Doi Moi in Review: The Challenges of Building Market Socialism in Vietnam

Transcription

1 Jurnal f Cntemprary Asia Vl. 38, N. 2, May 2008, pp V\ Rutledge ^^ Ta,,,.F.>a Di Mi in Review: The Challenges f Building Market Scialism in Vietnam MELANIE BERESFORD Divisin f Ecnmic & Financial Studies, Macquarie University. Sydney, Auslraiia ABSTRACT TWO decades ag the Vietnamese Cmmunist Party embarked n a transfrmatin frm eentralplanning twards a "scialist market ecnmy under state guidance." It lked t East Asian develpment mdels, particularly the rle f state enterprises (SEs), cmbined with the creatin f a "civilised and equitable" sciety. The article argues that, in the case f SEs, the state's inability, especially under dnr pressure, t prvide crucial investment supprt t the SEs meant that freign investrs and the dmestic nn-state sectr began t dminate the ecnmic landscape. While state-led develpment remains feasible, it requires a clear and mre authritative industry plicy; therwise, the balance f interventinism culd eventually tip twards crnyism. Eurther, the vagueness f the term "civilised and equitable" sciety leaves pen bth cnfrmity with the pst-washingtn cnsensus and the pssibility t achieve mre aggressive redistributive measures, including redistributin f pwer. In practice, inclusin in and exclusin frm successful public-private netwrks has been crucial fr the capacity f individuals t participate in the rising prsperity f the market ecnmy and has driven a prcess f rising reginal inequality and the emergence f a new scial class structure. KEY WORDS: East Asian develpment, scialism, distributin f incme, industry plicy, transitin ecnmies At its 6"^ Natinal Cngress in December 1986, Vietnam's Cmmunist Party made a decisive step t abandn the central planning mdel f scialism and t adpt a "market-riented scialist ecnmy under state guidance" - als knwn as Di Mi (Renvatin). Since that declaratin the cuntry's ecnmy, state and sciety have undergne dramatic transfrmatins. On the mst cmmn criteria f ecnmic develpment, the prcess has been very successful. After the crises f the early refrm perid (which nevertheless were nwhere near as devastating as in Eastern Eurpe), the decade f the 1990s was ne f high GDP grwth rates, rapid reductin in pverty, mre plitical penness and an upsurge f cultural diversity. Vietnam survived the reginal crisis in in a relatively healthy state. While there have certainly been negative aspects t this transfrmatin - increasing crime, reduced availability f public health, rising inequality, fr example - mst peple in 2006 Crrespndence Address: Melanie Beresfrd, Divisin f Ecnmic & Financial Studies, Macquarie University, Sydney, 2109 NSW, Australia. melanieb@efs.mq.edu.au ISSN Print/ Online/08/ Jurnal f Cntemprary Asia DOI: /

2 222 M. Beresfrd were better ff than they had ever been and the expectatin is that things will imprve further. The sheer rapidity f change, hwever, presents sme serius challenges cncerning the way frward. The Vietnamese state must grapple, nt nly with new demands arising frm its wn ppulatin, but aid dnrs and freign investrs wh carry much weight by virtue f their ability t influence ecnmic plicy and investment prgrammes. Further, the refrms have prduced changes within the state itself, leading t uncertainty and cnflict ver the directin f change. Is Vietnam still n the rad t scialism? Or has it, as many authrs assert, effectively abandned that path in favur f capitalism? Few nn-vietnamese bservers appear t think that scialism is any lnger relevant t the Vietnamese case. Gabriel Klk (1995) suggested that the Cmmunists have sld ut t capitalism. The Washingtn Cnsensus, nw repackaged as the pst-washingtn Cnsensus, takes essentially the same view, but with the twist that the apprved versin f capitalism will eventually prduce a scially ptimal result. Within Vietnam, hwever, the debate seems much mre cmplicated. The Party is nt an autnmus mnlith, but is clearly embedded in the sciety that gave birth t it and has an nging traditin f reaching decisins by a prcess f experimentatin, cmprmise and cnsensus (Beresfrd, 1988; Dang and Beresfrd, 1998). The leadership has learned hw t survive the buffeting, nt nly f dmestic pressures, but f changing internatinal circumstances as well. As Pietr Masina (2006) has ably argued, the Vietnamese market ecnmy "mdel" is nt set in cncrete. Instead, the tw decades f refrm have prduced new pressures and interests that will be influential in shaping the ecnmy and sciety in future. Amng these pressures and interests a cntinued cmmitment t building scialism remains visible. What is unclear, hwever, is the extent t which the visin f scialist Vietnam retains any plitical strength. This review f the last tw decades examines the ways in which the state and plitical life influence and are influenced by the changing ecnmic structure. There are tw themes running thrugh the argument. The dmestic plitical cnsensus t date lks "East" fr strategic plicy guidance. While East Asia prvides the nly recent mdels f successful "late industrialisatin," the experience may be difficult t replicate in the Vietnamese cntext f transitin frm central planning. Mrever, all f these cases, except China which was nt initially a credible mdel, were vertly capitalist.' A "market ecnmy" has been in place in Vietnam since the early 1990s, but the meaning f the term "scialism" changed markedly after the ablitin f central planning. The article examines the meaning f this term in the new cntext and discusses sme issues arising as a result f the change. "Lking East": Sme Cnceptual Issues East Asian "Alliance Capitalism" A cnsistent theme f Western plicy advice t develping cuntries is that the rle f gvernment shuld be "market facilitating." Vietnamese plicy statements, n the

