing village into an economic powerhouse, Lee's credibility in Hanoi probably outweighs that of the IMF and World Bank, which are perceived as Western institutions. During his four-day visit, Lee bluntly urged Hanoi to reject isolationism and embrace the world economy--and relayed oft-repeated investor complaints.

Two days after Lee visited, economists, officials and academics from the region convened in Hanoi to share their experiences with Vietnamese policymakers at a seminar sponsored by the Asian Development Bank. Most warned Hanoi against closing the door to reform, despite the problems in neighbouring countries. Said the IMF's Offerdal: "It's important to keep in mind that the cornerstone of success in the region was exactly market-opening reforms, opening to foreign trade and access to foreign capital flows."

The government appears to be making attempts to ease conditions for foreign investors. For starters, the Ministry of Planning and Investment is trying to convince state firms and civil servants that foreign businessmen are an important part of the economy, not a necessary evil. When investors complain about problems, "mid-level officials and executives think these are a rich man's difficulties and they deserve it," says a Vietnamese journalist. "They must be instructed to help foreign enterprises."

Proposed investment incentives include reducing land rentals, easing tax and export rules, and giving foreign workers visas for longer than six months. Though investors say the proposals are promising, "what matters is the actual application on the ground," says Japanese Ambassador Katsunari Suzuki. "Beautiful words alone won't do."

He and others also question the effectiveness of piecemeal measures such as the recent campaign against smuggling: Customs officers place stickers on every product that enters the country legally, starting with bicycles, liquor and electric fans. Simply reducing tariffs would attack the root of the problem and have a more lasting affect, observers say. (High tariffs mean many investors in Vietnam can't even take advantage of the fall in its neighbours' currency values: A Singaporean plastics company in southern Vietnam says a 45% duty doesn't help against the 60% depreciation of the Thai baht.)

Much bigger issues also loom, like a banking sector creaking under the bad debts of state firms. Despite introducing privatization regulations in 1992, the government seems in no hurry to let go of state enterprises. The World Bank says the government has compiled a list of 150 companies (out of about 6,000) to be equitized, or partially privatized, next year. "That's not very many, I agree," says the Bank's country director, Andrew Steer. "But it's a start, isn't it?" The Bank has yet to receive the list.

It may have to be patient if the party plenum results in a new hardline leader. Barring last-minute changes, Gen. Phieu appears to be the man. If he steps in, the longstanding ideological balance within the party's top ranks would be maintained. But whether that's good for Vietnam and improving the living standards of its citizens remains debatable.