Crony capitalism went on trial in
Vietnam last week. However, the proceedings did
little to quell public skepticism or address the
underlying causes of a spectacular economic and
political failure.
Assigning
responsibility for the near collapse of Vietnam
Shipbuilding Industry Group Vinashin), the
state-owned entity that effectively went bankrupt
in 2010 with over US$4.4 billion in debts, a
Vietnamese court on March 30 sentenced former
chief executive officer Pham Thanh Binh and eight
other senior company officials to upwards of 20
years in prison.
As Vietnamese bloggers
were quick to point out, Binh and his
co-defendants were charged with misappropriating
$43 million in funds - which represented less than
1% of the total debt racked up by Vinashin. While
the court ruled that the defendants caused
"serious economic
consequences" and "reduced the people's trust in
the government"' throwing away $43 million as
detailed in the indictment was hardly the main
explanation for Vinashin's meltdown.
The
root problem can be traced back to 2006 when Prime
Minister Nguyen Tan Dung reorganized many of the
country's state-owned enterprises and placed the
largest corporate groups under the direct control
of the prime minister's office. Dung's ambitious
plan was to pursue a corporatist development
strategy along the lines of South Korea's
chaebols while building a personal power
base.
Dung appointed close allies to run
Vinashin and the other business groups. According
to critics, the prime minister's office succeeded
in consolidating control but did not exercise real
oversight.
Thanks to preferential credit
policies, Vinashin got cheap domestic loans from
state-owned banks and lots of dollars from
international lenders which it used to expand into
unrelated businesses such as real estate,
motorcycle manufacturing and tourism. Benefiting
from a government guarantee, even the proceeds
from Vietnam's inaugural dollar bond of $750
million and a high-profile syndicated loan
arranged by Credit Suisse worth $600 million were
funneled to Vinashin.
Vinashin's shoddy
management and unsustainable expansion eventually
led to a debt crisis with wider economic
implications for the country. Vietnam's sovereign
credit rating, for example, was downgraded to four
notches below investment grade by international
credit agencies partly because of the failing
shipbuilding company's potential impact on
government finances.
Lenders naturally
want to know whether a sovereign borrower can
service its debts. But in the case of Vietnam, how
much debt the Hanoi government is on the hook for
is a big question mark. According to official
statistics, the outstanding amount of government
debt has been expanding quickly and is currently
at 60% of gross domestic product (GDP).
However, this figure does not account for
borrowings by state-owned enterprises. If the debt
of these entities are included on the central
government's balance sheet, Vietnam's debt
position is markedly worse. Just how much worse is
anyone's guess.
Besides Vinashin,
Electricity of Vietnam (EVN), Vietnam National
Coal and Mineral Industries Group (Vinacomin) and
Vietnam Oil and Gas Group (PetroVietnam) are among
several big state-owned companies carrying high
debt loads and seen as potential trouble spots,
especially in a market downturn.
The
circumstances that catalyzed the Vinashin collapse
- government-directed lending, corruption and a
distorted playing field - are still rampant in
Vietnam. Unfortunately, the trial last week only
focused on individual criminality instead of
systemic malfeasance.
One seemingly
logical solution would be to privatize state-owned
firms in Vietnam to bring an end to government-run
chaebols. In a press interview on the
sidelines of the Association of Southeast Asian
Nations (ASEAN) summit this week Dung conveyed
this very point to reassure foreign investors.
Specifically, he pledged to "accelerate
equitization to diversify the ownership of
state-owned businesses".
However,
privatization without transparency and
accountability is no panacea, according to the
candid assessment of a World Bank senior economist
with experience on Vietnam. Instead,
"equitization" (communist Vietnam's euphemism for
privatization) could open the door to the looting
of public assets.
This economist, speaking
off the record, compared the possible outcome in
Vietnam to that of Russia in the 1990s when much
of the state sector passed into the hands of a
coterie of politically-connected individuals.
Indeed, the bosses of many of Vietnam's
largest investment firms today are the friends and
family of the prime minister. His daughter, Nguyen
Thanh Phuong, is the founder and chairwoman of
VietCapital Asset Management. The prime minister's
son-in-law, Henry Nguyen, is the head of IDG
Ventures Vietnam, another large private equity
fund.
Given the level of corruption in
Vietnam, it is not unreasonable to believe that
politically favored investors would have
significant advantages in any equitization deal.
As demonstrated by the Vinashin saga, there are
currently no checks and balances. (Legal scholar
Cu Huy Ha Vu, a vocal critic of the prime minister
who even lodged a lawsuit against Dung, is
currently in jail for so-called anti-state
propaganda.)
A developing country surely
requires talented and successful businesspeople,
including those who are related to political
leaders. What Vietnam can do without are
Russian-style oligarchs or the crony capitalism
that contributed to the 1997-98 Asian financial
crisis.
Ultimately, what Vietnam sorely
needs is equal doses of fundamental economic and
political reforms. Only by leveling the economic
playing field, ensuring transparency through a
free media, and generating democratic reforms and
accountability, can there be no more Vinashins.
Duy Hoang is a US-based leader
of Viet Tan, a pro-democracy, unsanctioned
political party active in Vietnam. He was formerly
a principle financial officer at the International
Finance Corporation responsible for local currency
financing in Vietnam.
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