3 Di Mi in Review: Vietnam 223 ther hand, have cnsistently expressed an intentin t implement "state guidance" f the market, primarily thrugh dminatin f the "cmmanding heights" by state enterprises (SEs). Rbert Wade (1998) cined the term "alliance capitalism" t describe the ecnmic ratinale fr this type f state-business relatinship that has been characteristic f East Asian ecnmies, such as Japan, Suth Krea and Taiwan. His cncern was t demnstrate an ecnmic ratinale fr this type f ecnmic system. The key characteristic f East Asian ecnmies frm this pint f view is that the mst imprtant surce f capital fr enterprises in industry and services is the statedminated banking system. In cnsequence, firms in East Asia tend t have high debt-equity ratis and, in rder t ensure the cntinuing viability f their lans, banks have develped clse relatinships with the brrwing firms. The danger in these clse relatinships lies in the develpment f a culture f lending that relies upn cnnectin and reputatin rather than clse examinatin f the cmmercial viability f individual prjects. It makes sense, therefre, fr gvernment t exercise a supervisry rle - mnitring the perfrmance f firms and banks. Whether this wrks successfully r nt is incidental t the argument that the mdel des have an ecnmic ratinale. As Wade and thers have frequently pinted ut, gvernment failure is n mre cmmn than market failure in achieving lng-term stable grwth patterns. Wade als distinguished "alliance capitalism" frm "crnyism."^ The frmer, he argued, has an ecnmic ratinale and is featured by relative autnmy f the state. This pint particularly applies t elite ecnmic ministries that are charged with versight f the develpment prcess. In these key areas, neither gvernment plicy nr bureaucratic management f the system are influenced by persnal relatinships r crruptin. Instead, they have been characterised by meritcratic recruitment practices and "arm's length" ecnmic management (Amsden, 1989; Wade, 1990). "Crnyism," n the ther hand, has a primarily plitical ratinale which Wade assciates with the gal f regime maintenance. Where, fr instance, regimes have risen t pwer withut a brad dmestic pwer base, r where gvernments have sught t appeal t sectinal interests, clse relatinships between business and gvernment are mre likely t arise as a means f preserving the regime. Relatinships are mre persnalised than in the case f "alliance capitalism" and privileges accrded t flrms depend signiflcantly upn such persnal cnnectins. A prblem with Wade's distinctin between "alliance capitalism" and "crnyism" lies in his separatin f the ecnmic frm the plitical. All states in mdern scieties share tw cmmn functins: they need t facilitate sustainable capital accumulatin as well as maintain legitimacy f the regime. These tw d nt ccur in islatin frm each ther, althugh that may happen in the shrt t medium term. Successful late industrialisers appear, with ups and dwns, t have achieved bth. Often beginning with authritarian regimes,^ they have succeeded nt nly in prmting high rates f accumulatin and grwth, but in spreading the beneflts in a way that blunts and islates ppsitin. Such an achievement ften invlvesflexibilityin the shape f the regime: Suth Krea and Taiwan have bth shifted t mre demcratic systems in line with changing aspiratins f their expanding educated middle classes.

4 224 M. Beresfrd Plitics and ecnmics are thus inextricably intertwined, althugh the essentially plitical nature f alliances is nt always clearly visible. In pst-clnial scieties a shared idelgy f "natin building" can preserve, ver a relatively lng perid, a sense that all citizens have an investment in maintaining the current frm f the state. Natinalism has been a pwerful frce, ften verriding class interests in East Asia in all but the mst serius crises. Alliance capitalism and crnyism are tw sides f the same cin insfar as they share a cmmn reliance n clse business-gvernment relatins and state directin f the industrialisatin prcess. They differ in the extent t which state actins are relatively autnmus frm the business cmmunity. Put anther way, crnyism exists t the extent that the state has been "captured" by sectinal interests such that ther interests are excluded frm cnsideratin in the decisin-making prcess. The existence f crnyism means that excluded grups are unlikely t perceive any gain frm it. While vested interests arise in maintaining the crny system, despite its inefficiencies, ppnents gain an interest in putting an end t the regime. Establishment f a crny regime is therefre likely t lead ultimately t instability. A key feature f crnyism, which distinguishes it clearly frm alliance capitalism, is that gvernment is unable r unwilling t discipline flrms that fail t perfrm. The ne great advantage that the market ecnmy cnfers in bth the develped and. develping ecnmy cntexts is that it cmpels flrms t becme efficient r die. Cmpetitin is the greatest driver f technical change, increasing prductivity and efficiency in the use f resurces. While all successful industrialisers have used prtectinism, sme have been mre successful than thers in maintaining their advantage thrugh prductivity grwth, cnstantly renewed thrugh market cmpetitin."* Others have ften failed t utilise this advantage f the market: selfperpetuating crnyism prevents them frm ding s. Develping ecnmies, like Vietnam, can rest n a knife edge between building a strng state-led ecnmic system and degenerating int crnyism. The Cnsequences f "Alliance Capitalism" Fr ur purpses, tw majr features f alliance capitalism are imprtant. The flrst f these is its ability t achieve lng-term structural change (industrialisatin). The secnd is its capacity t avid bth market failure and gvernment failure. The ability t achieve lng-term structural change is undubtedly the majr success stry f alliance capitalism. In the entire histry f capitalism there has been n grup f cuntries that has achieved such sustained grwth, ecnmic diversificatin and rising living standards as East Asia's s-called "miracle" ecnmies. Nwadays, aside frm thse idelgues wh are inclined t dwngrade the significance f East Asian industry plicy (Wrld Bank, 1993), there is widespread agreement that the prcess was pushed alng decisively by state interventin. In rthdx macrecnmic thery, designed in cuntries that were already highly develped, the fcus f state interventin is n shrt-term adjustments twards (r away frm) a full emplyment path f grwth. In the practical sphere, such shrt-term adjustments give a stp-start character t public plicy and are

