Comment on “Vietnamese Economy at the Crossroads: New Doi Moi for Sustained Growth”


Correspondence: Siow Yue Chia, Singapore Institute of International Affairs, 2 Nassim Road, Singapore 258370. Email:

With doi moi, Vietnam has successfully transited from a planned to a market economy with socialist characteristics, escaped the poverty trap, and emerged as a lower middle-income country by 2008. Vietnam's extraordinary economic progress is second only to the achievement of China in Asia. However, slowed growth and macroeconomic instability in recent years have highlighted serious challenges to international competitiveness and sustained economic growth. Tran (2013) identifies the problems arising from continuing protection of state-owned enterprises (SOEs) and an inability to respond to the China challenge, and calls for a new doi moi to further SOE reforms and pursuit of an “industrial policy” to promote Vietnam's dynamic comparative advantage.

Vietnam's SOE sector is beset with problems of inefficiency and monopoly power arising from soft budget constraint and subsidies, inadequate performance standards and corporate governance, and inadequate domestic competition. Tran does not advocate drastic SOE reforms. First, existing SOEs do not have to be privatized, but further state ownership should be restricted to areas of market failure, and where private sector is underdeveloped and lacks capital or skill to undertake the delivery of certain types of goods and services. Second, continuing protection and subsidization can be justified only for SOEs providing essential public goods and services, and infant industry/firms that need time to acquire skills and technological capabilities and achieve minimum scale to be internationally competitive. Third, there must be a level playing field with SOEs having no privileged access to credit and land, being subject to hard budget constraints, and having their monopoly power regulated. Fourth, corporate governance must be established for SOEs to ensure the efficiency of their operations. However, Tran did not explain the role of SOEs in the Vietnamese economy of the 21st century. Are they instruments of industrial policy for regulating and stabilizing the macroeconomy, for competing against foreign enterprises, and/ for achieving the socialist-oriented market economy? Also, does improved corporate governance ensure strengthened monitoring and oversight of SOEs to ensure their sound performance and accountability?

On industrial restructuring and upgrading, advocates of industrial policy argue that the free market alone is inadequate for a latecomer, so proactive policies are necessary. However, the design and implementation of industrial policy is crucial to its outcome. A weak institutional framework with corruption and red tape and a policy of import substitution discourages FDI in export industries. Further, to successfully attract FDI up the value chain, Vietnam needs an adequate supply of technically skilled manpower, reliable SMEs as suppliers to the multinational corporations, and intellectual property right enforcement. Producing technical manpower through enhanced education and training, and supplemented by inflows of foreign skilled manpower, is called for. Vietnam could also learn from the experiences of Singapore, Malaysia, and Thailand in fostering FDI–SME linkages.

It is unclear from Tran's paper what roles the World Trade Organization and the Association of Southeast Asian Nations (ASEAN) accessions have played in trade and investment reforms. Tran's analysis of the role of the ASEAN–China Free Trade Agreement is negative, with Vietnam reduced to the role of being an exporter of primary products to China, and importing both capital goods and labor-intensive manufactures, hence undermining Vietnam's nascent industries and SMEs. This impact is also the concern of other ASEAN frontier economies. However, not all is a negative sum game. China's east coast is rapidly losing its low-wage advantage for labor-intensive manufactures, and investors are seeking relocation westward into China's interior or southward where ASEAN's frontier economies still have labor availability and wage advantage over coastal China. The focus should be on improving the investment climate in Vietnam to capture these migrating industries.

Tran seems to have a more positive assessment of Vietnam's participation in the Trans-Pacific Partnership (TPP) negotiations. Vietnam has already achieved considerable access to the US market under the US–Vietnam bilateral agreement, particularly for its apparel and footwear exports, and enjoys a considerable trade surplus. Additional market access under the TPP for its labor-intensive exports will face considerable objections from US negotiators. Further, the TPP would entail Vietnam opening up to foreign service suppliers (particularly in the telecom sector dominated by Vietnamese SOEs) and foreign investors (US businesses cite challenges of corruption, bureaucratic inefficiency, customs delays and procedures, and poor infrastructure and internet connectivity), improving domestic competition through curtailing SOEs, and enforcing intellectual property protection, labor, and environmental standards. The SOE issue will complicate Vietnam's ability to negotiate successfully its entry into TPP.