Vietnamese Silicon Valley Network

By Amy Kazmin
Published: January 8 2007 02:00 | Last updated: January 8 2007 02:00
As Communist-ruled Vietnam revels in rapid growth, rising prosperity and a surge in international favour, a Hanoi
museum exhibition is drawing crowds to a remembrance of past rice rationing and material privation. “Hanoi Life
under the Subsidy Economy” portrays the hardships of urban existence between 1975 and 1986, when Hanoi
was still in thrall to Soviet-style central planning and state economic control.
The humble artefacts - old ration books and food coupons, a sweater knitted from scraps, a cherished Sovietmade
pressure cooker and even a rock used to hold a man’s place in a rice queue - evoke the struggle to meet
basic needs. In videos, ordinary Vietnamese recollect the joy of obtaining rice untainted by mould, the power of
Provisions Department officials, covert manual labour to supplement salaries and the longing for a simple fan to
combat Hanoi’s summer heat.
Nguyen Van Huy, director of Vietnam’s Ethnology Museum, says he wanted to convey the indignities of the prereform
period to young Vietnamese - a mobile phone and motor scooter generation coming of age in an economy
growing about 8 per cent a year that is pulling in big foreign investors such as Intel, Nike, Ikea and Canon.
“The young have so much more comfort today - they don’t know what a hard time their parents had,” Mr Huy
says. “But if they come here, they feel their parents’ experiences. Then they respect the past - and they respect
what they have now.”
But while food rationing, collective agriculture and other hardships created by the Marxist economy and the brutal
war with the US have been literally relegated to museum pieces, Vietnam’s rulers have not renounced all aspects
of their orthodox communist ideology.
Even as it joins the World Trade Organisation on Thursday, completing a three decade-long journey to full
integration with the global economic mainstream, Hanoi is formally committed to what it calls a “socialist-oriented
market economy”. What that translates into is preserving a leading role for state-owned enterprises - a goal that
could augur frustration for foreign companies clamouring to provide everything from banking services to
hypermarkets to telecommunications for Vietnam’s youthful, increasingly affluent market of 83m people.
Economists warn that Hanoi’s determination to preserve state dominance in key industries may be a drag on its
quest for prosperity, generate a strong protectionist impulse and stifle the fledgling domestic private sector, which
is already confronted by difficulties in accessing land and credit anda deep official suspicion of privatecapitalists.
But Hanoi’s leaders are undeterred.
“Their model is that the state controls the commanding heights of the economy - and that you can have momand-
pop capitalism that can generate exports and jobs but it shouldn’t detract from the leadership role of the state
in industry,” says Jonathan Pincus, a senior economist at the United Nations in Hanoi. “I don’t think it’s a model
that will take them all the way to being a middle-income country. Either they will slow down or the model will have
to change.”
Vietnam’s current dynamism and potential are indisputable. Its economy is being propelled partly by surging
exports to the US, after a trade deal with Washington dramatically lowered US tariffs on Vietnamese imports.
That bilateral deal, reached in 2000 afterprolonged negotiations, allowed companies such as Nike, Victoria’s
Secretand Disney to capitalise on Vietnam’s most attractive resource: its abundant supply of diligent, motivated
young workers.
American figures show US-Vietnam trade reached $8.1bn (£4.2bn, €6.2bn) in 2006, out of which $7.2bn
represented Vietnamese exports to the US. That compares with two-way trade worth just $1.1bn in 2000, of
which Vietnam’s exports to the US were less than $400m. The export spurt - and the jobs it has generated - is
fuelling a consumer boom. Vietnamese are buying television sets, computers and cameras, going on shopping
trips to nearby Bangkok and on beach holidays. This consumer revolution is expected to power on as affluence
spreads and deepens.
Yet Vietnam is still burdened by the legacies of its old centrally planned, state-controlled economic system. Its
vast, sclerotic bureaucracy has ample discretionary power, yet is often reluctant to take big decisions. The media
are restricted. Universities are moribund. The judicial system is opaque and subject to political interference.
Corruption is rampant. Even after two decades of reform, the economy remains dominated by large and inefficient
state enterprises, which account for 38 per cent of gross domestic product, exert strong anti-competitive pressure
and squander scarce state resources.
