Vietnam beat coronavirus. With its economy booming, can it face up to China ?

In less than half a century Vietnam has risen from the ashes of war to being a regional economic powerhouse that even the coronavirus couldn’t stop As its Communist Party meets to decide its future, the country is on the brink of realising its potential. First, it must tame corruption and navigate ties with China

Vietnam’s Party Congress beginning on Monday will elect the country’s next leaders and unveil its economic goals. Held amid a pandemic and uncertain geopolitical winds, the once in five years event is also widely seen as a coming-of-age moment for Vietnam, given its effective handling of the coronavirus and the strong growth of its economy in recent years.

While the case for the Southeast Asian country to be considered a rising middle power is growing, experts warn it faces challenges ahead, among them tackling bureaucratic inertia, corruption and nepotism and restructuring the economy.

A BRUTAL BATTLE FOR POWER

When the great and good of the Communist Party of Vietnam assemble for the weeklong 13th National Congress, it will be to take decisions that will reverberate far beyond the borders of this Southeast Asian country of nearly 100 million people. Some 1,600 delegates from across the country will travel to Hanoi to attend the meeting, which lasts until February 2, to select a new leadership for one of the world’s fastest growing economies – and one that has increasingly found itself caught in the middle of the crossfire between the United States and China, its two biggest trade partners.Beijing, Hanoi’s communist bedfellow, and Washington, its Cold War foe with whom ties are warming, will both be watching closely for an insight into the direction the country is taking. The US, in particular, has made no secret of its hope that it can draw Vietnam into its orbit by touting it as an alternative global manufacturing base to China.

Against this background, there are two key areas to watch. One is the leadership battle that will pitch two factions with different visions for the country against each other. The second is the five-year economic plan that Congress will be expected to approve.

While the leadership battle will ostensibly be waged in a series of votes – delegates will select a Central Committee, which will in turn pick a politburo and from that the general secretary – Bill Hayton, an associate fellow at the London-based think tank the Asia-Pacific Programme at Chatham House, described the Congress as a “brutal battle for power” in which the real action took place behind closed doors months, or even years before the meeting itself.

He said that since the last Congress the fight had been between “loyalists” who believed the party must remain Vietnam’s supreme source of power and “liberalisers” who were willing to tolerate more flexibility in the drive for economic development.

Vietnam officially has a leadership made up of “four pillars” – the general secretary, prime minister, president and chair of the National Assembly. However, the general secretary is widely seen as the single most powerful person. At present Nguyen Phu Trong, 72, is both general secretary and president, but he is expected to step down due to health issues and is thought to favour handing over to his protégé Tran Quoc Vuong, 67, the head of the party’s central office who spearheaded Trong’s aggressive anti-corruption campaign.Vuong’s biggest rival for the top spot is likely to be the current Prime Minister Nguyen Xuan Phuc, 66, a technocrat who has received widespread recognition for his role in the country’s effective handling of the coronavirus pandemic (Vietnam has recorded a little more than 1,500 infections and just 35 deaths).

Age could be a complicating factor, as the mandatory retirement age is supposed to be 65. Carl Thayer, professor emeritus of politics at the University of New South Wales in Canberra, said that while an exemption had been made for Trong in 2016 due to his “exceptional performance”, it was “highly unlikely he will be reappointed to a third term” due to the stroke he reportedly suffered in 2019. While both Vuong and Phuc are also over the age limit, Thayer said a compromise had been reached under which both would receive exemptions.

Were Phuc to take the top job, his ascent would leave the economically focused prime minister role open. Pham Minh Chinh, an apparatchik who heads the party’s organisation committee, has emerged as one candidate to replace him, although Chinh does not appear to have such broad economic experience as those who have previously held the role. If selected, Chinh would be the first Vietnamese prime ministerr not to have previously served as a deputy prime minister. Another possible candidate with broader economic qualifications who could also be in the running to become prime minister would be Vuong Dinh Hue, a former deputy prime minister who is currently secretary of the Hanoi Party Committee.

Hayton said the fight between loyalists and liberalisers would continue no matter what happened in the leadership battle and that either way, “the outcome is likely to be more of the same: increasing economic opening combined with ongoing political authoritarianism.”

