Vietnam’s rapid growth has not undermined social cohesion, which helps explain the country’s 53rd place ranking on the Legatum Institute’s 2012 Prosperity Index — placing it higher than China, Thailand or Indonesia. But, while lauded as the poster child for economic liberalization, Vietnam’s ‘market Leninist’ attempt to blend capitalism with authoritarian governance is not a success, writes Jonathan Pincus, Dean of the Fulbright Economics Teaching Program in Ho Chi Minh City and resident academic advisor to the Harvard Kennedy School Vietnam Program.
Aid-donor reports on Vietnam typically open with an homage to doi moi, the ‘economic renovation’ policy announced in December 1986. This event is said to mark a deliberate shift in policy away from central planning and toward a mixed economy—what the Vietnamese term a ‘socialist market economy’.
Shortly thereafter, as the story goes, the government decollectivized agriculture, liberalized prices and foreign trade, and allowed greater space for private sector activity. Two decades of rapid economic growth followed, during which per capita income increased more than three-fold in terms of purchasing power and the official poverty rate fell from 60% of the population to 12%.
No one was surprised, then, when the most recent Vietnam Development Report published by the World Bank concluded, “Vietnam’s transition … is now a case study in development textbooks.” Or as a former World Bank representative in Hanoi inelegantly put it, Vietnam is the “poster child” for economic liberalization.
However, the panegyrics to doi moi miss an unintended consequence of the reforms that is anything but serendipitous. The shift from central planning to market allocation while retaining government control over productive assets within the state sector has led to the progressive commercialization of the state itself. Driven by a worldview in which private capital was identified with imperialism, the Communist Party was deeply committed to keeping what Lenin called the “commanding heights” under state ownership, even as markets replaced central planning as the primary means of allocation. This gave rise to powerful interests within state enterprises, banks, ministries and local authorities who benefited personally from the new arrangements and gave them strong incentives to prevent the growth of competing private centres of economic power.
Weak administrative capacity and decentralized political structures subsequently thwarted Hanoi’s attempts to impose discipline on the economic agencies of the state. And as ideology faded as a motivating factor, the desire of these elites to protect their privileged positions emerged as the main obstacle to change. To put it another way, the doi moi reforms achieved productivity gains that fit a classic vent-for-surplus model seen elsewhere in Southeast Asia. But much of the gains have been hijacked by government functionaries and their private-sector allies, who stand in the way of the vigorous market competition needed to sustain rapid growth.
The main determinants of economic success (or failure) will be political in nature. The most effective means of disciplining SOEs and their supporters in government would to be to introduce more competition—even competition confined to the state sector. It would require the creation of independent regulatory agencies and courts of law that are shielded from the influence of large state firms and the Communist Party. And it would require greater transparency, including enforceable codes of corporate governance that mandated independent directors and the de-politicization of personnel decisions. Yet such reforms would challenge market Leninism and the concentration of economic power in the hands of the loyal political elite.
Jonathan Pincus served as senior country economist in Vietnam for the UN Development Program. This is a brief extract from one of a dozen specialist reports commissioned to complement the 2012 Legatum Prosperity Index. The studies range from essays placing contemporary challenges in historical context (Iran, China, Mongolia) to surveys of barriers to economic growth (Egypt, Japan, India) to controversial alternatives to conventional policy interpretations (Iceland, Colombia, Vietnam). Download the reports here.