Asia | Strong
tailwind, no rudder
Few countries are better placed
than Vietnam to get rich
Yet political paralysis could slow it down
Jan 23rd 2024 | HANOI
Abrief but revealing panic struck Vietnam this month.
On January 12th the country’s 79-year-old leader, Nguyen Phu Trong, failed to
meet the visiting president of Indonesia. Mr Trong’s name was removed from the
official schedule without explanation. Rumours spread that he was dead. For
three days noodle shops raged with speculation about who his successor might
be. Would it be someone corrupt? Or more pro-China? The ruling Communist Party,
a secretive bunch, revealed nothing.
Then, on January 15th, official media showed a frail Mr
Trong attending a humdrum session of the legislature in Hanoi, as if to holler
“I’m not dead!” like a Monty Python plague victim. The public may never know
whether it was sickness or something else that made the Communist Party chief
disappear from view. But it was unsurprising that his absence should scupper a
meeting with a global leader. Everyone wants to be Vietnam’s friend these days.
This is partly for geopolitical reasons. Vietnam, a country
of 100m, has shrewdly positioned itself halfway between China and America,
prompting both superpowers to woo it. In 2023 Vietnam was the only country
honoured with state visits from both Joe Biden and Xi Jinping. In September it
upgraded its relationship with America to a “comprehensive strategic
partnership”, putting it on the same level as Russia and China.
Although Vietnam’s ruling party has much in common with
China’s, ordinary Vietnamese are deeply suspicious of their giant, bullying
neighbour. China unlawfully claims parts of the South China Sea that belong to
Vietnam; its ships harass Vietnamese fishermen. An Asian Barometer poll found
that only 25% of Vietnamese have a positive view of China, whereas 85% have a
positive view of America. The Biden administration, eager to deter Chinese
expansion, has supplied Vietnam with coastguard ships to protect its waters.
America would love to offer more help, but Vietnam rules out a formal alliance.
The country’s growing geopolitical relevance is based on its
strong economic performance, as well as geography. When Vietnam started opening
up in the mid-1980s, annual income per head was half that of Kenya. On the back
of pragmatic and increasingly pro-business policies, it has since grown sixfold
to $3,700. Today, the government’s ambition to turn Vietnam into a rich country
by 2045 is plausible. Economically, Vietnam has probably never faced a more
benign global environment.
Geopolitics is driving investment towards it, as America
seeks to decouple from China and private firms of all nationalities sense which
way the wind is blowing. Most manufacturers cannot simply pull out of China.
But to mitigate the cost of current and future trade barriers, they can hedge
their bets by making things elsewhere as well (a strategy known as “China +
1”). Many also hope to reduce their exposure to arbitrary policies in
China—memories of its painful zero-covid lockdowns remain fresh. “The pandemic…showed
us we were too concentrated in China,” notes a foreign manufacturer in Ho Chi
Minh city.
Firms that export to the West are shifting production to
Vietnam. Brands such as Samsung and Apple are making gadgets there. Suppliers,
including Chinese ones, are clustering around them. “Our customers insisted we
move to Vietnam [for geopolitical reasons],” says the boss of an electronics
firm. “But we were already thinking about it, since labour costs in China were
rising and young Chinese no longer want to work in factories.” In the first
three quarters of 2023 inflows of foreign direct investment to Vietnam as a
share of gdp were twice as large as in Indonesia, the Philippines or
Thailand, reckons clsa, a bank (see chart).
If the world keeps fragmenting into rival trading blocs, the
global economy could be seriously damaged, reckons the imf. And given
the high share of Chinese components in many products labelled “Made in
Vietnam”, it is unclear how much America is really reducing its dependence on
China by moving supply chains there. But so far the shift has been good for
Vietnam.
gdp growth has been bumpy: it slumped during the
pandemic, bounced back to 8% in 2022, fell to 4.7% in 2023 amid a credit
crisis, and is expected to recover to 5.8% this year. Still, Vietnam is well
placed to keep attracting investment, argues Tony Nafte of clsa. It is
more open to commerce than its South-East Asian peers. Trade in 2022 was
equivalent to a whopping 186% of its gdp, versus 45% in Indonesia, 72% in
the Philippines and 134% in Thailand.
image: the economist
Vietnam’s plentiful, young manufacturing workers are
diligent, reasonably well educated and half as expensive as those in Chinese
coastal areas. Vietnam, unlike Indonesia and the Philippines at times, has no
problem with Islamist terrorism, notes a factory boss. It offers fat incentives
to foreign investors, both explicit (tax breaks, cheap land) and de facto
(high-tech workers were among the first to get covid vaccines). And although it
is a one-party state like China, it is friendlier. Expatriates in Beijing
complain of a climate of fear; those in Vietnam seem relaxed.