Those seeking to read the tea leaves might do better to look further down the ranks of the leadership shuffle.

Linh Nguyen, associate director with the risk consultancy Control Risks, said the big changes could occur at ministerial and provincial government level.

“This is where we might see changes in policies that will define the country’s economic development strategy in the next five years”, Linh said.

Unlike Thayer, she felt there was a lingering concern that the party’s charter could be amended to allow Trong to remain as general secretary.

“If so, this would create a precedent for future leaders who might take advantage of it for personal benefit rather than for the good of the country,” Linh warned.

If Trong does not step down, he will become the longest-serving general secretary since Le Duan, who ruled with an iron fist after the death of Vietnam’s founding revolutionary Ho Chi Minh.

ASIA’S RISING STAR

The country’s success in tackling the coronavirus has not only raised Phuc’s profile, but that of the country more widely.

As well as burnishing its credentials for competent governance, its strong showing against the virus has converted into economic gains that made Vietnam one of the few countries in the world to post positive growth last year – strengthening the argument of those who say it should be viewed as a rising middle power.

Since sealing itself off to the world last March, the country’s strict monitoring systems, mandatory quarantine periods and extensive coronavirus testing have won it praise from around the globe.The World Health Organization credited the country as having moved forward to a “safe coexistence with Covid-19” in which it had achieved the dual objectives of disease control and economic development.

Lye Liang Fook, a senior fellow and coordinator of the Vietnam Studies Programme at the ISEAS-Yusof Ishak Institute in Singapore, said this had allowed Hanoi to focus on regaining growth momentum.

“Vietnam’s economy grew 2 to 3 per cent in 2020, which is a very positive development in view of the negative growth in many other countries,” Lye said.­­­­

This year, Vietnam’s economy is expected to grow more than 6 per cent, a development that will solidify its claims to be Asia’s “rising star”.

DBS Group senior economist Irvin Seah, who used that term to refer to Vietnam in a seminal 2019 report, believes Vietnam is finally “coming of age” as its strong economic fundamentals and well-considered policies come together to ensure favourable long term prospects.

Seah said Vietnam had undergone a transformation since just over a decade ago when it was struggling with inflation of up to 28 per cent, weak growth and a drastic devaluation of its currency.

From 2012, Hanoi had managed to turn its fortunes around by tightening monetary policies and focusing on reforms in state-owned enterprises, the financial sector and public investment.

Since then, Vietnam’s economy had grown at an average 6.4 per cent, witnessed stable inflation, and began to outperform its regional rivals.

“In terms of the size of the economy, Vietnam is expected to join the ranks of some of the relatively more developed economies in the region in the coming decade,” Seah wrote, attributing the success to the country’s highly integrated industrial zones, strategic location in regional supply chains, attractive tax concessions, low corporate tax rate and competitive workforce.

Seah is far from being the only fan of Vietnam’s development.

Last October, the World Bank in Vietnam said the country’s shift from a centrally-planned to market economy had transformed it from one of the poorest in the world into a lower middle-income country.

“Between 2002 and 2018, GDP per capita increased by 2.7 times, reaching over US$2,700 in 2019, and more than 45 million people were lifted out of poverty”, it said.

This month, The Economist Intelligence Unit reported that Vietnam had beaten China and India to emerge as an attractive destination for foreign direct investment in Asia and a new hub for low-cost manufacturing in Asian supply chains.

FURTHER GROWTH MOMENTUM

Ivan V. Small, a visiting senior fellow at the ISEAS’ Vietnam Studies Programme, said Vietnam’s growth would continue as tourism rebounded from the pandemic.Manufactured and agricultural exports – including everything from smartphones, chips and electronics to textiles, shoes, coffee and rice – were also likely to grow.Small said this growth would be fuelled by the “China Plus One” investment strategy in which many foreign companies, prompted by the US-China trade war, were planning to move (or had already moved) production bases to Vietnam as a way of avoiding investing in China and diversifying their supply chains.

The escalating trade war with Washington had also boosted Vietnam’s appeal by increasing tariffs on Chinese imports, making it more expensive for firms to conduct business in Asia’s largest economy.

