Friday, January 7, 2011

Vietnam’s Troubled Economy

Steady as she staggers
Rulers pass up the chance to deal with mounting economic problems

ALL too frequently Vietnam’s capital is plagued by power blackouts. Hotel lifts get stuck, and even the espresso machines in Hanoi’s Parisian-style cafés splutter to a halt. Many thought this fast-developing country had left such symptoms behind. Yet the economy is now straining, and often failing, to keep up with the ambitious growth targets set by Vietnam’s Communist bosses. Inflation is rising; the budget is in deficit; the currency is falling; and people are rushing to turn their savings into dollars or gold.

Decisive action is called for, but is unlikely to come from the Communist Party’s showcase congress, its 11th, later this month. As well as a misfiring economy, the list of problems includes official corruption, unpopular land grabs, environmental damage and, as ever, a lack of political transparency. Little change in policy is expected, nor even in personnel, apart from a polite game of musical chairs at the very top. Earlier hopes that a cohort of reform-minded apparatchiks might replace an older, more staid generation have now been disappointed.

Even the prime minister, Nguyen Tan Dung, may stay in office, after speculation that he would take the rap for the biggest mishap, the collapse of Vinashin, the giant state-owned shipbuilder. Last year the sprawling empire imploded with debts of $4.5 billion. In December Vinashin defaulted on a loan to international creditors and it has been forced to go cap in hand to the government to pay its wage bill.

To critics of Vietnam’s policies, the collapse of Vinashin was a vivid illustration of the perils of relying on state-owned enterprises (SOEs) to provide the impetus for economic growth and modernisation. Yet according to congress documents which have already been agreed upon, the SOEs will continue to play the economy’s “leading role”, as they always have done. One expert on Vietnam, David Koh of the Institute of South-East Asian Studies in Singapore, says that, away from the party congress, the government has been taking some action. It recently issued directives that put new restrictions on how SOEs are allowed to operate, particularly in terms of how much they may diversify away from their core businesses. But commerce in Vietnam is highly bureaucratic. It will take the state enterprises a long time to respond to these directives, if indeed they ever do. Meanwhile, who is to say that the enterprises are in the right business to start with?

Such conservatism will make investors fret. The problems of the SOEs explain much of Vietnam’s weakening macroeconomic outlook. If the government does not take the SOEs by the scruff of the neck, it will be able to do little else. The SOEs need to be set free, but for that the Communists would have to give up political control of the economy. That is out of the question. So these corrupt and inefficient behemoths continue to gobble up and then squander a good share of the foreign investment and export earnings that come into the country. Meanwhile, the government is blowing its budget. The fiscal deficit rose to 7.4% of GDP last year, breaching the target of 6.2%.

The country now also runs big trade and current-account deficits, as it relies too heavily on exporting low-value stuff like processed seafood and rice. These deficits, added to inflation, which rose to 11.8% last year, have put the currency under pressure. Three times in the past 14 months the government has been forced to devalue, hence the rush among Vietnamese to hoard dollars and gold as they lose faith in the dong. The government has pledged to improve all these gloomy figures. Yet chasing growth rates of 7% a year or more without commensurate structural change will only generate more of them.

The Economist

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