In the late 1980s, Vietnam was a major food importer, suffering hyperinflation, and largely isolated from world markets. Since then, things have changed rapidly, as Adam Fforde explains.

There is no doubt that Vietnam remains a poor country. Its per capita GDP is around US$ 400, and around half the population live on less than $100 a year. But economic growth has been consistent throughout the 1990s – averaging 7.6% – and stood at almost 7% in 2000. From being a net food importer, the country is now one of the largest rice exporters in the world. Poverty seems to be falling and incomes growing. Population growth, at 1.3%, is heading in the right direction. In general, the picture is one of relatively good social and economic performance. Yet in 1975, Vietnam was devastated by war, heavily dependent on aid, and reunited under a hardline Communist government. So how did we get from there to here?

From central planning to market economy

Vietnam’s transition is explained in two quite different ways. Amongst country specialists, the dominant view stresses the importance of ‘bottom-up’ forces. Here, if we look at the role played by markets in the north of the country before reunification in 1975, we find that, despite a veneer of hard-line Stalinism, the system was much lighter than it could have been. Then, as Vietnam moved closer to the Soviet Union in the late 1970s, foreign aid from China and the West fell away sharply, and we see elements of the planned economy spontaneously ‘fence-breaking’: buying and selling products as farmers started to abandon their cooperatives.

By January 1981, various partial reforms – which came far earlier than in China or the Soviet Union – permitted all state enterprises to trade on markets, and Pandora’s box was opened. Commerce gathered strength, both in the south and north, and allied with Party reformists and others to push through acceptance of a shift to a market economy at the 1986 Sixth Party Congress. When the Soviet bloc collapsed and Soviet aid was lost in 1988-90, central planning euthanased, and an economy emerged. Of course, the story is more complicated than that, but in this way of explaining change, policy was not the main cause of it. Instead, the liberalisation was the outcome of interaction between economic incentives and the adaptive politics of both the Vietnamese Communist Party and the general population.

This explanation differs from the view of other observers, especially those in the Bretton Woods institutions, who started to have significant involvement in policy discussions in the early 1990s. Their assumption is that policy determined change: in essence, that Vietnam’s leaders “woke up” to the realisation that central planning “did not work”. This, of course, ignores the politics of it all, the workings of the real economy, and also the realities of policy both in terms of its formation and whether it actually had real effects.

Growth in the 1990s

Through the 1990s, markets for land, labour and capital began to emerge in Vietnam. This, in conjunction with a rapide increase in exports and high levels of inward foreign investment, helped drive steady growth. By the end of the decade, however, as private businesses started to grow rather fast, forces of supply and demand largely determined access to factors of production. Importantly, apart from the less densely-populated Mekong delta and the coffee-growing central highlands, land access was spread evenly, due to its origins in processes of de-collectivisation, where farming families got most of the land. This had a profound effect upon the society, reducing risk for internal migrants and offering ‘return’ options to workers in the new factories, as well as contributing to fairly rapid rural economic growth.

Also, by the early 1990s, the state’s fiscal crisis was over. A new tax base was created, helped by early creation of a Treasury system, which can and does permit fiscal operations deep in the rural areas. Reforms to the bank system also created a deposit base. A high proportion of deposits (around half) are in foreign currencies, and pay rates of interest close to those on world markets; generally, they are seen as secure.

In the early 1990s, the government tended to use these resources to support state businesses. At the same time, small private businesses failed to grow much, which was unusual by regional standards. Some argue that this was due to poor policies, and the Party certainly did not yet really support this sector. Others, though, point to surveys showing that this was less important than high levels of competition from imports and the time needed to build up capital and expertise when capital markets were also slow to grow. Chickens came home to roost in the mid 1990s with many bankruptcies and major evidence of corruption. By 1996 the large inflows of foreign direct investment (FDI) of the early 1990s were starting to fall off, and a balance of payments crisis was looming. The Bretton Woods institutions looked forward to conditionality and rapid privatisation. With the 1997 Asian Crisis, however, this was avoided. Exports were re-oriented to new markets, greater efficiency was gained from use of state credits, imports were curbed through administrative means, and, intriguingly, increased disbursements of bilateral aid largely compensated for reductions in FDI inflows.

As FDI projects came on stream in the late 1990s, and as private businesses now emerged, exports growth has been strong.

Puzzles and surprises

When Saigon fell in 1975, nobody expected that all this would happen – rather, analysts expected rapid Stalinist industrialisation and growth of military power. The emergence of a market economy in 1989-90, and the relative success of the late 1990s, was also something of a surprise. Solving this puzzle requires two things: first, re-examination of how we understand such countries; second, realising that change processes involve, not just policy, but politics and social transformations that have their own dynamic. Often, positive change took place despite policy; often, it could only take place if policy was supportive. Neither of these sits well with the ways in which we often understand development and development policy.

Lessons and challenges

Vietnam has an unusual history, a particular geographical situation, and a distinct world ‘image’. The country has tended to develop Vietnamese solutions to its problems, and these are of their nature local rather than general. But the situation raises a number of points for discussion.

For one thing, the Vietnamese experience illustrates how valuable political adaptation and continuity is. This means that mistakes at all levels can be corrected sooner rather than later, and state and societal measures adopted to deal with the negative consequences of change. Notions of ‘top-down’ change tend to require a politics that acts against this, and should therefore be avoided.

Next, we can see in Vietnam the operation of certain “universal logics”. The most important of these echo major events in other contexts, such as in European history:

• The notion that the state should regulate its internal and external relations in ways that clarify boundaries, rather than, through corruption, muddle them;
• The dynamic and positive value of private property when it operates under competitive conditions;
• The great difficulties that arise in rationalising state intervention;
• The extreme difficulties caused by development ‘models’, whether in the area of the high levels of competition from subsidisation of export-oriented growth that a latecomer like Vietnam faces in world markets, or in the ways in which state practices and policies are to be devised.
  

And finally, an open press and open discussions about political and policy discussions are extremely useful.
Challenges clearly remain. Corruption is far more dangerous in some areas than in others – for example, decisions over very large investments compared with regularised petty payments to local officials with low salaries. This is an issue that needs to be dealt with. Probably the central challenge facing the Vietnamese, though, is to develop a commercial base that is competitive without the subsidies and support that are enjoyed by so many other export-oriented countries, that the Vietnamese government, being far poorer, cannot match. Whether this happens or not depends upon both state and society. Yet, going by the performance data, outcomes so far seem good.

Adam Fforde is a development economist and Senior Fellow, Southeast Asian Studies Programme at the National University of Singapore. Author of a number of books on Vietnam, he has worked and studied at length in the country.

Image: Rice paddy workers © Panos Pictures

Image: Vietnamese shops © Clare Payne