DBS’ Seah said the process of diversifying away from China had started a few years ago but had been accelerated by the trade war.

“Vietnam has definitely been a key beneficiary” Seah said, adding that he expected the trend to continue.On the slew of free-trade agreements that Vietnam had signed in recent years, such as the EU-Vietnam Free Trade Agreement and the Regional Comprehensive Economic Partnership (RCEP), Small said these would generate more opportunities and further integrate Vietnam into the region.

“Vietnam also has a strong commitment to technology development and promoting an increasingly digital economy,” Small added.

Indigenous companies and domestic conglomerates such as Vingroup were another source of growth, said Hayton.

Widely seen as Vietnam’s answer to South Korea’s Hyundai or Samsung, Vingroup looks set to dominate its home market while exporting its products around the world. Apart from real estate and resorts, the group has expanded into mini-marts, schools, health care, even cars and smartphones.

“So far its success has been limited, as most of Vietnam’s exports come from foreign companies based in the country such as Samsung. But we should get some clues about the likely future direction from the Congress,” Hayton said.

A RISING MIDDLE POWER

The country’s remarkable economic rise is seen by many as confirmation that it has in just a few decades completed its transformation from being on the brink of ruin at the end of the Vietnam war to being a fully fledged (and still rising) middle power.

It’s a transformation that is not lost on Jim Laurie, who has covered the region as a reporter for America’s NBC news company since the early 1970s.Recalling the American withdrawal from Saigon – today’s Ho Chi Minh City – in 1975, Laurie said he had been struck by the relatively “gentle” takeover of the city as compared to the takeover of nearby Cambodia the same year with its “extreme radicalism and cruelty of the Khmer Rouge”.

When Laurie returned to Saigon in 1979, all businesses had been nationalised, some private property seized, and the nation reduced to poverty.

“The state industry was stagnant. There was a rice shortage. Only small shops and the black market remained open,” recalled Laurie, also the author of The Last Helicopter: Two Lives in Indochina.

After the 6th party Congress in 1986, Vietnam declared Doi Moi, or economic reforms, which ended collectivised agriculture and gave a greater role to market forces. By the time Laurie returned in the 1990s, this time to the coastal city of Da Nang, he was struck by the changes as the city had emerged as a model for economic reform and privatisation. “The central government appeared to have given provincial and city authorities more leeway, allowing the city to attract foreign investment”, Laurie recalled.

In recent years, as the country has consolidated the economic turnaround attested to by Laurie, Vietnamese scholars have increasingly urged the country to see itself as, and behave like, a middle power by taking a greater role in regional security and economic cooperation.

In the 2020 Lowy Institute Asia Power Index, Vietnam was ranked 12th among 26 regional nations for comprehensive power, 11th in military capability, and hailed as “a middle power in Asia”.Lye pointed to the summit between US President Donald Trump and North Korean leader Kim Jong-un in Hanoi in 2019, as evidence that Vietnam had already begun to play a role beyond the national level.

Since 2014, Vietnam has also taken part in UN peacekeeping operations and inaugurated the UN Peacekeeping Centre in Hanoi. Last July, it announced plans to upgrade the centre into a regional facility for the Asia Pacific region.

“These are concrete indications that Vietnam seeks to play a bigger role commensurate with its capabilities and comfort level,” Lye said.

Huynh Tam Sang, an international relations lecturer at the University of Social Sciences and Humanities, Vietnam National University, Ho Chi Minh City, wrote this month that it was time to reassess Vietnam’s standing in the power rankings.

Huynh said the country had not yet officially embraced the notion of being a middle power as this might be “decoded as assuming a bigger role in Southeast Asia, thus challenging China in its backyard”.

However, Huynh noted calls from Vietnamese scholars for Hanoi to be recognised as a middle power had increasingly been appearing in domestic media, including outlets that were government-run.

Getting Vietnam to publicly acknowledge its middle power status, Huynh said, would require Vietnam to be more confident about its capabilities and support from the US and Hanoi’s regional partners.