5 Di Mi in Review: Vietnam 225 designed t smth cyclical fluctuatins rather than raise the ecnmy t a higher grwth path. Fr develping ecnmies, the mre imprtant issue is precisely hw t reach the higher grwth path. Investment decisins are aimed at inducing lng-term structural changes in the ecnmy (Kalecki, 1971). What matters, therefre, is nt merely the quantity f investment, but als its quality - r hw it induces thse lngterm changes. Left t their wn devices, markets in pr cuntries tend t favur cnsumptin decisins. The shares f savings and investment in natinal incme are lw because mst incmes are lw. Mrever, investment decisins are cncentrated in sectrs that, far frm generating structural change, tend t perpetuate existing structures - particularly the dminance f trade. Since financial sectrs are, by definitin, underdevelped and farmers have few savings, urban ecnmies thrive n exprt f agricultural surpluses and imprt f manufactured cnsumer gds. Successful state interventins in East Asia tended nt nly t raise the share f investment and savings in natinal incme, but t ensure that investments were directed twards enterprises that wuld generate lng-term structural change - in ther wrds, industrialisatin. Implemented either thrugh state cntrl ver the banking system, which allwed fr directed credit, r the use f public enterprises t establish new industries, the key strategic fcus in successful East Asian industrialisatin was n industry plicy. Japan, Krea and Taiwan did nt encurage freign investment, but made use f favurable verseas interest rates t n-lend t firms that undertk desired investments. Singapre, relying n much greater penness t freign investment, used ecnmic levers - taxatin, subsidies and, abve all, wages plicy - t direct investment int its desired sectrs. Singapre used a cmpulsry savings prgramme, Krea used crprate prfits and the state's financial pwer t frce an increase in investment rates. Taiwan used its public crpratins t underpin the prfitability f a myriad f small exprt-rientated family firms. Cnsultatins with the business cmmunity in bth Krea and Taiwan were regular and ften dictatrial. A crucial characteristic f the East Asian mdel is, therefre, that investment decisins and lng-term structural change were directly influenced by plitics. Private investment decisins were nt dminant during the industrialisatin prcess. The secnd key feature f successful East Asian mdels is their ability t avid bth market failure and gvernment failure. Unlike the mdel f crnyism described abve, public investments (whether directly in state enterprises, r indirectly via state bank credits) did nt becme deadweight lsses that were permitted t remain inefficient under their prtective shelter while cntinuing t prvide pcket mney fr a restricted elite. Instead, strng pressures were exerted n these enterprises t becme internatinally cmpetitive. Tw types f plicy were used in rder t exert this pressure. At the micreenmic level, selected firms and sectrs received special incentives, subsidies and mnplistic privileges. These, hwever, were far frm uncnditinal: firms that failed t meet targets, including exprt targets and training f skilled wrkers, were penalised. In Taiwan a mixture f state and market discipline was impsed - state enterprises were established in upstream industries in rder t prvide cheap inputs fr small and medium enterprises (SMEs) wrking in highly cmpetitive

6 226 M. Beresfrd exprt-rientated manufactures. At the macrecnmic level gvernments used vervaluatin f the exchange rate t encurage the purchase f imprted capital equipment and then devalued in rder t increase cmpetitive pressure n firms. In the next sectins I argue that Vietnam has nt met many f these criteria. Vietnam: Lking East? The Vietnamese Definitin f Scialism The term "scialism" held a particular meaning in Sviet-type ecnmies, basically cnsisting f three cmpnents. These were (i) allcatin f resurces thrugh central planning and eliminatin f markets fr gds and labur; (ii) wnership f all majr means f prductin by the state, representing the whle sciety, and eliminatin f private enterprise; and (iii) distributin f incme accrding t labur input and the eliminatin f wage differentials based n labur markets. The Vietnamese Cmmunist Party, while bradly perceived as legitimate in the natinalist struggle, never pssessed the strength t eliminate markets and private enterprise entirely. Numerus dmestic pressures arse, leading t a refrm prcess that began in 1979 and saw the gradual reversal f these "scialist" bjectives in all but the sphere f public wnership. Central planning had disappeared by 1989 and labur markets had begun t emerge. The remaining element f the earlier definitin f scialism is the gvernment's determinatin t maintain state enterprise dminatin f the ecnmy's cmmanding heights. The ratinale fr this determinatin is very clear: the Cmmunist Party wishes t retain its ability t influence the lng-term structural changes discussed abve. While there are sme variatins in the way this prject is cnceived at the practical level, it is similar t the "natin-building" prject f East Asian capitalist states. The state is viewed as representing the lng-term interests f the whle natin, rather than shrt-term r particular interests, and gals are expressed in abstract terms such as "industrialisatin" and "mdernisatin." This bjective implies that the gvernment will cntinue t prvide supprt fr state enterprises (SEs) as a central plank f the "scialist market ecnmy." Tw issues arise here: first, whether the weakness f the central planning state can be vercme sufficiently t permit successful "East Asian-style" develpment; and, secndly, hw the state can supprt SEs in a way that is beneficial fr sciety, withut degenerating int crnyism. These issues will be discussed in the remainder f this sectin. First, hwever, we need t mentin a new gal, replacing the ld "distributin accrding t labur," that has emerged since the inceptin f Di Mi. The gal f creating a "civilised and equitable sciety" (taken frm the slgan "strng cuntry, rich cuntry, civilised and equitable sciety" prmulgated by the 7''' Party Cngress in 1991) adds a scialist flavur, albeit an extrardinarily vague ne, t the prject f natin-building described abve. In the market ecnmy, hwever, the way t create an equitable sciety is mre pen t debate than it was under central planning. In a later sectin sme f the prblems that have arisen are reviewed.

