Vietnam’s journey towards economic liberalisation is only beginning. But even for the country’s old-school captain the direction of travel seems certain
Chinese parlance often needs a pinch of interpretation. When Beijing says its sovereignty over disputed islands in the South China Sea is a “core interest”, for instance, it means it's pretty damn closed to negotiation. But sometimes official communication requires no decryption. “The US act severely violated Chinese law, sabotaged the peace and undermined the region's stability.” This is how China reacted to the sending of American ships near said islands this weekend. Clearly it sees limited merit in Washington’s efforts at challenging “excessive maritime claims”.
The US considers the South China Sea a vital trade artery. As an American think-tank puts it, Washington wants to deter Beijing from making it a de-facto "Chinese lake”. But nations along the reef, who also claim some of the islands as theirs, have more at stake. And sometimes disputes go beyond words: in May 2014, when China parked a massive oil drilling platform off the Vietnamese coast, Hanoi responded by sending fishing boats. Beijing then used water cannons, causing some to capsize. Hanoi expressed outrage. In Vietnam anti-Chinese riots erupted.
This episode was bad enough – but there probably won’t be a sequel too soon. Not because China’s suddenly decided to act less provocatively: about a week ago it sent another huge rig in the same waters. But the tide may be turning on the Vietnamese side. Last week the country’s one and unique party elected its secretary general – and the man is known for wanting Vietnam and China to become better pals.
The appointment of Trong Tan Sang was not a given. In the build-up to the Communist Party’s five-yearly congress, Nguyen Tan Dung, prime minister, had mounted a serious bid for the country’s top job. Soon to step down after serving two consecutive terms, he was angling for a nice promotion prior to retirement. He had rights to be hopeful: his patronage network is extensive and business types like his support for freer markets. Many Vietnamese also credit him for improving relations with the US.
Reformers must be disappointed that Trong, a 70-year-old party apparatchik from a conservative faction, ended up winning instead. The past decade has seen Vietnam record remarkable if uneven economic progress: a number of unwieldy state-owned groups, like garment maker Vinatex, have been restructured; revised enterprise laws have allowed a generation of start-ups to thrive. Strong domestic consumption, booming exports and solid foreign investment have propelled growth to nearly 7 percent. Inflation has fallen from 23 percent in 2011 to less than 2 percent last month.
Analysts worry that the pace of liberalisation will now slow down, endangering the economic miracle. Trong is an old-style ideologue; his recently reaffirmed view that “socialism and the state must remain at the heart of the economy” casts doubts over his reform drive. Most of the people being handed key jobs in last week’s reshuffle are fellow conservatives.
Fortunately they probably have little choice but to stick to the current course. Vietnamese leaders understand that fast growth and rising living standards are needed to guarantee the party’s survival. As fresh economic challenges arise, they'll have to walk a fine line. The Vietnamese currency, the stability of which is necessary to undercut inflation, is coming under pressure: the dong has faced nominal devaluations of 1-2 percent in recent months, despite being pegged to the dollar. A slide in international tourism and a sudden boom in imports – and their effect on the trade balance – seem to have been the cause.
The government could try and stem the fall-off in tourism through measures like streamlining customs procedures and cutting visa fees. But putting a break on imports will be trickier. Despite its bright short-term prospects, Vietnam remains faced with a fundamental problem: its industry, very reliant on cheap labour, lacks both breadth and depth. Even if the country imposes fresh taxes to deter purchases of foreign luxury goods, its workshops will continue to import the machinery and intermediary goods they're not able to produce.
In order to make its industry more competitive, Vietnam needs to further reform its bloated, flabby state-owned enterprises. These continue to gobble up the lion's share of bank loans – saddling lenders with bad debt – and receive preferential treatment that creates inefficiencies. Efforts at selling off public assets have been too timid: the privatisation of airports, initiated last week, will see the state retain a 75 percent stake. Last year’s abolition of a 49 percent foreign ownership cap was welcome – but exemptions on crucial sectors like banking limit its impact. In order to make its young and numerous workforce a durable advantage – 60 percent of the population is under 35 – the country also needs to put in place sustainable safety nets.
If economics fail to convince Vietnam’s new leaders that further modernisation is needed, then politics and diplomacy probably will. Last year the country agreed to become a member of the Trans Pacific Partnership (TPP), an American-led free trade bloc that could boost Vietnam’s exports by 30 percent by 2030 (according to the World Bank). Opening up the economy and levelling the domestic playing field will be a pre-requisite for the nation to become a fully fledged member. Other free trade agreements Hanoi has signed with the EU, Korea and Russia will generate similar pressures.
The old guard is back in command aboard the Communist Party ship, and under its watch Vietnam probably won’t be travelling at light speed. But at least the country now seems securely set on the right orbit.