Vietnam: the beginning of another economic transformation?

Consensus-based policy making is a salient feature of Vietnam, where important decisions are collectively made.

Consensus is needed not only for the formulation of a reform vision but also for the elaboration and implementation of this vision. Doi Moi, the most successful economic reform to date, would certainly not have occurred in 1986 if no consensus were reached at the VI Party Congress.

A series of events in 2011 indicate that a vital consensus for the acceleration of economic reforms has been attained. Vietnam’s first major economic event for 2011 was the Communist Party Congress held in January, which set out Vietnam’s development strategy for the next 10 years. Like its predecessor, the 2011–2020 Strategy adopted at the Congress places great emphasis on rapid economic growth, with a target of 7–8 per cent average annual GDP growth over the next decade. The strategy puts increased attention on the quality of growth, including targets on macroeconomic stability and requirements for clarifying the role of the state in a market economy. Nevertheless, the ambitious quantitative growth target suggests a continuation rather than a fundamental break with previous strategies.

But events took a significant turn just a few weeks after the Congress. In late February the government issued Resolution 11, aiming to restore Vietnam’s macroeconomic stability and cool down an overheated economy. Specifically, the resolution sought to address high levels of inflation, tension in the foreign exchange market, high nominal interest rates and declining foreign exchange reserves. The implementation of Resolution 11 remained a top priority in the government’s agenda throughout 2011, and reviews of its implementation continue to take place regularly. Resolution 11 represents a decisive switch from growth to stability. For the first time, there is an official government policy document that completely neglects the term ‘growth’ in its targets. Its longevity signals a significant change in the mindset of Vietnam’s policy makers.

Signs of a radical shift in economic strategy became more evident when the new administration came into power in July. Several workshops and focus group discussions were held to facilitate policy dialogues regarding the restructuring of Vietnam’s economy to improve efficiency and competitiveness. From this process, consensus was reached on Vietnam’s strategic development priorities, identifying major areas for reform in the coming years. This consensus argues for radical transformation in three areas: state-owned enterprises (SOEs), the financial sector and public investment. The need for reform was also officially documented in the Socio-Economic Development Plan (SEDP) for the period 2011–2015, which was approved by the National Assembly in November.

Following these events, Vietnam recorded good economic growth in 2011, with an estimated rate of GDP growth at 5.8 per cent. Exports performed very well, increasing by 33 per cent despite a significant decline in global demand. This robust GDP and export growth prevailed over a significant contraction in fiscal and monetary policy, and Vietnam’s strong export performance contributed notably to the reduction of trade deficits and the foreign exchange market’s stabilisation. The rate of inflation also slowed in the last four months, largely due to the implementation of Resolution 11.

The adoption of Resolution 11 and the SEDP in particular indicate that Vietnam has achieved consensus on accelerating market-based reforms in ‘difficult’ reform areas, namely SOEs, the financial sector and public investment. The recent release of an ambitious proposal for SOE reform through to 2020, developed by the National Steering Committee for Enterprise Reform and Development, provides further evidence of this consensus. According to the proposal, about 44 per cent of the remaining 1300 full SOEs will be equitised in the next four years.

In this context, 2012 will be a very challenging year for Vietnam. The country still has to deal with an overheating economy, and inflationary pressures remain a genuine threat to the country’s economic stability. The banking sector is vulnerable, with a rising share of non-performing loans resulting from a long period of extraordinary credit growth. Challenges also lie in transforming the SEDP’s vision into specific actions. The plan calls for a fundamental restructuring of the economy, and while many agree on the vision of the reform, the formulation of a feasible action plan will take time, owing to the likelihood of resistance from economically strong interest groups.

The Vietnamese government is developing a detailed action plan for its ambitious restructuring strategy. It is expected that this plan will be approved by the end of the first quarter of 2012. The timeframe looks very ambitious as consensus for detailed actions still needs to be built. But there is a significant factor which may speed up the implementation process: while the market economy was an unfamiliar concept in previous times, it now receives strong support from the vast majority of Vietnamese people.

By Dr Doan Hong Quang Senior Economist at the Poverty Reduction and Economic Management Unit, World Bank, Vietnam. East Asia Forum