7 Di Mi in Review: Vietnam 227 The Situatin f State Enterprises Abut a decade ag, many f the SEs were described t me by a retired senir Cmmunist as "defrmed" - a textile mill, fr example, may have spinning and weaving plants, but be "missing a leg," namely, the dyeing plant. Others had been cbbled tgether frm a range f different (Sviet, Chinese, East Eurpean) surces and culd nt perate as an integrated plant. Further, in explaining why the state was unwilling t privatise, disslve r break up the SEs, he argued that "they are ur children and we cannt eat ur children." I wuld argue, nevertheless, that the Vietnamese state had been "eating its children" since the inceptin f central planning in In general, SEs received little supprt frm the state befre Instead, the fcus was n creating new enterprises, while existing nes were expected t perate with n new investment. A study I cnducted in 1992 (Beresfrd, 1993) shwed that the vast majrity f SE equipment dated frm the time the factry was first established, usually in the 1960s r 1970s.^ Even then, much f the equipment was acquired secnd-hand. At the time, five years after the enterprise autnmy legislatin f 1987, nly a few enterprises had been able t undertake any mdernisatin at all f their plant and equipment. Despite the liberalisatin, the depreciatin fund f the enterprise was ften still returned t the state cffers and directrs wishing t upgrade their plant still had t apply fr the necessary funds. Thus, at the inceptin f Di Mi, the SE "children" were, if anything, even mre defrmed than they had been at birth. A further aspect f the lack f supprt fr SEs during central planning was that the subrdinatin f plans t plitical targets meant that ver-investment in new plant ccurred at the expense f chrnic input shrtages. The Secnd Five Year Plan ( ) was especially ver-ptimistic, entailing the necessity t reduce imprts f key raw materials in rder t accmmdate large-scale imprtatin f new capital equipment frm a limited pl f Sviet aid (Beresfrd and Dang, 2000). As a result, enterprises culd neither meet utput targets nr ensure the quality f utput. All planning cycles prir t Di Mi suffered frm this prblem t sme extent. Only the plan, inaugurated after the refrm prcess was already under way, demnstrated clear recgnitin f the prblem. In the late 1970s many leaders did begin t dubt that central planning culd be made t wrk. A prcess f institutinal refrm began, basically thrugh granting f greater autnmy t enterprises. In the 1990s, this autnmy extended t allwing the frmatin f jint ventures with freign investrs and a gradual prcess f equitisatin (partial privatisatin), particularly f smaller, nn-cre businesses. The fcus remained n institutinal refrm, based n the suppsitin - fstered by the ne-classically trained ecnmists f the internatinal aid agencies - that marketisatin alne was sufficient t generate ecnmic grwth. Dnr advcacy f increased investment in the public sectr was restricted t prvisin f infrastructure, basic educatin and basic healthcare - in ther wrds, market facihtating rather than market-directing investments. In this prcess f institutinal refrm, SEs were largely left ut in the cld. Frm their starting pint f utdated technlgy, prly integrated prductin systems and lw prfitability, they were expected, under the regime f enterprise

8 228 M. Beresfrd autnmy, t pull themselves up by the btstraps. While they were given trade prtectin, in the name f "nt eating the children," this nly enabled mst f them t survive. Due t lw rates f investment, increases in prductivity within SEs came mainly frm the shedding f labur during , and tended t slw dwn after that. A large number remained unprfitable, such that bad debt in the banking system frced a majr bank restructuring prgramme t be undertaken in The majrity f SEs cntinued, thrughut mst f the last tw decades, t lack investment supprt frm the state. Table 1 shws the brad pattern f change in state and ther investment frm Over the perid the share f grss capital frmatin in GDP dubled, while ttal state investment rse in line with the trend. The share f nn-state investment (which includes private capitalist enterprises, the few remaining c-peratives and small-scale husehld enterprises) remained high and stable until the Asian crisis, when freign investment fell away. As a result f the last factr, public investment has been the mst imprtant element f capital frmatin since When we cme t examine the breakdwn f public investment, tw elements f Table 1 stand ut. First, investment frm the state budget retained a relatively stable share frm the mid-1990s. Secnd, the SE's wn investment share rse by abut a third befre 1997, but stabilised thereafter, and that f investment directed thrugh the state cmmercial banks (SCBs) rse by ver 50% in the secnd half f the 1990s There was als a marked decline in "ther" surces f state investment (nt defined in the surce). During the first half f the 2000s investment by dmestic private firms rse by 20.9% per year, leading t a sharp rise in their share f the ttal. It is nt surprising, therefre, that SE utput has undergne a relative decline. In 1996 SEs still accunted fr half f industrial utput, but their share declined t 34% by 2004, which translates int a decline frm 11.5% t 9.3% f GDP (GSO, 2007). Within ttal state investment a rising share has been devted t infrastructure. In 2000, 41% f all state investment went t electricity, gas and water supply plus transprt, strage and cmmunicatins (GSO, 2004: 295), cmpared with 22% in 1993 (GSO, 1994: 237). There is n dubt ihat infrastructure investment was very necessary, but the shift left a much smaller share fr SEs: in 1993 state-wned industry tk 55% f ttal state investment, but nly 14% by The decline was accmpanied by a large shift frm budget finance t self-finance as enterprise autnmy increased. In cntrast, public enterprises in Taiwan cnsistently accunted fr a third f grss capital frmatin during the three decades frm (Wade, 1990: 177). The ther majr surce f finance fr SEs came frm credit, which, hwever, prvided a prgressively lwer prprtin f their investment. Given generally lw prfitability, they tended t brrw fr wrking capital rather than fr lnger-term investments in fixed assets. The structure f interest rates favured shrt-term brrwing ver lng term, partly as a result f risk management by banks and partly because interest rate plicy was designed t enable SEs t survive in the market envirnment. The latter was nt, hwever, designed in a way that enabled technlgically backward firms t upgrade their equipment t glbally cmpetitive standards. Further, the private sectr received an increasing prtin f credit