HURDLES TO MIDDLE POWERHOOD

Despite Vietnam’s relative success amid the pandemic, analysts said Hanoi needed to overcome several hurdles to maintain its growth and win over its critics. Challenges included tackling corruption and nepotism, thoroughly reforming state-owned enterprises and ensuring legal transparency and accountability.

Huynh said pervasive corruption had caused widespread anger, adding that even though the anti-corruption campaign helmed by Trong had made real headway, it was controversial due to its association with infighting among party members. Over the past five years, more than 2,500 party members have been disciplined for corruption.

Huynh said there were concerns as to whether the new leaders who emerged after the Congress would be committed to fighting corruption with the same vigour as Trong.

Describing nepotism as the biggest obstacle to the country’s growth, Phua Koon Kee, CEO and co-founder of Aquarius Vietnam, said while bureaucracy and corruption had been tackled to varying levels of success in recent years, action against nepotism had not kept pace.

Phua, a Singaporean who has lived and worked in Vietnam for almost three decades, said nepotism in state companies had resulted in high “hidden costs” for businesses as they needed to “lubricate” the right individuals to get projects or contracts approved.

Nepotism also prevented the government from attracting the best brains, Phua said, adding that bright young people who returned from studying overseas and who had refused to take bribes were often sidelined.

“Either you follow the rules or you are out of the system,” Phua said.

Small said even though reforms at state enterprises had made way for new conglomerates that were more efficient and streamlined, these companies still controlled significant sectors of the economy and could lobby for trade protection, subsidies, deregulation and preferential market access, leading to potential “conflicts of public and private interests”.

Small added that the focus on Vietnam’s remarkable growth meant other challenges had been overlooked. These included the need to distribute wealth and investment hubs beyond the key cities of Ho Chi Minh, Da Nang and Hanoi.“Ongoing conflicts with China over the South China Sea will continue to make China-Vietnam diplomatic ties as well as economic supply chain relations difficult,” Small said.

Given that 70 per cent of world shipping transits the South China Sea, many analysts warned any disputes in the area would have a global impact on both the movement of goods and regional supply chains.

Thayer added that Chinese harassment of Hanoi’s efforts to develop hydrocarbon resources in the waters near Vanguard Bank – the westernmost reef in the resource-rich Spratlys chain, and within Vietnam’s exclusive economic zone (EEZ) and continental shelf – was also a concern.

Beijing says the area falls within the “nine-dash line” it uses to claim sovereignty over 80 per cent of the South China Sea. From 2017 to 2019, under Chinese pressure, Vietnam cancelled contracts with foreign oil companies for operations in the area.

“Any attempt by Vietnam to resume exploration and development in waters claimed by China would result in Chinese intervention,” Thayer added.Huynh said that as Vietnam’s “frenemy”, China’s strategy would continue to challenge and test Vietnamese leaders’ efforts in fostering relations with “like-minded” countries such as Japan, South Korea, India and Australia.Huynh also expressed concerns that Brunei, which is the 2021 chair of Asean (the Association of Southeast Asian Nations), might not be as committed as Vietnam – last year’s chair – in promoting Asean centrality due to the close ties between China and the sultanate, which relies on Beijing for investment and infrastructure projects.

“Brunei’s navigating of the US-China strategic competition while maintaining the cohesion and integration of Asean will not be easy. Vietnam should be well-prepared for negative scenarios,” Huynh added.

Hayton said the country’s “home-grown oligarchs” could limit competition and stifle the country’s growth. These “oligarchs” included those who dominated the domestic private sector and who had effective control over particular regions and sectors of the economy.

They also included those who controlled the state monopolies operating national infrastructure, a sign the party was continuing to direct large organisations “from behind the scenes”, according to Hayton.

“The result is a stifling of economic growth in some sectors and bottlenecks in infrastructure development,” Hayton said.

Phua warned that if the pandemic continued, in the absence of government stimulus packages, Vietnam’s economy would suffer.

Pointing to how some other countries had cautiously opened their borders, Phua said allowing some tourism – which contributes almost 10 per cent of the country’s GDP – would allow Vietnam to meet the growth estimates of 6 to 8 per cent this year.

By Maria Siow – The South China Morning Post – January 23, 2021