Case study: Economic Transformation in Vietnam

Economic Transformation in Vietnam

Vietnam is a country undergoing transformation from a centrally planned socialist economy to a system that is more market orientated. The transformation dates back to 1986, a decade after the end of the Vietnam War that reunited the north and south of the country under Communist rule.

At that time, Vietnam was one of the poorest countries in the world. Per capita income stood at just $100 per person, poverty was endemic, price inflation exceeded 700 percent, and the Communist Party exercised tight control over most forms of economic and political life. To compound matters, Vietnam struggled under a trade embargo imposed by the United States after the end of the Vietnam War.

Recognizing that central planning and government ownership of the means of production were not raising the living standards of the population, in 1986 the Communist Party embarked upon the first of a series of reforms that over the next two decades were to transform much of the economy. Agricultural land was privatized, and state farm collectives were dismantled. As a result, farm productivity surged. Following this, rules restricting the establishment of private enterprises were relaxed. Many price controls were removed.

State-owned enterprises were privatized. Barriers to foreign direct investment were lowered, and Vietnam entered into trade agreements with its neighbors and its old enemy the United States, culminating in the country joining the World Trade Organization in 2007. Today Vietnam is one of the signatories of the Trans Pacific Partnership, a trade agreement that, if ratified, could further liberalize its economy.

The impact of these reforms has been dramatic. Vietnam achieved annual economic growth rates of around 7 percent for the first 20 years of its reform program. Although growth rates fell to 5 percent in the aftermath of the 2008–09 global financial crisis, by 2015 Vietnam was once again achieving growth rates of around 7 percent. Living standards have surged, with GDP per capita on a purchasing parity basis reaching $5,700 in 2014. The country is now a major exporter of textiles and agricultural products, with an expanding electronics sector. State-owned enterprises now only account for 40 percent of total output, down from a near monopoly in 1985. Moreover, with a population approaching a 100 million and an average age of just 30, Vietnam is emerging as a potentially significant market for consumer goods.

For all of this progress, significant problems still remain. The country is too dependent upon exports of commodities, the prices of which can be very volatile. Vietnam's remaining state-owned enterprises are inefficient and burdened with high levels of debt. Rather than let prices be set by market forces, the government has recently reintroduced some price controls. On the political front, the Communist Party has maintained a tight grip on power, even as the economy has transitioned to a market-based system. Vietnam bans all independent political parties, labor unions, and human rights organizations.

Government critics are routinely harassed and can be arrest and detained for long periods without trial. The courts lack independence and are used as a political tool by the Communist Party to punish critics. There is no freedom of assembly or freedom of the press.

To compound matters, corruption is rampant in Vietnam. Transparency International, a nongovernmental organization that evaluates countries based on perceptions of how corrupt they are, ranks Vietnam 112 out of the 167 countries it ranks. Corruption is not a new problem in Vietnam. There is a well-established tradition of public officials selling their influence and favoring their families. However, critics say that the problem was exacerbated by privatization processes that provided opportunities for government officials to appoint themselves and family members as executives of formerly state-owned companies. Although the ruling Communist Party has launched anti-corruption initiatives, these seem to be largely symbolic efforts.

Many observers believe that widespread corruption has a negative impact on new business formation and is hamstringing economic growth

Sources: “Crying over Cheap Milk,” “The Economist, November 21, 2015. “Gold Stars,” The Economist, January 23, 2016; Nick Davis, “Vietnam 40 Years on,” The Guardian, April 22, 2015; Vietnam, CIA Fact Book, 2016; Human Rights Watch, “Vietnam,” World Report 2015