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Few countries are better placed than Vietnam to get rich - The Economist - 23.01.24

Yet political paralysis could slow it down

A brief but revealing panic struck Vietnam this month. On January 12th the country’s 79-year-old leader, Nguyen Phu Trong, failed to meet the visiting president of Indonesia. Mr Trong’s name was removed from the official schedule without explanation. Rumours spread that he was dead. For three days noodle shops raged with speculation about who his successor might be. Would it be someone corrupt? Or more pro-China? The ruling Communist Party, a secretive bunch, revealed nothing.

Then, on January 15th, official media showed a frail Mr Trong attending a humdrum session of the legislature in Hanoi, as if to holler “I’m not dead!” like a Monty Python plague victim. The public may never know whether it was sickness or something else that made the Communist Party chief disappear from view. But it was unsurprising that his absence should scupper a meeting with a global leader. Everyone wants to be Vietnam’s friend these days.

This is partly for geopolitical reasons. Vietnam, a country of 100m, has shrewdly positioned itself halfway between China and America, prompting both superpowers to woo it. In 2023 Vietnam was the only country honoured with state visits from both Joe Biden and Xi Jinping. In September it upgraded its relationship with America to a “comprehensive strategic partnership”, putting it on the same level as Russia and China.

Although Vietnam’s ruling party has much in common with China’s, ordinary Vietnamese are deeply suspicious of their giant, bullying neighbour. China unlawfully claims parts of the South China Sea that belong to Vietnam; its ships harass Vietnamese fishermen. An Asian Barometer poll found that only 25% of Vietnamese have a positive view of China, whereas 85% have a positive view of America. The Biden administration, eager to deter Chinese expansion, has supplied Vietnam with coastguard ships to protect its waters. America would love to offer more help, but Vietnam rules out a formal alliance.

The country’s growing geopolitical relevance is based on its strong economic performance, as well as geography. When Vietnam started opening up in the mid-1980s, annual income per head was half that of Kenya. On the back of pragmatic and increasingly pro-business policies, it has since grown sixfold to $3,700. Today, the government’s ambition to turn Vietnam into a rich country by 2045 is plausible. Economically, Vietnam has probably never faced a more benign global environment.

Geopolitics is driving investment towards it, as America seeks to decouple from China and private firms of all nationalities sense which way the wind is blowing. Most manufacturers cannot simply pull out of China. But to mitigate the cost of current and future trade barriers, they can hedge their bets by making things elsewhere as well (a strategy known as “China + 1”). Many also hope to reduce their exposure to arbitrary policies in China—memories of its painful zero-covid lockdowns remain fresh. “The pandemic…showed us we were too concentrated in China,” notes a foreign manufacturer in Ho Chi Minh city.

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Firms that export to the West are shifting production to Vietnam. Brands such as Samsung and Apple are making gadgets there. Suppliers, including Chinese ones, are clustering around them. “Our customers insisted we move to Vietnam [for geopolitical reasons],” says the boss of an electronics firm. “But we were already thinking about it, since labour costs in China were rising and young Chinese no longer want to work in factories.” In the first three quarters of 2023 inflows of foreign direct investment to Vietnam as a share of GDP were twice as large as in Indonesia, the Philippines or Thailand, reckons cLSA, a bank (see chart).

If the world keeps fragmenting into rival trading blocs, the global economy could be seriously damaged, reckons the IMF. And given the high share of Chinese components in many products labelled “Made in Vietnam”, it is unclear how much America is really reducing its dependence on China by moving supply chains there. But so far the shift has been good for Vietnam.

GDP growth has been bumpy: it slumped during the pandemic, bounced back to 8% in 2022, fell to 4.7% in 2023 amid a credit crisis, and is expected to recover to 5.8% this year. Still, Vietnam is well placed to keep attracting investment, argues Tony Nafte of cLSA. It is more open to commerce than its South-East Asian peers. Trade in 2022 was equivalent to a whopping 186% of its gDP, versus 45% in Indonesia, 72% in the Philippines and 134% in Thailand.

