Vietnam’s Third Way poses party teaser

As Vietnam’s rapid economic expansion gathers pace, the country’s communist party leaders are having an increasingly difficult time maintaining their so-called “Third Way” model of economic development, where centrally planned strictures and market dynamics uncomfortably co-exist.

The question merging over the transitional economy is whether, more than 20 years after the launch of market-oriented doi moi reforms, a new generation of political leaders has the political will to bury the country’s communist past and fully embrace market economics.

How the party strikes the balance could in the coming years make or break Vietnam’s the reform experiment, claim some academics. Mancur Olson’s Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships makes the theoretical point that in transitional economies there are certain reforms that governments may pursue to better promote economic growth and that certain styles of government are better able to create and enforce those reforms more consistently.

Reforms that respect and secure individual rights, according to Olson, will provide strong incentives for individuals to produce, invest and engage in mutually advantageous trade, of which society will broadly gain more from so-called rights-intensive production, the theory argues. And as one might expect, rights-respecting and strong governments are most able to successfully implement such reforms.

In today’s Vietnam, Prime Minister Nguyen Tan Dung and his economic lieutenants must weigh whether such reforms are appropriate at this arguably still early point in the country’s economic development and, if yes, will his more market-minded administration allow the country to fully outgrow communism?

For economic development scholars who study Vietnam, the general answer is yes and an eventual yes. Several economists now argue that in today’s Vietnam, many of the reform pieces are in place, including evidence that the slow but steady government grant of more land rights has led to greater productivity and investment compared with areas that have not implemented the same reforms.

On the one hand, the current group of reform-minded Vietnamese leaders is committed to market liberalization because to date it has led to fast economic growth and helped to shore up the communist party’s overall popularity. Yet they continue to do so with an unequivocal determinism that their reforms do not challenge the party’s monopoly over state and society.

Indeed, any activities by groups that are not sanctioned by the state are subject to criminal prosecution, as activists who last year called for more democracy and are now languishing in prison can attest to. “When leaders here say they want a socialist market economy, they really mean it … no one with any influence is arguing that the state should surrender the economy’s commanding heights,” said Jonathan Pincus, a UN economist based in Vietnam.

Yet at the same time, the party remains strongly committed to socialism, or more accurately to Ho Chi Minh thought, still the underlying basis of its overarching authority and political legitimacy. That means Dung’s administration probably won’t anytime soon abandon communism or implement reforms that would pave the way for Vietnam’s full-blown conversion to a rights-based capitalism.

Instead, capitalism and its externalities will continue to be co-opted in order to “revolutionize” the prevailing socialist order, with the country gradually becoming more modernized, technocratic, wealthier, powerful, and, perhaps finally, democratic. Intellectually, the party has started to map out what this new socialist order may look like in practice.

According to party-affiliated scholar Phan Dinh Dieu, the one party state is not in contradiction with market reforms:

if we look upon the whole society as a unified system, then generally speaking the State does not only ‘dominate’ society, but also increasingly fulfills many service functions for society, as if to create a structure and a favorable environment for the activities of society’s members … In this sense, antagonistic relations between State and civil society will be replaced by relations of collaboration; the democratic State will be the State ‘of the people, by the people, and for the people’.

Party leaders are well aware of the challenges in pursuing its third way between capitalism and communism. Although this middle path is not fully bulletproof against internal and external challenges, party leaders seem to think that in time it can be. A recent example of the party’s new thinking was also presented in a recent op-ed by former prime minister Vo Van Kiet, who oversaw the implementation of many important economic reforms during his tenure.

In responding to a recent scandal over the widespread distribution of tainted soy sauce, Kiet reiterated the party’s belief in the importance of a functioning press to check and balance their reforms, so long as reporters remain aware of their constitutional function and responsibility to the party:

Our socialist-oriented market economy has not commercialized the press, which worries many people. But the market itself is bringing the press and readers closer. Our nation is led by the Communist Party alone, which requires the press to be an effective source of information … Newspaperpersons who consider themselves above the law are prone to corruption. Thus, the press’ activities and penalties for corrupt journalists [either in state-run or private newspapers] should conform to the law.