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10 230 M. Beresfrd frm the SCBs: by the mid-2000s it accunted fr 60% f their lending (Masina, 2006: 125). State supprt fr the SEs, therefre, scarcely realised the Party's intentin t give them a leading rle in ecnmic develpment. In terms f investment and utput, SEs have lst grund t the private sectr since the 1990s. In practice, the main strategy adpted by the gvernment t allw SEs t upgrade was the encuragement f freign direct investment (FDI) thrugh jint ventures. Althugh the Law n Freign Investment was passed at the end f 1987, FDI nly began t increase rapidly in the early 1990s. In reality, FDI in Vietnam was driven nt s much by the law itself, but by external factrs. First, the cllapse f the Sviet Unin led t a gradual breaking f the Western aid embarg n Vietnam s that freign investrs felt mre secure abut investing in the cuntry. Secndly, the develpment f the speculative "bubble" in much f the Asian regin led investrs t disregard Vietnam's pr infrastructure and red tape. FDI rapidly increased t almst a third f ttal annual investment by 1995.* This strategy f the gvernment therefre was initially highly dependent n external develpments. Because it was bubble-driven, much f the early FDI was nt in areas favured by Vietnam's develpment gals. Htels and prperty develpment were at first the main sectrs and it was precisely the real estate bubble that accunted fr the dwnturn in freign investment after 1996 (Masina, 2006: 78). Only gradually did investr cnfidence abut investing in industry increase (in 2005 it cmprised the majrity f prjects). Within industry, jint ventures were initially the favured frm f FDI. The reasns were that freign investrs culd nt wn land, but SEs culd prvide it as their capital cntributin, and freign investrs als felt safer investing in the prtected SE sectr. Nevertheless, frm the pint f view f many SEs, these jint ventures had a relatively lw impact. In 2004, fr example, there were nly 821 FDI jint ventures and a ttal f 4596 SEs. A large majrity f SEs, therefre, had n freign investment at all. In fact freign investrs increasingly preferred 100% wnership. Between 2000 and 2004, jint ventures declined frm 44% t 26% in the number f freign-invested firms, frm 70% t 53% f freign capital frmatin and frm 30% t 17% f emplyment in FDI enterprises (GSO, 2007). Many SEs cntinued t survive thrugh prtectin frm internatinal cmpetitin and prvisin f lw-interest lans t cver their wrking capital needs. Largely absent in the transitin t a market ecnmy was gvernment cmmitment t invest in these enterprises in rder t upgrade technlgy t make them cmpetitive in an increasingly glbalised market. Given that public investment pririties shifted t prvisin f infrastructure, the prtective attitude f the Party and gvernment twards their SE "children" bre little fruit. The main reasn fr this situatin is that the fcus f plicy and strategy was n institutinal refrm (enterprise autnmy) rather than n using industry plicy t prmte investment in the gvernment's pririty develpment areas. It is hard t avid the cnclusin, when examining the situatin f SEs, that far frm using them as instruments f industrialisatin and mdernisatin, the Vietnamese state allwed the pririties f the private sectr, especially freign investrs, t act as the key t lng-term structural change. We examine this cnclusin mre clsely in the next sectin.

11 Di Mi in Review: Vietnam 231 Is the Ratinale fr Current Plicy Twards SEs Plitical r Ecnmic? Within the framewrk f the East Asian mdels described abve, it is difficult t find an ecnmic ratinale fr the pst-d/ Mi plicy twards SEs. Given their generally backward level f develpment, mst SEs were unable t play the leading rle in ecnmic strategy that the Party wished them t have. T many survived in the market ecnmy due t increasing indebtedness and "sft budget cnstraints," the burden f which ultimately fell n the state budget as the gvernment increased its external debt in rder t carry ut bank restructuring. Unless the efiiciency and prductivity f SEs can be imprved dramatically, it seems likely that this prblem will recur further dwn the track. The alternative, f liquidating prly perfrming enterprises, was als unpalatable. Over 900,000 wrkers were emplyed in industrial SEs in 2005 and, given high rural underemplyment (estimated at 20%) and yuth unemplyment in the majr cities at clse t 6% (GSO, 2007), the cnsequences f additinal unemplyment might be serius. The majr shake-ut f SEs that ccurred in saw sme 750,000 peple (mainly wmen) laid ff and was assciated with a rise in the unemplyment rate t 13%. Many frmer SE wrkers easily fund emplyment in the husehld sectr during that rund f enterprise disslutins, but there was a perceptin that the increase in yuth unemplyment, due t lack f new hiring by SEs, cntributed t the rise f scial prblems such as drug abuse, prstitutin and theft. The liquidatin rate did accelerate in the early 2000s, but this slutin remained a drp in the cean cmpared with the mre cmmnly applied strategy f merger. Smaller, ften unprfitable, SEs were absrbed int larger entities knwn as General Crpratins, a strategy aimed at replicatin f the Krean chaebl mdel. By 2005, f Vietnam's initial 12,000 SEs, nly 4086 were left. In 2004, 15% reprtedly cntinued t meet nne f the gvernment's perfrmance criteria based n turnver, prfitability, slvency and cmpliance with laws and regulatins, including 7% f the largest SEs.^ The number meeting nly ne r tw f these criteria is nt recrded (Wrld Bank, 2006). A handful f very large crpratins have been mre successful, including Baviet (insurance), Vinacmin (minerals), VNPT (telecmmunicatins), Vinashin, (shipping), Vinatex (garments and textiles), EVN (electricity), Vietnam Rubber Crpratin, and Petrvietnam (il). The first five f these have received apprval t be cnverted t "ecnmic grups," the parent cmpany f which will be a 100% state-wned limited liability cmpany. Such grups must have capital f ver $US650 millin and their scpe f peratins must be internatinal (Wrld Bank, 2006). Sme slutins have been fund by the SEs themselves. Many have changed their line f business in rder t survive. Since rent-free access t high-value urban land has been ne f the few marketable assets that SEs culd use as a surce f revenue, there was much participatin by industrial SEs in the real estate and htel bm f the early 1990s. Jint ventures were als ften nt related t the cre business f the enterprise. In ther cases, SEs used their access t lw-interest finance t engage in trading activities - again unrelated t their cre business, but prfitable enugh t ensure easy repayment f the debt. Such activities nt nly injected finance int

