Is Reform Alive In Vietnam?

To consolidate power, Hanoi is reining in the private sector

When Vietnamese government officials paid a visit to the Ho Chi Minh City offices of Peregrine Capital Vietnam on May 30, it wasn't a courtesy call. They seized armloads of documents ranging from computer manuals to financial records. And they accused the local branch of the Hong Kong-based investment house, which distributes Johnson & Johnson products and sells Mercedes-Benz cars in Vietnam, of setting up illegal subsidiaries. No official charges have been brought, but the incident has sent a chill through the business community.

On the eve of the Communist Party Congress beginning on June 28, the raid on Peregrine is one of the strongest signs yet of Hanoi's resolve to wrest back central control over the economy, rein in the private sector, and check foreign cultural influences. Ten years after launching the economic reforms known as doi moi, or "renovation," party leaders are intent on showing investors who's boss. No new economic reforms have been instituted for 18 months, and in a key report released prior to the congress, the party vowed not to let the country "stray onto the capitalist path." To bolster the forces of central control, it also recommended increasing the share of the state sector from 40% of gross domestic product to 60% in the next 25 years.

Outside investors are turning increasingly downbeat, fearing hardliners in the government and the party will jeopardize growth. "Vietnam has the potential to be a new economic tiger, but now the goal of the party is to maintain and consolidate power," says Hal Fiske, a corporate attorney with the firm Russin & Vecchi in Ho Chi Minh City.

That is bound to hurt efforts to turn around the nation's state sector. Few of Vietnam's 6,000 state-owned companies would survive without preferential access to land and credit, not to mention the subsidies they receive. Two star state-owned companies, Vietnam Airlines and Vietnam Posts & Telecommunications, owe their success more to their monopoly status than to any management savvy. As Vietnam is forced to dismantle its protective trade barriers by 2006, as part of membership in the Association of South East Asian Nations (ASEAN), these companies will be forced to become competitive, but the government shows few signs of letting that happen soon.

Analysts say the chill on reform reflects a struggle by party conservatives to regain the upper hand. While doi moi has unleashed an unprecedented period of growth, the reforms also have created an emerging class of rich entrepreneurs, whom ideologues see as a threat to their monopoly on power. "If you want growth, you have to allow the private sector to grow," says a European diplomat in Hanoi. "But if you get a strong private sector, it will seek political control."

OFFICIAL APATHY. Another reason the party has stalled on reform is because the economy has performed so well in recent years. Annual GDP growth has averaged more than 8% over the past five years, and the triple-digit inflation of 1989 has been tamed, to below 10%. International donors have pledged more than $4 billion in aid over the next three years, while foreign investors looking for Asia's next boom economy have officially pledged $22 billion since 1989.

But things aren't as rosy as those figures suggest. The investment figures overstate the money actually coming into the country. Of the $22 billion, less than 20% has been disbursed, and investment approvals up to the end of May fell 48% from a year earlier, to just $1.6 billion.

Vietnam could fall victim to a classic trap of reaping the easy gains of a newly opening economy without putting the fundamentals in place for the next stage of growth. A recent report by Peregrine, called "Transition under threat" and unrelated to the police raid, warns that overconfidence or apathy among the country's leaders could threaten the development drive and ultimately send the economy into a tailspin. For example, it sounded the alarm over the surging trade deficit, which last year more than doubled, to $2.3 billion--more than 10% of GDP--and widened a further $1.9 billion in the first five months of this year. Manufacturing accounts for just a tiny portion of exports, and the country needs to invest massively in upgrading its tattered infrastructure and reforming archaic institutions.

GLACIAL PACE. Vietnam's financial sector is particularly ill-equipped to deal with the needs of sustained growth. The government has ambitious plans to raise about $20 billion domestically--roughly equal to the country's current GDP--in the next five years, a goal that most experts think is pie-in-the sky in a country where cashing a check is practically impossible. The majority of Vietnamese remain deeply suspicious of the banking system and prefer to hoard their savings. Privatization could raise some funds, but so far the program has gotten off to a glacial start. The government has only partially sold off six state-owned companies by issuing shares that have raised less than $15 million since the program was launched in 1992.

Perhaps the biggest single risk is that the paranoia over foreigners will discourage outside investors and their desperately needed capital and knowhow. Government leaders, for example, are sounding a call to arms against "peaceful evolution," Hanoi's buzzword for an alleged foreign plot to undermine the Communist system through economic means.

Instead of restrictions, what the country needs is "aggressive reforms," World Bank President James Wolfensohn said during a visit to Hanoi in May. No country has ever achieved rapid industrialization on the back of the state sector, as Vietnam's hardliners would like to do. That's why the Party Congress could be such a defining moment for Vietnam. If the leadership reasserts a dominant role over the economy, rather than spurring it to new levels, Vietnam is one tiger whose roar may never be heard.