By co-opting and integrating elements of market liberalization and democratization, socialist institutions may eventually become, and in many ways already are, more efficient with greater responsiveness in which the party-state practices “a soft, diffused and highly qualified form of domination,” according to academic Chris Dixon of London Metropolitan University.

Reform blind spots
To be sure, Vietnam’s current economic growth has yet to be accompanied by an appreciable increase in economic freedom (ie government intervention in the economy, property rights, and rampant black market activities), political freedom (ie freedom of expression, freedom of association, and the right to organize political parties), or good governance (ie frequency of corruption in public and political sectors).

So far, the poor and disadvantaged have been willing to live with the economic, political and administrative deficiencies of the one-party state so long as the government delivers the basic economic conditions which allow for the creation of higher paying jobs, better public services, and a gradually improved standard of living.

The average Vietnamese household is in absolute terms now better off than before market liberalization measures were first introduced in the mid-1980s. The question going forward is not merely whether the party can deliver prosperity, but whether prosperity is equitable and perceived to be based on merit and not on communist party connectedness or government corruption. Simply put, the average Vietnamese citizen still evaluates the communist party based on its self-proclaimed constitutional credo that the communist party-state will function ‘of the people, by the people, and for the people’.

On the one hand, the economic marriage between communism and capitalism can probably be sustained over the medium term. Scheduled privatization of former state-owned enterprises (SOEs) should help to boost economic efficiency and growth. SOE managers and workers should have no immediate reason to oppose privatization, since the process as currently defined will allow them to continue to receive some form of government subsidies and a larger share of their productive surplus.

Party leaders will still hold on to strategic industries, such as telecommunications, banking and financial services, and education and training, for third-way sociopolitical reasons. Sustained state-control of crucial industries also serves as a sort of economic shock absorber. In case of a significant economic slowdown or financial crisis, party leaders can further privatize non-strategic enterprises, such as in the tourism industry, which are already driven by firms led by party loyalists.

On the other hand, the downside of sustained state-vested interests in the economy is that the country, while very capable of becoming a low- to middle-income country, will consistently lag the region’s more developed economies in terms of economic efficiency. The preferential treatment of SOEs by most accounts has led to an inefficient allocation of capital resources and drags on Vietnam’s still vastly untapped growth potential.

For example, the World Bank estimates that the amount of capital needed to create one job in a SOE is more than eight times higher compared with domestic private firms; the potential cost savings in transport and technical services could easily be more than 30% if the various privileges bestowed upon SOEs competing in the sector were eliminated, according to the same World Bank statistics.

To realize Vietnam’s true growth potential in job creation and economic productivity the communist party needs to level the competitive playing field between the state and private sectors. Unfortunately there is no official policy or the financial infrastructure in place to expand small private firms into larger, more globally minded companies.

The importance of this transformation is that, given the still relatively weak purchasing power of the average Vietnamese domestic consumer, higher incomes at this early phase of development will in the main come from export-oriented activities. Until these reforms take place, Vietnam will continue to be marked by inequality, expressed in recent political protests and labor strikes, which slowly but surely are from below eating away at the country’s socialist fabric.

Vietnam’s communist party leaders will find it increasingly difficult to reconcile their current marriage between communism and capitalism. As the population becomes more economically empowered, party cadres assertions that the party-state is equivalent to a democratic state of the people, by the people, and for the people will ring increasingly hollow. And any move back towards the socialist redistribution system to address emerging issues of inequality will just as likely be rejected by the very masses they would be designed to help but who are unwilling to revert to the party’s inefficient centrally planned old ways.

For Vietnam’s communist party leadership, this is the limitation and contradiction of their hoped for third way which if not resolved could in the end be its eventual undoing.


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