Vietnam’s plentiful, young manufacturing workers are diligent, reasonably well educated and half as expensive as those in Chinese coastal areas. Vietnam, unlike Indonesia and the Philippines at times, has no problem with Islamist terrorism, notes a factory boss. It offers fat incentives to foreign investors, both explicit (tax breaks, cheap land) and de facto (high-tech workers were among the first to get covid vaccines). And although it is a one-party state like China, it is friendlier. Expatriates in Beijing complain of a climate of fear; those in Vietnam seem relaxed.

Yet the country has a big political problem: its government is paralysed by indecision. Mr Trong must step down by 2026. As the panic over his rumoured demise reminded everyone, his succession is unclear. Not knowing who they will have to please in a couple of years, officials are reluctant to make major decisions.

A “blazing furnace” crackdown on corruption, lit by Mr Trong, has made them even jumpier. Hundreds have been arrested, and last year the president (who is number three in the hierarchy) was forced to resign. Lesser officials have been loth to approve big projects in case they turn out to be tainted. In the coming reshuffle, any whiff of scandal could be used to wreck their careers, or worse. So the safest thing, many have concluded, is to do nothing.

Consider energy. Vietnam has done a fine job of connecting homes to the grid (nearly 100% of rural ones have electricity, up from 14% in 1993). But as industry grows, so does demand for power. The supply can be unreliable: power cuts last year were “terrible”, says a manufacturing boss.

And foreign investors increasingly want to tell customers and shareholders that they use clean energy. Here, Vietnam is struggling. It depends heavily on coal, which makes the air in Hanoi worse than Shanghai’s. A push to install more solar panels has helped a bit, but a promise to hit net-zero carbon emissions by 2050 looks fanciful unless the country harvests the wind off its blustery, 3,000km-long coast.

That may happen, but it is taking ages. The process for granting approvals to survey the seabed for suitable spots is “extremely slow”, complains a wind-power executive, adding that officials are “cautious on making any decisions now”. Little of the legal framework for erecting turbines or selling power to the grid is clear, he sighs.

The relevant ministries barely talk to each other, and everything must go through the state-owned power supplier, eVN, which is as nimble as Jabba the Hutt. Environmentalists gripe that vested interests (ie, bigwigs who have invested in coal) are blocking the country’s energy transition. Some of those environmentalists have been jailed, typically for “tax fraud”.

Some in the ruling party, such as the prime minister, Pham Minh Chinh, understand how gravely Vietnam is imperilled by global warming. The delta of the Mekong river, which covers much of south-western Vietnam, is sinking even as sea levels rise, meaning the sea could ultimately swallow it.

Pragmatic officials argue that if Vietnam wants to be an industrial powerhouse it should bet on the clean technologies of the future, not the dirty ones that much of the world is trying to scrap. Hence the government’s implicit backing of VinFast, the ambitious but loss-making electric-vehicle arm of its biggest private conglomerate. But faster reform is needed if Vietnam is to meet its climate pledges or prepare for a warmer world.

Vietnam is heavily dependent on trade, and the global business environment is changing fast, so policymakers need to keep up. Sometimes, they do not. Vietnam’s policy of giving tax breaks to foreign investors, for example, has become less of an inducement since the oecd, a club of rich countries, agreed to apply a global minimum corporate-tax rate of 15%.

Multinationals that pay little or nothing in Vietnam may be hit with higher charges elsewhere, warns the manager of a foreign manufacturer in Ho Chi Minh city.

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Rather than offer tax breaks the government should simplify the rules, he says. “The opportunities are enormous but red tape is the biggest problem,” agrees Bruno Jaspaert, the boss of Deep C, an industrial zone in the city of Haiphong. Rules are often contradictory; some projects need the approval of a dozen ministries. More infrastructure would help. Public transport is still poor, so traffic in big cities is slow.

Despite the crackdown, corruption still hurts business. One foreign entrepreneur grumbles about having to play by two sets of rules: the formal ones, such as paying taxes and ensuring his warehouse doesn’t catch fire, and the informal ones, such as paying off local officials so they don’t hogtie him with inspections.

Vietnam has risen from dire poverty to modest prosperity in a single generation. But it needs to keep on reforming. Geopolitical winds can change. Rivals can grow more competitive. Vietnam is greying fast: its working-age population will shrink after 2038, by one estimate. And its citizens may tire of their ruling party if living standards do not keep rising rapidly. Regimes, like leaders, do not last forever. ■

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Few countries are better placed than Vietnam to get rich - The Economist - 23.01.24
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