Vietnam's Economic Crisis: Policy Follies and the Role of State-Owned Conglomerates

Introduction

The year 2007 left an an important mark on the economic history of Vietnam. The country became the 150^th member of the World Trade Organization (WTO) on 11 January 2007 after its accession package was approved by the General Council of the WTO on 7 November 2006. For Vietnamese political leaders and the population as a whole, WTO membership was the last hurdle to cross to make Vietnam fully integrated with the rest of the world, particularly in view of the perceived ability of the United States to block Vietnam's WTO membership and thus its path to economic development in order to extract political acquiescence from Vietnam. The admission to the WTO was therefore treated by the leaders of the Communist Party of Vietnam (CPV) as a major victory, and like any victory in the past, be it over France, or the U.S., they became consumed with the elixir of triumph and embraced grandiose plans in disregard of reality.

This time, Prime Minister Nguyễn Tấn Dũng's government came to believe that a quick catch-up with other countries in the region was within grasp. The plan for 2008 was set in terms of achieving a high rate of growth in GDP, in the range of 8.5-9 per cent, by focusing externally on attracting capital inflows through foreign direct and portfolio investment, and internally on expanding the state-owned conglomerates and their subsidiaries with easy credit, public land and public money. Politically, the economic plan was expected to win the support of the party's rank and file and the provincial governments throughout the country as it would provide benefits to them from the growth of the state-owned conglomerates and general corporations in terms of seed money, land-use rights, and shares in hundreds of semi-private enterprises spun out by the conglomerates and general corporations. This plan demised rather quickly in 2008 as inflation jumped, the stock market crashed and the economy was threatened by an imminent balance of payment crisis. It has cost the Prime Minister his credibility and his probable ambition to centralize the government economic power to himself, though not yet his position. In November 2008, the government reduced its expectation of the GDP annual growth rate to 6.7 per cent.¹ The actual GDP growth rate for 2008 turned out to be only 6.2 per cent.

The first part of this article attempts to review some important features of Vietnam's economic performance. This will serve as background for the second part which dwells on the political implications.

Performance of the Economy

Economic Growth

In terms of gross domestic product (GDP) growth rate, Vietnam's economy has performed quite well since 2002. The average annual growth rate between 2002 and 2007 was 8.1 per cent. Though it was not much lower than the 8.8 per cent of China, it was higher than the 6.8 per cent of India in the same period. It was, however, higher than the growth rates of most countries in the Southeast Asia (see Table 1).

Other indicators also showed that the economy was generally in good shape, at least up to the end of 2006, even though some disturbing signs had already appeared since 2004, indicating the need for some adjusment in monetary and related policies. Disturbing signs included inflation and a balance of trade that began to veer off from sustainable levels due to the expansion of money supply and credit. Inflation jumped from below 4 per cent before 2004 to 7-8 per cent in 2005 to 2006 and then accelerated. The balance of trade also turned negative at a rather higher percentage of GDP (almost 5 per cent and above). During the same period, fortunately, foreign debt was at a reasonbly low level of GDP, and debt service was also low, all due to the cancelling of foreign debts by foreign partners. The international reserves increased to US$20.7 billion as of June 2008