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Vietnam’s ‘Mini-China’ days over amid covid-era boom

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As much of the globe struggles to avoid Covid-19-related recessions, Vietnam faces an entirely different dilemma: overheating. 

The 6.5% growth the government predicts in 2021 already has the inflation-phobes warning about big trouble to come.

Hardly. If Japan has taught the globe anything it’s that it’s easier to cap runaway prices than to pull them out of a deflationary spiral. At the same time, Vietnam is that rarest of emerging nations: one that navigated the trade war masterfully, kept coronavirus deaths to a minimum and formed the vanguard of economies putting pandemic fallout in the rearview mirror.

This has economics writers tripping over themselves doing what-the-world-can-learn-from-Hanoi think pieces. Yet here’s a more interesting take: whether Prime Minister Nguyen Xuan Phuc’s government has actually learned the lessons from Vietnam’s last 20 years.

Tokyo, after all, still hasn’t heeded the lessons of “Japanization.” Rather than recalibrating growth engines, Japan is just throwing more and more—and more!—stimulus at an aging, uncompetitive economy. The U.S. still likes to think the answer to every problem is more tax cuts.

If the richest, most developed economies can’t learn new tricks, what hope does Vietnam, per capita income around $3,000, have? Lots, actually, so long as Phuc’s team makes the most of the post-Covid run it’s on.

One of the most glaring lessons from Vietnam’s last two decades is addressing the “pendulum economics” problem.

Any investor with even a passing interest knows that global markets tend to be wildly bullish on Vietnam or intensely negative. There’s rarely any middle ground. And so, boom-bust cycles that emerge like clockwork has been a Vietnamese hallmark since the late 1990s.

Some might say longer, of course. Ever since 1986, the year Hanoi launched its “Doi Moi” market-opening journey to today’s Covid-era success case. Financial turbulence has been Vietnam’s most consistent feature.

Until now, perhaps. Phuc’s team, it seems, is getting under the economy’s hood to tame the amplitude of the ups and downs.

One big source of the swings: Hanoi’s unhealthy preoccupation with exchange rates. For years now, the State Bank of Vietnam’s obsessive management of the dong has often provoked, inadvertently, these sudden shifts in investor sentiment.

Efforts to hold the dong down at excessively low levels can also get Hanoi in trouble with Washington. Case in point: the Trump administration labeling Vietnam a “currency manipulator” on the way out the door late last year. At the time, it smacked of sour grapes. Former President Donald Trump was miffed that factory jobs fleeing China were rushing to Vietnam rather than the U.S.

Yet an undervalued dong can lead to economic overheating that causes Vietnam’s pendulum to swing more widely. So, less dong-related policy zigzags would be all for the better.

Phuc’s team also must use this window of opportunity to shrink the state sector once and for all. With its factory-heavy growth model, communist politics, sizable population, low labor and land costs, rapid gross domestic product and geographical placement makes Vietnam a “mini-China” of sorts. This gives Vietnam a unique advantage in Southeast Asia as Trump’s tariffs and bans on companies caused a shakeup in production cycles.

Vietnam also sufferers a China-like affinity for sprawling state-owned enterprises. Yet SOE’s now stand as barriers to progress. They use their deep political ties to stymie the transition to an innovative, productive and startup-friendly growth model that creates millions of office jobs—and fresh wealth.

Altering economic power in top-down Vietnam requires great political will on Phuc’s part. That means reducing subsidies and preferential treatment for the inefficient and often graft-ridden state sector. And setting the stage for a private-sector boom.

With Vietnam enjoying China-like growth this year, there’s never been a better time to shift regulatory and tax codes in favor of small-to-midsize enterprises. Manufacturing jobs are plenty important. But in today’s “unicorn” crazed world, generating more economic energy from the ground up is more impactful.

The main objective is to diversify growth engines away from cheap exports toward services, innovation and tech startups that grow into $1 billion-plus valuation unicorns.

Vietnam has thrived producing electronic home appliances, furniture, garments, shoes, machine tools and smartphones for the West. The trick now is to swing the pendulum of policy priorities toward regulatory reform and improved education and training. And to incentivize risk-taking in ways that shift power from top to bottom.

This, of course, is true of Phuc’s Party, too. The last 20 years of boom-bust cycles are largely the result of a risk-averse government. Yet why not take the success of recent years out for a ride?

Vietnam winning Trump’s trade war and shining amid Covid-19 turmoil suggests Hanoi has a certain spring in its step. Phuc’s government even managed to navigate around China’s Covid-19 bullying in which it browbeats smaller countries to buy its vaccines. There’s much to learn from here.

Yet there’s no immunity from falling into a self-defeating economic pattern, as Vietnam did. There’s reason to hope that Vietnam, under Phuc’s leadership, is in fact learning the lessons of Hanoi’s past—and making that economic pendulum a relic of the past. It’s time Hanoi turned this hope into reality.

By William Pesek – Forbes – March 31, 2021

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