While visiting Hanoi recently, HPR staff writer Jay Alver noticed an astounding number of privately owned businesses in the city. Slightly confused, he asked a local guide how this could be true, given the supposedly absolute control the Communist Party wields. Smiling a bit, the guide responded slyly that with increasing liberalization in Vietnam and increasing regulation in the United States, Vietnam was now more “capitalist” than America.
Vietnam’s recent record of economic success has been staggering. According to the magazine Foreign Policy, from 1986 onwards, GDP growth has averaged an impressive 5.3 percent per year. Even more extraordinary, Vietnam weathered the recent global financial crisis with seven percent annual growth between 2005 and 2010. Should this growth persist, Vietnam would rank among the existing Four Asian Tigers (South Korea, Taiwan, Hong Kong, and Singapore), which averaged six percent annual GDP growth from 1960 to 1990.
The Roots of Economic Growth
David Dapice, a Tufts economics professor and contributor to the Harvard Vietnam program, highlights the government’s introduction of “Doi Moi” policies in 1986 to explain Vietnam’s economic growth. Influenced by declining Soviet influence, Doi Moi encouraged capital flows from the western world by initiating free markets, lowering tariff barriers, expanding agricultural exports through trade liberalization, and joining regional trade blocs. The discovery and development of oil and natural gas reserves in the South China Sea also contributed substantially to Vietnamese growth during the Doi Moi period.
In 2000, Vietnam took a step toward additional diversification and deregulation of its economy by enacting the Enterprise Law, which eliminated a substantial amount of red tape associated with establishing new private businesses. Vietnamese citizens, particularly urban ones, have embraced this reform quite enthusiastically. Many tall, narrow buildings characteristic of northern Vietnamese cities, their unique style reflecting earlier Communist land distribution policies have converted their bottom floors into stores selling consumer goods produced in Vietnam and neighboring countries.
The entrepreneurial spirit also extends to citizens without storefronts. On the same trip described above, the writer saw dozens of licensed barbers setting up shop against a fence surrounding a city park. Mirrors and hair-styling supplies hung from hooks along the fence while patrons sat in plastic lawn chairs, forcing pedestrians to sidle past to stay on the sidewalk and avoid the motorcycles filling the busy street.
The Enterprise Law explains in part why Vietnamese growth has been fundamentally dissimilar to that of other emerging Asian markets. Despite the continued growth of industrial exports, domestic consumption comprises 65 percent of output, compared with 36 percent for Vietnam’s northern neighbor China.
According to the Harvard Vietnam Program’s paper entitled “Choosing Success,” the Vietnamese economy is quite diverse, with strong agriculture and mining bases, and rapidly expanding manufacturing, tourism, utilities, construction, and financial sectors. The government has even used this period of stable growth to invest in poverty reduction programs and electricity. These factors, says Dapice, make Vietnam’s development model an example for other developing countries seeking to maximize usage of existing resources.
Despite a plethora of optimistic indicators, there is increasing awareness among developmental scholars of flaws in the Vietnamese model that could potentially stunt its future growth. Inefficient usage of foreign investment earlier led to high levels of inflation, and although price level growth has slowed, the overall inflation rate, estimated at around 18 percent in 2011, remains high enough to cause serious concern. Furthermore, the Vietnamese government’s infrastructure investment has not been matched by corresponding investment in human capital, and the nation’s schools and universities have not undergone any significant improvements.
According to the Harvard Vietnam Program’s “Beyond the Apex” paper on higher education, corruption and an inefficient budget allocation structure have contributed to failures in improving Vietnam’s education system. Compounding the situation, a growing middle class and the ascendancy of industries requiring skilled labor is leading to demand for more young Vietnamese students to pursue higher education. The government has also been unable to create an effective urban planning policy as traffic-choked and heavily polluted cities grow ever larger, damaging the prospects of human capital development that Vietnam’s future depends on.
Another potential problem for future growth is the persistence of “dualism” in the Vietnamese economy. Private industry and foreign investment have been the driving factors in Vietnam’s impressive growth, and hold the key for future development. Despite this, the Communist government has been unwilling to scale back the massive control it exerts over the economy through large state-owned conglomerates. This practice of dualism, or “one country, two systems,” made sense during the Soviet Union’s collapse and the Asian financial crisis of the late 1980s and 1990s. The system allowed for an orderly, managed transition to a market-oriented economy. However, now that the transition is well underway, the continued existence of a massive state-owned sector has stifled the growth of the private enterprises that have fueled job creation and economic expansion in Vietnam.
The Fifth Asian Tiger?
Despite the problems enumerated above, Vietnam still has enormous potential. According to the IMF, its economy remains smaller than that of nearby Thailand and the Philippines, but with access to abundant resources it still has ample room to grow. Comparisons between Vietnamese and Chinese development have been misleading, primarily because of Vietnam’s small size and relative lack of institutional development. However, Vietnamese growth has also been extremely diverse, rather than being based heavily on industrial exports.
Overall, while institutional reforms are needed to extract continued economic growth from Vietnam’s rich human and physical resources, the country has the potential to maintain existing levels of growth for the foreseeable future. If successful, Vietnam could very well become the next true Asian Tiger, and millions would come to enjoy higher standards of living.