Southeast Asia’s Economic Poster Child Is Stalling

How the Communist Party is fiddling while Vietnam burns.

BY BEN BLAND | NOVEMBER 20, 2012

"Long live the glorious Communist Party of Vietnam," proclaims one of the many red-and-yellow official banners that loom over central Hanoi.

Like citizens of other one-party states, most Vietnamese have developed a handy ability to block out propaganda as they buzz through the streets on their ubiquitous scooters in search of subsistence, stability, or greater riches. "Is the Party really attempting to send a message to the people, or merely trying to reassure itself?" quips one Vietnamese academic, unwilling, like most in this police state, to speak openly about the future of the country's self-appointed rulers.

Vietnam's leaders have good reason to be nervous these days. After an extended period of rapid economic growth (above 7 percent per year) that ended in 2008, the economy has been floundering, beset by inflationary bubbles, large outflows of capital, the collapse of two major state-owned companies, and a crippling build-up of bad debt in the banking sector.

In the headlong rush to invest in Vietnam as it prepared to join the World Trade Organization in 2007, foreigners overlooked structural weaknesses such as widespread corruption, the clunky but politically powerful state-owned sector, and a dearth of investment in infrastructure, health, and education. With most economists forecasting that Vietnam will struggle to grow much more than five percent in the near future -- hardly fast enough to absorb the young people entering the labor force -- no one is ignoring these difficulties now. Indeed, the timing of the slowdown could hardly be worse: Other Southeast Asian emerging-market economies, including Indonesia and the Philippines, appear to have sharpened their acts, while Burma has peeked from the shadows in search of connection to the global economy after decades of isolation and stagnation.

Everyone, from government advisers to foreign investors, knows what it would take to get the economy back on the fast track. Hanoi must stop providing, monopoly licenses, cheap credit, and other privileges to state-owned companies and their private-sector cronies. The banking sector must be recapitalized and given sufficient incentives to channel capital to enterprises with the best prospects. And the government must get serious about preventing corruption, which has a synergistic relationship with all the other ills. The catch is that this would require more than technocratic tuning of policies, and an atavistic, secretive Communist Party is hardly a promising vehicle for such reform.

Vietnam's chattering classes (and a growing number of highly critical, if highly anonymous, bloggers), have laid much of the blame for the country's woes at the door of Prime Minister Nguyen Tan Dung. Critics inside the Party, foreign diplomats, and academics all argue that Dung amassed unprecedented power in his own office, overturning a consensus-based approach to governing in the Politburo, the Party's 14-member top leadership body. More importantly, they contend that he used his excessive influence to support cronies and to drive the development of the powerful state-owned corporations and banks that have frittered away vast sums and served as a drag on growth.

When the Party's central committee recently met behind closed doors (as always) to thrash out a way forward, there was much speculation (or wishful thinking) that Dung would be deposed. But in the end, the Party opted for a classic "muddle through" solution. It criticized the Politburo and, in particular, "one comrade in the Politburo" -- widely rumored to be Dung, for mismanaging the economy. But it opted not to discipline them, lest "hostile forces" use the occasion to "distort and sabotage the country."

While senior Party members implicitly acknowledged the threat to its survival from poor economic performance, rampant corruption, and a surge in land and labor disputes, they clearly felt that the threat posed by accountability was greater. It is little wonder, then, that as the economy has struggled and social tensions have increased, Vietnam's powerful Ministry of Public Security has stepped up its crackdown on dissent. The latest among dozens to be arrested or jailed this year on catch-all charges of "propaganda against the state" are two songwriters and a bookish student, pictured on blogs hugging a teddy bear.

In the run-up to joining the World Trade Organization in 2007, Vietnam was on its best behavior when it came to human rights, persuading U.S. diplomats and others that it was committed to upholding freedom of speech and religion more seriously. But according to those same U.S. diplomats, the bloom is off the rose; they are now reluctantly chiding a Vietnam they have been keen to court as part of America's "pivot" back to Asia to counter-balance a rising China.

The crackdown hasn't been limited to political boat-rockers. Vietnamese authorities have been busy investigating the heads of state companies and banks who are widely blamed for Vietnam's economic woes. Among those accused or convicted: executives from Vinashin and Vinalines, the two giant state-owned shipping companies that collapsed after amassing billions of dollars in debt; Nguyen Duc Kien, the founder of Asia Commercial Bank (Vietnam's largest private bank) and one of the country's most prominent tycoons; and Tran Xuan Gia, a former investment minister and chairman of the aforementioned ACB. 

The wide range and high level of the people targeted has sent shockwaves through the business community in Vietnam, domestic and foreign. Kickbacks, bribes, and fraudulent accounting are systemic in Vietnam, and not just among domestically-owned companies. Indeed, as many of those arrested on suspicion of economic crimes have disappeared from view, and rumors swirl about who could be next, some senior executives have felt compelled to appear in public just to prove that they haven't been caught in the net.

Keen to revitalize Vietnam's image as a successful emerging market, some foreign investors and international donors have asserted that these arrests are a reassuring sign that the Party is trying to get its house in order. But that's a stretch: As the British political scientist Martin Gainsborough (who's written extensively on the country), has argued, crackdowns on corruption in Vietnam are typically related to infighting within a system that is driven more by patronage than policy.

China has been facing similar imperatives to fight corruption and restructure its economy. But, setting aside the intrigues surrounding Bo Xilai and the recent outcry over the reported wealth of other top leaders, China's Communists have proved far more adept at re-inventing themselves for the modern era than their Vietnamese comrades.

Richard McGregor, the former Beijing bureau chief for the Financial Times, has concluded that the Chinese Communist Party has morphed into a large, powerful Ivy League-style networking club for those who want to get ahead. In Vietnam, by contrast, the party and the government are hemorrhaging their best assets. Young people have been quitting by the thousands, frustrated by the low salaries and the old-fashioned hierarchy. Real ideology, as opposed to vapid slogans, is notably absent in Vietnam today.

Many observers like to argue that Vietnamese officials have a unique ability to muddle through without facing up to systemic crises -- a talent that has been found lacking in almost every other transition country, from Indonesia to Argentina. But this reliance on improvisation seems to have become part of the problem. "The Party displays an extraordinary ability to adapt, but has tended to react to challenges [only] when they came," wrote Tuong Vu, a political scientist at the University of Oregon. "This reactive mentality has not helped the party to stem corruption and decay, which now reach the top level." 

In contrast to nearby Burma, which has been freeing political prisoners and starting to implement overdue economic and political reforms, Vietnam's leaders appear to be trying to turn back the clock in hopes of shoring up their power. Over the last year, they have introduced new restrictions on imports and foreign workers, and are finalizing regulations to increase state control of the Internet and to reassert Soviet-style price controls.

The vast scale of the government's repressive apparatus probably assures the Party its grip on power for many years to come. But without a radical shake-up, the Party's political legitimacy will continue to ebb and the country's great economic potential -- only glimpsed to date -- will remain under wraps. Even reform-minded, Western-influenced officials feel caught in a bind. "We need a major crisis if the country is to move forward," says one mid-ranking economic official. "But we're scared about what will happen in such a situation."

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