The man with a plan for Vietnam

Fifty years ago the last Americans were evacuated from Saigon, leaving behind a war-ravaged and impoverished country. Today Saigon, renamed Ho Chi Minh City, is a metropolis of over 9m people full of skyscrapers and flashy brands. You might think this is the moment to celebrate Vietnam’s triumph: its elimination of severe poverty; its ranking as one of the ten top exporters to America; its role as a manufacturing hub for firms like Apple and Samsung. In fact Vietnam has trouble in store. To avoid it—and show whether emerging economies can still join the developed world—Vietnam will need to pull off a second miracle. It must find new ways to get rich despite the trade war, and the hard man in charge must turn himself into a reformer.

That man, To Lam, isn’t exactly Margaret Thatcher. He emerged to become the Communist Party boss from the security state last year after a power struggle. He nonetheless recognises that his country’s formula is about to stop working. It was concocted in the 1980s in the doi moi reforms that opened up the economy to trade and private firms. These changes, plus cheap labour and political stability, turned Vietnam into an alternative to China. The country has attracted $230bn of multinational investment and become an electronics-assembly titan. Chinese, Japanese, South Korean and Western firms all operate factories there. In the past decade Vietnam has grown at a compound annual rate of 6%, faster than India and China.

The immediate problem is the trade war. Vietnam is so good at exporting that it now has the fifth-biggest trade surplus with America. President Donald Trump’s threat of a 46% levy may be negotiated down: Vietnam craftily offered the administration a grab-bag of goodies to please the president and his allies, including a deal for SpaceX and the purchase of Boeing aircraft. On May 21st Eric Trump, the president’s son, broke ground at a Trump resort in Vietnam which he said would “blow everyone away”.

But even a reduced tariff rate would be a nightmare for Vietnam. It has already lost competitiveness as factory wages have risen above those in India, Indonesia and Thailand. And if, as the price of a deal, America presses Vietnam to purge its economy of Chinese inputs, technology and capital, that will upset the delicate geopolitical balancing act it has performed so well. Like many Asian countries it wants to hedge between an unreliable America and a bullying China which, despite being a fellow communist state, has long been a rival and now disputes Vietnam’s claim to coastal waters and atolls. The trade and geopolitical crunch is happening as the population is ageing and amid rising environmental harm, from thinning topsoils in the Mekong Delta to coal-choked air.

Mr Lam made his name orchestrating a corruption purge called “the blazing furnace”. Now he has to torch Vietnam’s old economic model. He has set expectations sky-high by declaring an “era of national rise” and targeting double-digit growth by 2030. He has made flashy announcements, too, including quadrupling the science-and-technology budget and setting a target to earn $100bn a year from semiconductors by 2050. But to avoid stagnation, Mr Lam needs to go further, confronting entrenched problems that other developing countries also face as the strategy of exporting-to-get-rich becomes trickier.

Vietnam’s growth miracle is concentrated around a few islands of modernity. Big multinational companies run giant factories for export that employ locals. But they mostly buy their inputs abroad and create few spillovers for the rest of the economy. This is why Vietnam has failed to increase the share of the value in its exports that is added inside the country. A handful of politically connected conglomerates dominate property and banking, among other industries. None is yet globally competitive, including Vietnam’s loss-making Tesla-wannabe, VinFast, which is part of the biggest conglomerate, Vingroup. Meanwhile, clumsy state-owned enterprises still run industries from energy to telecoms.

To spread prosperity, Mr Lam needs to level the playing field for smaller firms and new entrants. That means hacking back a bewildering licensing regime and allowing credit to flow to small firms by shaking up a corruption-prone banking industry. Legislation issued this month abolishes a tax on household firms and strengthens legal protection for entrepreneurs. That is a step in the right direction, but Mr Lam also needs to free up universities so that ideas flow more easily and innovations thrive.

This is where it gets risky. Vietnam’s people would without a doubt benefit from a more liberal political system. But although that may also help development, China has shown that it may not be essential—at least not immediately. What is crucial is facing down powerful vested interests that hog scarce resources. A good start would be forcing the oligarchs to compete internationally or lose state support, as South Korea did with its chaebols. Often they are protected by cronies and pals within the state apparatus and the Communist Party. Encouragingly, Mr Lam has already begun a high-stakes streamlining of the state, including by laying off 100,000 civil servants. He is also halving the number of provinces in a country where regions have sponsored powerful factions within the party. And he is abolishing several ministries. All this will modernise the bureaucracy, but it is also a brilliant way of making enemies.

The autocrat’s dilemma

The danger is that, like Xi Jinping in China, Mr Lam centralises power so as to renew the system—but in the process perpetuates a culture of fear and deference that undermines his reforms. If Mr Lam fails, Vietnam will muddle on as a low-value-added production centre that missed its moment. But if he succeeds, a second doi moi would propel 100m Vietnamese into the developed world, creating another Asian growth engine and making it less likely that Vietnam will fall into a Chinese sphere of influence. This is Vietnam’s last best chance to become rich before it gets old. Its destiny rests with Mr Lam, Asia’s least likely, but most consequential, reformer. ■

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