Vietnam, the State and Development.
In the last thirty years, Vietnam has morphed into a bold and bustling economy. The value in understanding Vietnam’s progress stems not only from seeking opportunities but also for understanding new methods of economic development. Rather than decentralizing to create a strong market environment, Vietnam has utilized active state planning to pursue the development objective of creating a modern market economy. Therefore, in order to understand the country’s economic decisions and outlook it is important to understand the unique historical and geopolitical context in which the current governing state was created. With this in mind, Vietnam provides an interesting case study for understanding new development methods, challenges and opportunities.
One of the most recognized frameworks for tracking economic development is the Rostow Model created by economic historian Walt Whitman Rostow. His model outlines five key stages of development for nations to become a “modern” economy.
Source: https://griffid10.wixsite.com/geography/theories-of-development
Internal ideological schisms and wars fought in the name of autonomy adversely impacted the ability of Vietnam to progress beyond stage one. By 1975, the Vietnam War ended and northern communist forces succeeded in uniting the south to form one nation. In the midst of the cold war, Vietnam’s new government was eager to reaffirm its commitment to communist ideals. This drastically impacted its economic policies with plans to centralize key sections of the economy such as agriculture and industry. However, by the early 1980s, it was evident that these policies were not advancing the nation forward as a period of economic inertia gripped the nation.
The decline of communism in the 1980s saw major alterations to the geo-political scene which in turn impacted the nation’s trajectory. Key allies such as the Soviet Union and China began major domestic reforms that restricted their ability to support the Vietnamese communist project. Moreover, persistent lacklustre economic performance led the government to adopt new strategies to ensure stability, prosperity and independence for the young nation, vital goals considering its turbulent recent history. In 1986 the government unveiled its Doi Moi policies designed to help Vietnam embrace market ideals albeit under firm supervision of the state.
Since making the shift Vietnam has seen amazing results achieving stable growth and lifting millions out of poverty. It has become a respected and increasingly integral player in the global economy reaching stage three of the model seamlessly. While the model focuses on tracking economic development, it factors in some key socio-political considerations. For example, in order for industries to “take off” the government should take a back seat so citizens and investors can play a larger role in society and thus the economy. This should lead to more efficient and creative markets that can best serve the nation’s needs. For a state-led economy such as Vietnam, this creates an interesting dilemma regarding the role of government going forward. Decision-makers are sentient to this fact as their recent policies have shown. Equitization has been a policy implemented to increase private sector participation in state-owned enterprises (SOEs).
Nonetheless, there are still concerns regarding the government's involvement. So far the policy has been slow as out of 4400 SOEs available for equitization between 2016-2020 only 162 have achieved the desired outcome. In addition, there are still limits on how much equity can be owned by external forces leaving key decisions with the government. As primarily political entities, decisions may be influenced by considerations other than optimizing performance. This fact means that the state may be less capable of accurately responding to the market disrupting Vietnam’s growth. With this in mind, how can the state contribute without hindering progress?
Infrastructure is one area the state could focus its attention. While the government has made concentrated efforts in this area, it currently ranks 79/144 in global infrastructure according to the Australian Trade and Investment Commission. Better roads, trains and ports will be vital for Vietnam to manage increasing economic activity, promote inclusive development and cement its position as a cornerstone of the world's supply chain. Favourable policies for foreign direct investment has been pivotal to the success of Vietnam's manufacturing industry. China’s handling of COVID-19 and a trade war with the US have exacerbated these ambitions as businesses look to make their supply chains more robust by relocating some production. Advancing in this field could help accelerate movement through the model.
Technology is booming in Vietnam as it recently became the second largest exporter of electronics in South East Asia behind Singapore. This has not only bolstered exports but increased access to technology which has improved the lives of citizens. In order to harness this momentum capital needs to flow in the right direction to encourage innovation. The Vietnamese government could address this by significantly improving the banking sector. The current financial condition of the nation is an area of concern with high debt and limited access for citizens. Remedying the issue would facilitate more opportunities for citizens and investors. The timing of this could not be better with the venture capital industry making huge strides. In addition, banking would be essential for modern day consumer spending which sits at the heart of reaching stage five - a mass consumption economy. The aforementioned policy of equitization has impacted the banking sector as foreign banks are now allowed to own a significant percentage of state banks, which could increase their input in building the financial infrastructure.
These are two areas in which the government can utilize state planning to keep up the success of the last thirty years. The role of the government needs to shift from an active participant to a guiding force that provides the framework for other economic actors to contribute towards development goals. Optimizing market performance seems to be tied to loosening government involvement in the economy and society generally. As Vietnam’s current economic ambitions were built on the principle of creating a prosperous and independent nation capable of participating in the global arena they are unlikely to shun this fact and has already attempted to adjust its role. A successful transition could see Vietnam potentially define a new method of development that could see state planning become more relevant for other nations.
Please follow our twitter page for further news, insights, and comments.