Yet the country has a big political problem: its government
is paralysed by indecision. Mr Trong must step down by 2026. As the panic over
his rumoured demise reminded everyone, his succession is unclear. Not knowing
who they will have to please in a couple of years, officials are reluctant to
make major decisions.
A “blazing furnace” crackdown on corruption, lit by Mr
Trong, has made them even jumpier. Hundreds have been arrested, and last year
the president (who is number three in the hierarchy) was forced to resign.
Lesser officials have been loth to approve big projects in case they turn out
to be tainted. In the coming reshuffle, any whiff of scandal could be used to
wreck their careers, or worse. So the safest thing, many have concluded, is to
do nothing.
Consider energy. Vietnam has done a fine job of connecting
homes to the grid (nearly 100% of rural ones have electricity, up from 14% in
1993). But as industry grows, so does demand for power. The supply can be
unreliable: power cuts last year were “terrible”, says a manufacturing boss.
And foreign investors increasingly want to tell customers
and shareholders that they use clean energy. Here, Vietnam is struggling. It
depends heavily on coal, which makes the air in Hanoi worse than Shanghai’s. A
push to install more solar panels has helped a bit, but a promise to hit
net-zero carbon emissions by 2050 looks fanciful unless the country harvests
the wind off its blustery, 3,000km-long coast.
That may happen, but it is taking ages. The process for
granting approvals to survey the seabed for suitable spots is “extremely slow”,
complains a wind-power executive, adding that officials are “cautious on making
any decisions now”. Little of the legal framework for erecting turbines or
selling power to the grid is clear, he sighs. The relevant ministries barely
talk to each other, and everything must go through the state-owned power
supplier, evn, which is as nimble as Jabba the Hutt. Environmentalists gripe
that vested interests (ie, bigwigs who have invested in coal) are blocking the
country’s energy transition. Some of those environmentalists have been jailed,
typically for “tax fraud”.
Some in the ruling party, such as the prime minister, Pham
Minh Chinh, understand how gravely Vietnam is imperilled by global warming. The
delta of the Mekong river, which covers much of south-western Vietnam, is
sinking even as sea levels rise, meaning the sea could ultimately swallow it.
Pragmatic officials argue that if Vietnam wants to be an
industrial powerhouse it should bet on the clean technologies of the future,
not the dirty ones that much of the world is trying to scrap. Hence the
government’s implicit backing of VinFast, the ambitious but loss-making
electric-vehicle arm of its biggest private conglomerate. But
faster reform is needed if Vietnam is to meet its climate pledges or prepare
for a warmer world.
Vietnam is heavily dependent on trade, and the global
business environment is changing fast, so policymakers need to keep up.
Sometimes, they do not. Vietnam’s policy of giving tax breaks to foreign
investors, for example, has become less of an inducement since the oecd, a
club of rich countries, agreed to apply a global minimum corporate-tax rate of
15%. Multinationals that pay little or nothing in Vietnam may be hit with
higher charges elsewhere, warns the manager of a foreign manufacturer in Ho Chi
Minh city.
Rather than offer tax breaks the government should simplify
the rules, he says. “The opportunities are enormous but red tape is the biggest
problem,” agrees Bruno Jaspaert, the boss of Deep C, an industrial zone in the
city of Haiphong. Rules are often contradictory; some projects need the
approval of a dozen ministries. More infrastructure would help. Public
transport is still poor, so traffic in big cities is slow.
Despite the crackdown, corruption still hurts business. One
foreign entrepreneur grumbles about having to play by two sets of rules: the
formal ones, such as paying taxes and ensuring his warehouse doesn’t catch
fire, and the informal ones, such as paying off local officials so they don’t
hogtie him with inspections.
Vietnam has risen from dire poverty to modest prosperity in
a single generation. But it needs to keep on reforming. Geopolitical winds
can change. Rivals can grow more competitive. Vietnam is greying fast: its
working-age population will shrink after 2038, by one estimate. And its
citizens may tire of their ruling party if living standards do not keep rising
rapidly. Regimes, like leaders, do not last forever.
https://www.economist.com/asia/2024/01/23/few-countries-are-better-placed-than-vietnam-to-get-rich