12 232 M. Beresfrd languishing enterprises, they enabled the retentin f emplyees well abve what was required fr actual prductin activities.^ Many enterprises in fact used their marketrientated businesses t prvide a scial safety net rather than as a way t invest in the activities fr which the gvernment had designated them t lead ecnmic develpment. Indeed, ne f the factrs hampering SEs in their drive t becme cmpetitive was the scial welfare functin carried ver frm the central planning system. While the traditin f lking after their emplyees - taking care f their health, educatin, scial security and childcare needs, as well as prviding jbs fr their children - is certainly admirable, private investrs are scarcely interested. In the market ecnmy prfitability rules, s if SEs are t survive in the lng run their welfare functins need t be taken n by the state. In shrt, enterprise autnmy enabled SE directrs t pursue market-rientated activities in a situatin in which their cre activities were ften unprfitable. While many managed t remain aflat by pursuing nn-cre activities and relying n credit and prtectin, directrs had few incentives t make large investments in the mre uncertain task f technlgical upgrading and becming internatinally cmpetitive. Further, as lng as they were "wned" by the line ministries that were als their regulatrs, gvernment industrial strategy scarcely infiuenced what these SEs did. The challenge psed t the Vietnamese state in terms f its strategy f SEs playing a leading rle was reinfrced by dnr attitudes. Thrughut the 1990s the main thrust f dnr advice n SE refrm was twards privatisatin and, when this advice failed, equitisatin, althugh little evidence was presented that this was either feasible r desirable fr the lnger term. Indeed, althugh the gvernment adpted an equitisatin strategy as early as 1991, very little happened during the ensuing decade. A key prblem was the valuatin f assets, since the assets f many SEs had n market value. A further prblem lay in the suspicin f directrs and wrkers that equitisatin wuld result in lss f cntrl and/r lss f jbs. The latter prblem was at least partly slved by the prevalence f "insider equitisatin" (managers and wrkers taking the majrity f shares) and by the state retaining a cntrlling interest. The refrm was able t prceed and 2121 SEs were equitised during , mstly at the smaller end f the SE scale (Wrld Bank, 2006: 23). As the size f SEs underging equitisatin has risen, a larger prprtin has been kept under state cntrl. Indeed, the equitisatin prgramme has clearly demnstrated the ability f the Vietnamese gvernment t resist dnr pressures in the interests f maintaining a cnsensus-driven plicy apprach. There has been a marked change in, fr example. Wrld Bank language frm the early 1990s when it advcated privatisatin, then equitisatin, t its 2006 reprt in which it refers t "enterprise transfrmatin" (Wrld Bank, 2006). The Bank's reduced level f cncern des nt, hwever, represent a change f heart. It reflects the gvernment's willingness t prmte a level playing field thrugh the new Enterprise Law, which puts SEs and private firms n the same fting, and Vietnam's accessin t the WTO, which will increase the pressures n inefficient and nn-cmpetitive SEs. Meanwhile thusands f larger-scale SEs have cntinued t functin withut majr new capital. Supprt fr direct investment in upgrading f SEs was bviusly nt frthcming frm the dnr cmmunity. While such supprt might actually

13 Di Mi in Review: Vietnam 233 have increased the attractiveness f equitisatin t ptential investrs, retentin f a cntrlling interest by the state wuld als have created an pprtunity t implement its strategy fr the public sectr. Until nw the incentives faced by SE directrs have been mixed. On the ne hand, the institutinal refrms put them in a "carrt withut stick" situatin. By this I mean that they had every incentive t make special pleadings fr prtectin and ther privileges in the Vietnamese market, but the gvernment had little pwer r influence ver what they actually did. Market discipline was largely absent, but gvernment discipline was nt implemented either. On the ther hand, they faced a generally unsupprtive investment climate and lacked the necessary funds t upgrade their backward prductin facilities. Withut investment, the task f becming cmpetitive, either against imprted gds r in exprt markets, was nigh impssible. Offsetting the slw prgress f the SE sectr was the success f the FDI and dmestic private sectrs, including sme key jint ventures. At the end f 2005 freign-invested firms emplyed a millin wrkers, an increase f 156% cmpared t 2000, reflecting increasing cnfidence in the Asian regin fllwing the disturbances f the late 1990s, Emplyment in dmestic nn-state firms had expanded t 2,5 millin - an increase f 137% ver while SE emplyment had grwn by nly 8% ver the same perid, t 2,2 millin. Mre imprtantly, the FDI sectr was the mst dynamic sectr in terms f generating GDP grwth. Table 2 gives sme data n prductivity in the SE, dmestic-private and freign-invested sectrs,' It shws that the SE sectr has a tendency t under-perfrm. In the FDI sectr utput per unit f fixed capital rse in the tw-year perid and capital per emplyee fell substantially. This relative decline in utput per wrker f the FDI sectr after 2000 is due t a shift twards labur-intensive manufacturing cmpared t the earlier dminance f capitalintensive il prductin. In the SE sectr, n the ther hand, utput per unit f Table 2. Prductivity indicatrs in industrial enterprises Output per emplyee SEs Dmestic private" Freign invested 1,00 1,23 1,95 1,00 0,92 1,86 1,00 0,79 1,19 Output per unit f capital SEs Dmestic private'' Freign invested na na na 1,00 3,10 0,57 1,00 2,50 0,66 Capital per emplyee SEs Dmestic private" Freign invested na na na 1,00 0,30 3,30 1,00 0,31 1,80 "Registered enterprises nly. Surces: Calculated frm GSO (2000; 2007) and Wrld Bank (1999).

