beyondbrics

By Jonathan Pincus at the Vietnam Program, Harvard Kennedy School.

Vietnamese newspapers are full of talk of economic restructuring. Price inflation in excess of 20 per cent, high nominal interest rates, a weakening currency and a swollen trade deficit have undermined faith in the government’s growth strategy, which consisted of a mix of trade liberalisation in agricultural and labor intensive industries, plus subsidies and protection for state owned companies.

But how should Vietnam actually go about effecting change?

The search for a new growth model already has the official seal of approval. Last month Nguyen Tan Dung, Vietnam prime minister, once again called on state-owned enterprises to focus on their core businesses and ordered the finance ministry to publish the financial results of state-owned corporations and conglomerates, known as state-owned economic groups.

But economic restructuring means different things to different people.

The most radical interpretation — and the one supported by foreign diplomats and international agencies in Hanoi — is based on redefining the role of the state, primarily through selling-off state companies.

Most Vietnamese leaders are not willing to go that far. They prefer imposing tighter administrative controls on local governments and state companies, and reducing public investment levels and fiscal deficits.

These approaches propose different means to achieve a common objective: imposing discipline on state-owned enterprises and local government.

Vietnam has routinely invested more than 40 per cent of GDP – largely a product of the easy access to state land and credit afforded to state companies and local authorities. Not only is it easy to turn a profit when land and capital is cheap or free, but earning profits may not even by the main aim. When public officials have a time horizon of five years or less, and much money is to be made making deals and signing contracts, the act of investing is more of a one-off transaction than a long-term undertaking.

So economic restructuring is code for turning off the public investment tap, or at least achieving a tighter relationship between investment and economic returns. Sure enough, the Nationally Assembly recently announced a reduction in the target investment rate from 42 to 35 per cent of GDP.

Foreigners, however, favour using market competition to impose discipline on state companies and agencies. Selling off state companies and forcing provincial authorities to finance investment out of local revenues and bond sales would reduce the scope for politically-motivated lending.

But this approach assumes that a class of genuinely private investors exists that is willing and able to buy state assets and government bonds. Bristol University political scientist Martin Gainsborough has argued that even nominally private investors in Vietnam are linked to the state in some way, for example through connections to previously “equitised” state companies, state-owned commercial banks, state contracts or land deals. Far from reducing the reach of the state, privatisation extends indirect state power by expanding government-linked business networks.

The rise of “quasi-private” conglomerates that have amassed huge fortunes through favoured access to state land, credit and business deals supports the view that privatisation in a country where the private sector is small and weak is unlikely to generate the expected results.

Meanwhile, the government’s refuses to a sell controlling stake in state companies to foreign investors, a policy that is at once protectionist and hugely popular. Vietnamese people may have lost faith in state enterprises, but that doesn’t mean they trust foreigners.

Progress in increasing investment efficiency will depend mostly on the government’s ability to impose discipline on the banks — not just the state-owned commercial banks, but also the “joint stock banks”, many of which are partly owned by state agencies and enterprises.

Real restructuring will only come when economic considerations replace political calculus as the basis for bank lending. How to achieve this change remains the fundamental problem of Vietnamese economic restructuring.

Related reading:
Vietnam: grappling with change, beyondbrics
Vietnam: a question of balance, FT
beyondbrics Vietnam file