WTO accession is supposed to help Hanoi wrestle with these problems, committing it to a long-term programme
of reform, liberalisation and privatisation that will modernise its economy and government, while creating a level
playing field for foreign companies. But the multinational investors flocking to do business in Vietnam may find the
path to profit long and littered with unexpected obstacles, as vested interests use bureaucratic and political tools
to defend their turf and resist change.
“Everyone sees that foreign direct investment is good, bringing capital and management skills,” says Vo Tri
Thanh, a trade policy expert at Hanoi’s Central Institute for Economic Management (CIEM), a government thinktank.
“But some sectors may be more politically sensitive. So it is difficult. Our labour-intensive industries can
benefit from integration and can exploit our comparative advantage. But capital-intensive heavy industries - like
sugar, cement or paper - can lose theirposition.”
In spite of their WTO commitments, Hanoi’s communists are still divided over the extent to which state enterprises
should be subjected to the pressures of market competition - let alone be relinquished. While giving up control of
smaller businesses, the government is simultaneously pumping vast sums of money into some state enterprises,
hoping to create national champions similar to the South Korean chaebol. Sectors targeted include insurance,
minerals, oil, shipping, telecoms and electricity. Hanoi has set up a state holding company - ostensibly along the
lines of Singapore’s Temasek - to manage its investments and maximise returns.
In its pursuit of state-led development, Vietnam is following the path blazed by its powerful neighbour, China,
whose economy been transformed into what some call “capitalism by central committee”, in which the authorities
carefully modulate market forces and direct growth. Many other east Asian countries have also achieved
sustained growth and improved living standards for their people through an ad hoc mix of market reforms, statist
policies and protectionism, often flouting the so-called “Washington consensus”, which pushes more aggressive
privatisation and liberalisation.
Yet economists fret that Hanoi may simply be unable to transform bloated, inefficient and often deeply corrupt
state businesses - which have never operated from a profit motive - into truly competitive companies. Instead, the
risk is that they will suck up valuable capital that could be used more productively by others. State-owned banks,
which account for about 70 per cent of banking system assets, are alreadyburdened with high levels of bad debt
from poorly performing companies.
“These state enterprises are not transparent and are not necessarily disciplined to produce profits,” Mr Pincus
says. “South Korea said to the chaebol, ‘we will give you credit and preferential access to the domestic market,
but you have to prove you are internationally competitive and win in the export market’. But what is the stick they
are going to use to beat big state enterprises in Vietnam? Are they going to cut them off if they don’t make
profits? Are they going to cut off their credit? Where is the discipline of the market going to come from?”
HSBC economists recently observed that Vietnam was already suffering from declining capital efficiency, the
consequence of a poorly managed state investment drive in recent years. While the state’s share of fixed
investment has risen to 52 per cent - up from 43 per cent - during the past decade, its share of economic output
has fallen slightly, reflecting an inefficient use and allocation of capital.
Corruption is one reason for the poor performance. The government’s own CIEM last year estimated that 20 to 40
per cent of all state investment is lost in “leakage and waste”.
Le Dang Doanh, a senior economist and adviser to the Ministry of Planning and Investment, says the Communist
authorities recognise the need to force state enterprises dramatically to raise their game, lest they become a
serious drag on growth and erode Vietnam’s competitiveness. “It is the biggest challenge - and the government
wants to push ahead,” he says. “The problem is, how can they overcome the vested interests?”
It is not just heavy industries that have established privileged positions. In recent years, state enterprises - and
entities including urban and provincial administrations, the military and government ministries - have expanded
into service industries such as telecoms, retail, hotels, resorts and property development. Many of these
operations have murky ownership structures, with some private individuals participating. But nearly all have
politically powerful patrons who may try to protect them as competition intensifies.
Even Vietnam’s appeal for labour-intensive, export-oriented industries is threatened by old mindsets. With WTO
accession, local garment companies are likely to ramp up production, as are makers of furniture, shoes, computer
printers and other manufactured exports. Intel’s plan to build a $1bn semiconductor assembly and testing plant in
Ho Chi Minh City, the former Saigon, could presage more high-technology investments in the future.
Severe infrastructure bottlenecks loom, however, as facilities strain under existing demand. Electricity of Vietnam,
the power monopoly, estimates a 1,700 mega-watt shortfall next year. Ports around Ho Chi Minh City, the
country’s export hub, are already full and new ones are not due to open for three years at the earliest.