14 234 M. Beresfrd capital grew nly slightly (negative in real terms) and capital per emplyee rse - reflecting a cntinuing tendency t fcus n capital-intensive prductin. The dmestic private sectr appears t fllw the same tendency as the SEs. Its decline in prductivity relative t SEs between 1998 and 2000 is accunted fr by a change in the cmpany registratin law, which led t a splurge n investment. During the tw years its utput per unit f fixed capital drpped and capital per emplyee rse. It is nt clear that this wrsening f the capital-utput rati will be permanent, hwever, as the available data cver nly a shrt perid. Exprts are dminated heavily by FDI enterprises: in the 1998 enterprise survey, 79% f freign-invested firms and 50% f jint ventures reprted exprts, cmpared t a third f SEs, The prevalence f sub-cntracting blurs the picture fr purely dmestic firms, hwever. While 30-40% (SE and private) reprted exprts, thers may have been selling gds t dmestically based exprters. Despite the stated gal f using SEs as leaders f the develpment prcess, we can cnclude that this did nt happen in practice. If anything, the attempt t frm chaebl-type cnglmerates, including many lss-making units, actually hampered the dynamism f the sectr. Althugh the plitical ratinale fr a clse gvernment- SE relatinship remained intact, the ecnmic ratinale was present nly in rhetric. While I wuld hesitate t suggest that this plitical ratinale degenerated int a frm f crnyism - rather it seems t have cntained a strng element f welfarism - a clear ecnmic ratinale fr the gvernment-se alliance remained t be established, Guanxi - Vietnamese Style S far in this article I have used the distinctin between SEs and the private sectr smewhat uncritically. Hwever, in the East Asian cntext this is nt such an easy distinctin t make. East Asian ecnmies are characterised, mre than their Western cunterparts, by markets embedded in scial netwrks (Orrii et al,, 1997; and Hern, 1997, fr the Vietnamese case), A particular characteristic f this system is that legal framewrks are regarded widely as irrelevant. Transactins are carried ut n the basis f trust, reputatin and scial pressure. Such netwrks can extend t the internatinal sphere, especially when, as in the case f Vietnam, there is a large diaspra - in Eastern Eurpe, France, the USA, Australia and elsewhere. Established internatinal netwrks created by sailrs f the Vietnam Overseas Shipping line, by guest wrkers in Eastern Eurpe, by emigres and by students studying verseas, played an imprtant intermediary rle in the develpment f Vietnam's internatinal trade bth befre and after the flicial inceptin f Di Mi (Beresfrd and Dang, 2000), Vietnamese cmmercial netwrks began t be established in the early stages f the refrm prcess, at a time when private enterprise was still frwned upn. As a result, cadres played an imprtant rle within the netwrks. It was usually lcal fiicials, using their urban cnnectins, wh enabled the establishment f market relatins between twn and cuntryside (Abrami and Henaff, 2004; DiGregri, 1994), Since family prductin units ften lack infrmatin and access t markets, these lcal cadres still play an imprtant rle in rganising village-based cmmercial enterprises, SE directrs similarly used their flicial cnnectins t establish semiautnmus cmmercial activities, while wrkers were als able t use the skills and

15 Di Mi in Review: Vietnam 235 cnnectins gained in SEs t set up small-scale peratins. Many private enterprises tday are in sub-cntracting arrangements with larger firms in bth the state and nn-state sectr (Tran, 2004), Glbal firms can be fund sub-cntracting t Vietnamese state firms. The cnsequence f this histrical develpment f market relatins in Vietnam is that the dividing line between public and private sectrs is blurred. It fllws that the state-private dichtmy is nt very helpful fr analysing the develpment f the business sectr, primarily because we cannt assume the existence f enterprise autnmy. Fr example, ne might find that underdevelpment f the SE sectr hinders rather than aids the develpment f the private dmestic sectr. The tw sectrs may nt be in a relatin f rivalry but in a relatin f mutual dependence. Clsing dwn SEs, even unprfitable nes, might have knck-n effects that are detrimental t private firms and husehlds that either use their prducts as inputs r rely n their demand. If the state-private dichtmy is nt very helpful fr analysis, the links between SEs and private firms als suggest that the Taiwanese mdel - in which SEs prvide inputs t r buy utputs frm thusands f small exprt-rientated, and highly netwrked, firms - might be a mre apprpriate mdel fr state-led develpment in Vietnam than the Krean chaebls. The mve in 2005 twards the creatin f statewned hlding cmpanies, including dminant SEs within their industry (insurance, minerals, telecmmunicatins, shipping, and textiles and garments), with glbal linkages, suggests smething alng these lines. Since nly the hlding cmpany is required t be 100% state-wned, the grupings will presumably include equitised SMEs with clse netwrk linkages t the parent. Inclusin in public-private netwrks can be beneficial t small firms because they prvide access t markets and mre r less stable emplyment (cyclical fluctuatins ntwithstanding). Imprtantly, if the Taiwanese mdel is pursued, inclusin in these netwrks culd facilitate the develpment f backward and frward linkages, thereby mitigating the inherently destabilising effects f expsure t "ftlse" glbal capital mvements (as have been seen, fr example, in garment manufacturing in the regin). While there is, as yet, little evidence fr a cnscius strategic shift by the Vietnamese gvernment in this directin, the current structure f the Vietnamese enterprise sectr - with 105,569 registered firms (average emplyment 32) in 2005, thusands mre husehld-scale enterprises, and nly 4086 SEs - indicates that the Taiwanese mdel might be a mre successful strategy fr state-led industrialisatin than the Krean ne. Mrever, such a strategy might prvide the ecnmic ratinale that is currently missing frm the state-se alliance. An Equitable Sciety? Achievements in Pverty Reductin Since Di Mi Vietnam recvered quickly frm the difliculties f its early refrm decade and, since 1992, prgress has been rapid and impressive. There has been cnsistently fast grwth f natinal incme, the Asian crisis causing nly a minr slwdwn. Per capita GDP has apprximately quadrupled and, accrding t the fur natinal Living Standards Surveys (LSS), there has been rapid reductin in abslute pverty.

