In late 1997, a large number of Vietnamese peasants displaced by official land
seizures struck back through widespread protests that rocked the ruling
Communist Party. The demonstrations raised questions about the party's
commitment to improving the lot of the rural masses and prompted intra-party
soul-searching for ways to make the government more accountable to the people.
Prominent technocrats were permitted briefly to float alternative policy
prescriptions for dealing with the rapid transformation from a command to a
market-oriented economy. Mathematics expert Phan Dinh Dieu aired controversial
opinions about the party's limitations in economic management and reasoned that
without more political liberalization and privatization, the peasant protests
and other economic problems would likely multiply.
Dieu was later expelled from the party for his contrarian views, but his
political and economic forecasts now look prophetic. They also presaged a
seminal study by Vietnam experts James Reidel and William Turley, who in 1999
predicted the country's reform program would eventually lead to "questions
about the adequacy of Vietnam's political leadership and institutions". The
study called for strengthened controls over fiscal, monetary and revenue
matters, and more transparency and accountability, and predicted that balance
of payments difficulties, accelerating inflation and revenue losses would
trigger crises.
These have now arrived in Vietnam. The mounting economic woes, including an
annual inflation rate of 27% in July and a surging balance of payments deficit
estimated at US$15 billion in the first seven months of the year, have
undermined confidence among outspoken factory workers and the middle class in
the party's ability to manage the economy.
The price of rice surged 72.7% year-on-year in July, according to the General
Statistics Office, which now predicts year-end inflation at between 25%-30%.
Prime Minister Nguyen Tan Dung reported to the National Assembly in May that
the number of families "going hungry" had doubled from last year. High
inflation is also weighing against growth: the Asian Development Bank estimates
Vietnam's gross domestic product (GDP)growth will drop from over 7% last year
to 6.5% in 2008, while private sector analysts say growth could fall as low as
5%.
Some hope those economic woes will revive the long-dormant debate about the
need for more political openness to achieve greater market efficiencies. The
party's prevailing view that GDP growth will gradually lead to more openness is
being called into question as growth begins to slow and social unrest rises.
The idea that political liberalization is necessary to ensure sound economic
management is still a dangerous one among the party's rank and file, including
a conservative camp that fears even the slightest political opening could
develop into a people's power-style revolt against one-party rule.
Economic shocks have previously galvanized bold reform moves in Vietnam,
including the 1986 doi moi market reform program. While reform consensus
frequently led to policies that favored the interests of ranking party cadres,
it didn't always lead to efficient outcomes, as the current economic woes have
brought into view. A new class emerged of business-minded cadres who leveraged
their official positions to enrich themselves from Vietnam's fast expansion,
often at the wider population's expense.
Foreign advice
The question now is whether the Communist Party will respond differently to its
emerging economic crisis or instead opt for more half measures and preservation
of its political and economic dominance? According to Jonathan Pincus, an
economist with the United Nations in Vietnam, there "is no shortage of people
in Vietnam who understand the causes of the current economic instability and
the steps needed to quell price inflation and restore stability to the
markets", but "these people are not in a position to do much about it".
The government has so far opted to listen to friendly foreign rather than
critical local advice. Premier Dung in mid-July agreed to the creation of a
board of foreign economic advisors from prestigious Western institutions to
offer policy advice for dealing with the crisis. However, the foreign experts
are expected to offer up mostly economic and financial prescriptions, and steer
clear of calls for more political pluralism.
The government's surprise decision on July 21 to cut subsidies and raise retail
petrol prices by 31% are in the spirit of the orthodox neo-liberal
prescriptions many Western economists favor, even though the move will surely
stoke even faster inflation. Under lobbying pressure from the Electricity of
Vietnam Group, policymakers are now also deliberating whether to remove caps on
electricity prices by the end of this year, another standard market-oriented
reform prescription.
Behind the inflation figures, Vietnam faces a spiraling debt crisis, with the
economy weighed down by the debts of state-owned enterprises. Adding to those
debt woes are corporations and other party-affiliated economic actors that were
allowed to set up their own banks and have invested unknown millions of dollars
from their equity into businesses outside of their core competence, including
securities and real estate that have recently collapsed in value.
Nor has foreign direct investment been efficiently applied to actual projects,
which some say explains why Vietnam's money supply grew by over 80% while real
output expanded by a mere 17% from 2004-2006, according to economist David
Dapice. He estimates that the yawning gap between money spent on asset
accumulation rather than raw materials and capital equipment likely widened
last year and has contributed to the recent runaway inflation.
The government is now scrambling to balance fighting inflation while keeping
debt-ridden and politically connected SOEs afloat, rather than undertaking more
deep-seated reforms to its economic management. Indications are that rather
than tightening monetary policy, the government is willing to accept inflation
rates as high as 25% this year. There are also indications the government plans
to cut commercial bank deposit rates, currently at about 14%, in a bid to pump
more liquidity into ailing businesses.
SOEs, state corporations and other vested economic interest groups aligned with
the party have made and apparently are winning their case that tighter monetary
policy will not only bankrupt them, but will also cause the country to miss its
targeted economic growth rate of 7% for this year. Whether the government's bid
to keep businesses afloat rather than restoring broad macroeconomic stability
will lead to an economic soft landing in 2009 and restore local confidence in
its management is highly uncertain.
Behind the times
Vietnam's emerging economic crisis is demonstrating that more than 20 years of
market-oriented reforms have outgrown the capacities of the one-party
communist-led political system. Some now argue that extraordinary growth rates
may be attributed to the sudden change from communism to capitalism as the
organizing basis of economic life, and not to improvements in the efficiency of
investment, productivity of labor or enhanced national competitiveness.
The Economist Intelligence Unit recently forecast that Vietnam's economic
growth would slow from an average of 7.9% from 2002-2007 to 5.1% for the decade
spanning 2011-2020 as "vested political interests may impede reform, thereby
preventing the necessary restructuring of some SOEs". Slower growth will
inevitably lead to more difficulty in providing jobs and potentially more
social unrest, others predict.
Foreign investors and analysts had earlier predicted that Dung would speed
economic reforms, based on his frequent calls for a more transparent, legal and
liberal framework for doing business. But the mounting contradictions in the
state-led market-oriented economy, including the fact that party-aligned SOEs
account for 70% of foreign borrowing while producing only 40% of GDP, are
becoming more glaringly apparent as the economy unravels.
It all means Vietnam is fast hurtling towards a moment of reform truth. The
communist leadership is now trying to reach a new consensus between national
and provincial leaders, as well as between conservative and progressive
intra-party camps, to address the deteriorating economic and social situation
while maintaining its grip on power.
But adherence to technocrat Dieu's call over a decade ago for more political
liberalism and economic privatization arguably would have forestalled the
crisis in confidence the party now faces.
Long S Le is the director of international initiatives for the Global
Studies Program and also a lecturer of Vietnamese studies at the University of
Houston in the United States.
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