While Hanoi has ambitious infrastructural development plans, with a growing role for the private sector, progress
is slow. As causing economic losses to the state is a serious crime - potentially punishable by death - bureaucrats
and state company executives are loath to sign off on big deals lest they later be accused of agreeing to
unfavourable terms.
“If you make the wrong decision you can be up against the wall, so no one makes any decisions and it just goes
up the chain,” says Tony Foster, a Hanoi-based partner for Freshfields Bruckhaus Deringer, the law firm, and a
veteran of many negotiations on infrastructure projects. “It’s a consensus system and consensus is not just
horizontal - it’s vertical. All decisions end up going upwards because people say, ‘I can’t make that decision - I’ve
got to ask the boss’.”
Infrastructure planning is also hindered by non-commercial factors, such as Hanoi’s desire to disperse investment
equally around the country and incumbents’ worries that foreign entrants into the market will show up their own
massive inefficiencies. “The protectionist element is reasonably strong, but nationalism is sometimes a pretext to
cover corruption,” saysMr Foster. “Some of the incumbents have lucrative patches, which they are loath to give
up.”
Privatisation - or what Vietnam calls equitisation - is the prescribed remedy for both the protectionist impulse and
modernising decrepit enterprises. Yet over the past decade, just 12 per cent of total state enterprise capital -
mostly in small companies - has been turned into shares and just half of that has passed into private hands,
mostly to managers and employees of the enterprises. The process is slowed by hesitant decision-making, an
insufficient technical capacity to value large state businesses and continuing ideological resistance.
“Some people still say, ‘if you lose the key factors of production, how can you keep your socialist orientation?’ ”
says the CIEM’s Mr Thanh. “There is consensus on the need for state enterprise reform, but [people see] theway
and the target differently. It’s not easy to change the way of thinking overnight.”
Vietnam is, however, in the throes of an equity market revolution that is changing attitudes. Share values on the
young stock exchange rocketed 144 per cent last year - making it one of the world’s best performing equity
markets - after Merrill Lynch issued a bullish report calling Vietnam a “10-year buy”. While big investment banks
rushed to assist foreign clients eager for exposure to one of Asia’s fastest-growing economies, the report also
spurred heavy local buying.
The market dramatically expanded in size as local companies - mainly small former state enterprises previously
reluctant to be subjected to too much outside scrutiny - rushed to list before Hanoi abolished tax breaks for newly
listed groups at the end of 2006. Market capitalisation of the Ho Chi Minh City stock exchange hit $9bn at the end
of 2006, up from just $510m a year earlier, while the number of listed companies increased to 106 from about 30.
December alone saw 49 new listings and a peak daily turnover of $50m.
But the quoted companies are richly valued, with a weighted average price/earnings ratio of 32 times 2006
earnings. FPT, the information technology group that has become the market’s largest stock, has been trading on
a p/e as high as 68.
Vietnam-dedicated investment funds are flush with cash to buy stakes in larger, more lucrative state enterprises
that are due for partial privatisation in the coming years. Nyugen Tan Dung, the prime minister, recently gave inprinciple
approval to the public sale of shares in dozens of the bigger state enterprises by 2010.
But with precise plans yet to be drawn up, it is unclear whether Hanoi will sell just small minority stakes or allow in
foreign strategic partners that can overhaul operations. The authorities are still debating whether to let an
international bank buy into Vietcombank, the first big state bank slated for “equitisation”.
Even after share sell-offs, Hanoi may still treat these companies as state property, protecting them from rivals yet
meddling in their operations. “The headline is, ‘They are opening up the state sector’,” says Fred Burke, a partner
with Baker & McKenzie in Ho Chi Minh City. “The fine print is, ‘Better watch out. The devil is in the detail’.”
Ultimately, though, the government’s strongest protectionist impulse is to safeguard its monopoly on political
power, which means it is determined to keep the economy humming and deliver jobs and rising living standards.
That overriding goal will eventually lead the Communist party to embrace whatever it believes will deliver the best
economic results.
“The key is whether Vietnam seriously sees the commitment to openness as good for Vietnam or bad,” says Mr
Thanh. “For Asian people, the theory is not important. They will come back and see reality. If things go well, they
will support bolder measures. But foreign investors will need to have patience.” The risk is that it may take
another hard lesson before Hanoi’s Communists truly give up on the last of their Leninist economic ideals.
Copyright The Financial Times Limited 2007