16 236 M. Beresfrd frm 58% f the ppulatin in 1993 t 23% in 2004, Since pverty is nt defined by incme alne, we als nte that the ability f individuals t make decisins and t be cnsulted abut decisins impinging n their ecnmic and scial well-being has imprved immensely. Elected bdies like the Natinal Assembly have adpted a far mre critical rle than they had under central planning, newspapers have increased their scrutiny f develpments in sciety and plitics, and individuals have far greater access t infrmatin than befre. The uneven distributin f these imprvements has, hwever, been widely nted, Beresfrd (2003) discussed, fr example, the marked increase in reginal inequality during , While there was a slight cnvergence in incmes f agricultural prvinces during the 1990s, the gap between urban and rural areas cntinued t widen. In the early 2000s, in the wake f the Asian crisis and plitical tensins arising in sme prvinces (Thai Binh in 1998 and the Central Highlands in 2001), a much greater phcy cncentratin n pverty reductin seems t have brne fruit. The urban-rural gap, as measured by the rati f average urban t average rural mnthly incmes, declined frm 2,26 in the 2002 LSS t 2,16 in 2004 (GSO, 2007), Nne the less, scial stratificatin cntinued apace: the rati f the richest t the prest quintile rse, ver the same tw years, frm 8,11 t 8,34, and that f the richest quintile in the richest regin (the suth-east), t the prest quintile in the prest regin (the nrth-west) frm 19.9 t 21,4. Since the end f central planning there have been changes in the ways in which peple becme pr and unable t participate in the benefits f grwth. Whereas under central planning, the distributin f incme was fairly flat (Beresfrd and McFarlane, 1995), the increased dynamism f the ecnmy in recent years has generated a new mechanism fr the distributin f incme with a cnsequent need t tackle the questin f equity in new ways. One way, f curse, wuld be t rely n the s-called "trickle dwn" effect. While this might lift average standards f living, it is ntriusly unsuccessful in imprving equality and tends t leave large numbers belw the pverty line. Welfare handuts, n the ther hand, may succeed in temprarily alleviating the wrst impacts f pverty, but unless they are targeted in such a way that new investments and jbs are created, they are likely t sustain relative pverty in the lnger run. Any successful strategy t create a mre equitable sharing f the benefits f grwth must first analyse the mechanisms by which relative wealth/pverty are created and then use plicy instruments t ffset these mechanisms. The "Grwth Ple" Mdel The "grwth ple" mdel f develpment adpted by the gvernment in the early 1990s built n several realities f Vietnam's emerging market ecnmy that led t a strng bias in favur f develpment f a few majr urban agglmeratins. While a third grwth ple, arund Da Nang, was part f the gvernment's plan, in practice nly tw areas. H Chi Minh City (HCMC) and its immediate vicinity and the Hani-Haiphng-Quang Ninh triangle received the lin's share f investment, FDI was attracted mainly t the suthern grwth ple arund HCMC and t a lesser extent the nrthern ne. By 2005, 83% f prjects were lcated in these tw

17 Di Mi in Review: Vietnam Til areas r in ffshre il and gas. Given the imprtance f FDI in the ttal investment effrt during 1990s, the pattern f FDI cnstitutes a majr reasn fr uneven develpment between rural and urban areas, A better survival rate f centrally managed SEs was anther imprtant reasn fr the widening urban-rural gap. It was largely lcally managed SEs and c-peratives that suffered clsure during the restructuring. In a majr plicy reversal since 2000, hwever, investment in centrally managed enterprises has grwn at nly 5% per annum in real terms, cmpared t 16,6% fr lcally managed enterprises (GSO, 2007), Develpment f the rural areas relied t a large extent n small, privately wned enterprises, mstly at the husehld scale with rather lw capital investments and lw prductivity grwth. There are als majr differences between regins in the extent t which rural develpment and diversificatin has ccurred. In the 2000s, the tendency twards urban-rural equalisatin has depended largely n rural diversificatin in the nrth, especially the Red River delta (FAO, 2006: Part III, 39), The same tendency has nt appeared in the suth, where migratin ut f the rural areas has been a mre imprtant feature f the grwth prcess.' While I have seen n systematic study, there are several case studies suggesting that the ruralurban cmmercial netwrks mentined abve have led t strnger develpment in traditinal artisan villages in the nrthern delta (althugh ften in nn-traditinal activities), a phenmenn that was absent frm the suthern regin (Abrami and Henaff, 2004; Bui, 2004; DiGregri, 2001), In principle, fiscal redistributin thrugh the state budget culd be used as a means partially t ffset the inequalities arising frm investment decisins by the crprate (SE and FDI) sectrs. Gvernment spending in pr regins shuld be able t generate higher grwth rates, mre emplyment and a prcess whereby these prvinces can begin t catch up. Hwever, fiscal redistributin in Vietnam was nt very strng during the 1990s, Mst state revenues were raised within the urban areas which were, in turn, permitted t spend a high prprtin f thse revenues. Other areas, that raise relatively few revenues, had smaller budgets and much lwer per capita spending. The prest prvinces d receive subsidies frm the central budget in rder t increase their level f spending - the tw regins that receive nearly all f these subsidies are the pr, densely ppulated castal prvinces in the centre f the cuntry and the muntain prvinces. The size f such subsidies is als rughly in inverse prprtin t the GDP f the prvince. Hwever, the subsidies received by the muntain prvinces are cnsiderably higher than thse received by the pr castal prvinces. They are nt purely redistributive and spending in the muntain prvinces may be mre related t issues such as defence and integratin f ethnic minrities. Mrever, subsidies are insuflicient t enable pr prvinces t catch up t the wealthy urban areas. Class Frmatin While increased scial stratificatin is certainly visible in nrthern villages, village slidarity has t sme extent survived the break-up f the c-peratives (Kerkvliet, 2006), In the suth, n the ther hand, class frmatin - in the sense f separatin