Is Vietnam the new China?

(by Nicolò Rizzo)

By Perry Tse

1. Introduction

After the Cold war, while Francis Fukuyama was proclaiming the “end of history” with the final victory of the capitalist block and the disintegration of the communist one, it was not difficult to envisage the upcoming fall of popular democracies.

At the end of the 1980s, in Europe and in Asia, the domestic and geopolitical environment of many of them appeared to be fragile. For example, in 1989, the Tiananmen Square protest broke out in Beijing. At that time, many analysts argued that the Chinese communist system was about to collapse, whereas this protest meant a gradual but resolute strengthening of the communist leadership of the People’s Republic of China (PRC), as a series of measures, such as the education reform, were adopted.

Meanwhile, Vietnam remained a poor country, with a GDP per-capita of barely $917 at purchasing power parity (PPP). The economy was devastated by the long conflicts throughout most of the 20th century, and the country was heavily dependent from USSR aids.

Yet, it is surprising that while experiencing tragic crises, the PRC and Vietnam were able to adopt reforms that challenged the widespread idea that economic openness necessarily leads to democracy and increased protection of civil and political human rights. In fact, Vietnam and the PRC are the only two examples of popular democracies that have managed to keep their political system almost unchanged, while partially liberalizing their economies. Other communist countries have not succeeded in this achievement or have not even tried: for example, North Korea still maintains a strict control over both the political and economic life of the country. Furthermore, Vietnam's growth has been so robust, especially following the outbreak of the trade war between China and the United States, that many commentators are wondering whether Vietnam will be able to replace China as the "factory of the world" or not.

To understand whether this guess is well founded or not, we will first present the evolution of Vietnamese politics since the Doi Moi reforms, before focusing on the current situation of the Vietnamese economy and on the determinants of its success. We will finally conduct a static analysis to examine the weaknesses of the Vietnamese economy, and a dynamic analysis that considers the strategic interactions between Vietnam, the US and the PRC.

2. Vietnam in transition: Doi Moi reforms

When the Communist Party of Vietnam (CPV) succeeded in reunifying the country in 1975, its leaders knew that much remained to be done. Already in 1948, Ho Chi Minh, the hero of the struggle for independence first against the French, then against the Japanese and again against the French and the Americans, stressed the need to win the battles against "poverty, illiteracy and the invaders".

Having beaten the invaders, in 1975 the IV Congress of the CPV adopted the first five-year plan (1975-1980) to reduce poverty and illiteracy. Faithful to the orthodox communist doctrine, the plan included measures such as the collectivization of land, the nationalisation of all productions and the priority of heavy industries. However, these measures did not lead to the desired results. Thus, after another failed five-year plan, the leadership was forced reconsidered the economic strategy, and the VI Congress of the CPV in 1986 adopted the "Doi Moi reforms", namely "renewal".

These reforms meant tolerance of small private economic entities, focus on light industry and on consumer goods, as well as openness to international trade and foreign direct investment (FDI), including those from the West. This approach was very similar to that promoted by Deng Xiaoping in the PRC since the Third Plenum of the 11th Chinese Communist Party Congress in 1978. In other words, Vietnam was transitioning to a socialist market economy. [1]

Such events necessarily have significant political repercussions. In fact, a precondition to attract foreign direct investments (FDI) from the West, was to cooperate with countries such as the United States, with which a bloody war had been fought until no more than 13 years earlier. At the same time, Vietnam had to be integrated into the international economy and politics, thus overcoming the binary logic of the blocs and its dependency on Moscow, to emerge from the i