Learning From Our Enemies, No One is Infallible

China's rise stirs Vietnam's anxiety

By Anh Le Tran

Asia Times Jun 12, 2009

If there was a need to identify a consensus among Vietnamese across the spectrum from domestic to overseas, it must be the uneasy feeling towards China. The Vietnamese mentality regarding national security from time immemorial has been that of vigilance on China.

Although Vietnamese pride for fighting off foreign invasions always runs high, the country’s history of 1,000-year Chinese domination is painful enough to be a relentless reminder. And three current developments seem to reinforce it to a significant extent.

First, over the past few months, the Vietnamese public outcry against Chinese involvement in Vietnam's bauxite mining plan in the Central Highlands has been dramatic. The list of accused Chinese elusive intentions is long, ranging from exporting environmental degradation to compromising Vietnam's national security. This phenomenon is unprecedented and shows an increasing contrast between the Vietnamese populace and government towards Chinese investments.

A quick look at the way Chinese companies carry out their bigger projects in Vietnam may provide a reasonable explanation for this sentiment. When constructing huge electric, cement, chemical and mining plants in Vietnam, instead of hiring locally, Chinese companies usually brought their own workers with them.

Most of them are unskilled laborers, who currently cannot legally work in Vietnam according to the country's labor regulations. Recent reports by popular Vietnamese media have shown an influx of Chinese laborers into Chinese-implemented projects, with some sites having in excess of 2,000 workers each. From the Vietnamese public's perspective, this is both undesirable for local employment and potentially difficult for public and national security.

Moreover, as pointed out by Vietnamese critics, the transfer of older and less environmentally-friendly technologies from China to carry out many of those projects does create a fear that Vietnam is becoming a dumping ground for industrial waste. In this regard, the fact that Chinese companies have increasingly won bids for big projects in key sectors across Vietnam cannot help but reinforce that fear.

Second, Vietnam's overall economic relationship with China has produced certain levels of stress on the Vietnamese economy. The country has faced a consistent annual trade deficit with China since 2001. The number for 2008 was shockingly high at more than US$11 billion, which is around 12% of Vietnam's gross domestic product.

This huge trade deficit has not only put negative pressure on Vietnam's current account balance but also placed competing Vietnamese businesses in hardship since many of the Chinese imports could be produced domestically.

Currently, it does not take much effort to find out that ultra-cheap Chinese goods are flooding the Vietnamese market nationwide. If this were to happen in countries such as the US or India, one would see anti-dumping and counterveiling investigations mushrooming left and right. But the Vietnamese government, due to legal capacity and political reasons, has not ventured to address the growing concern of its domestic business community.

In addition, problems stemming from the smuggling of Chinese goods, ranging from poultry to toys, into Vietnam are also significant, imposing not only an economic cost but also a health threat as the items are largely outside the reach of the Vietnamese government. Although this is a long-standing problem, Vietnamese media has recently rung an alarm bell on the potential massive influx of smuggled goods as Chinese businesses try to rid themselves of inventory buildup during the current economic slump.

Third, overlapping territorial claims over the Paracel and Spratly islands in the South China Sea (referred to as the East Sea by Vietnam) have intensified. The Vietnamese government tried to contain public outcry against Chinese assertive claims over the islands in late 2007 and early 2008 in order to prevent diplomatic tension between the two countries. However, in the face of China's increasing assertiveness, the Vietnamese government now encourages the public to research and understand historical and legal evidence to bolster its territorial claims. This can be seen as a very assertive move by the government of Vietnam since the country’s greatest strength lies in the will of its people as manifested throughout the country's history.

In light of the dispute, China's military buildup in the South China Sea, such as the reported secret nuclear submarine base on Hainan Island, has created anxiety in many Vietnamese circles. In this regard, Vietnam's recently reported deal to buy six submarines amounting to US$1.8 billion from Russia may be viewed as a reaction to the Chinese development. However, given its limited economic resources, Vietnam certainly does not want to engage in any potential arms race with China. But at the same time it cannot simply sit still and watch China continue to make bold military moves in the sea.

But there is still hope for Vietnam to address these issues in the direction of mutual benefits and regional stability. First and foremost, the concerns of the Vietnamese public cannot be underestimated and should be taken into account. In this respect, regardless of being approved by the Vietnamese government, Chinese companies investing in Vietnam should be acutely aware of the environmental and political impacts of their projects and faithfully address them in accordance with accepted international business standards and norms. It is in their long-term interest to earn the goodwill of the Vietnamese people by being responsible foreign investors. In this regard, Japanese foreign direct investment in Vietnam can be a good example for them to follow.

In addition, the Chinese model of sending workers to work on its projects is politically unsound and has the potential to spark unnecessary resentment that will further complicate bilateral diplomatic relations. Stopping this practice would be a good first step to reverse the negative sentiments of the Vietnamese populace.

In the larger context of economic relations, the trade balance and the problem of smuggling must be addressed to reduce stress on the Vietnamese economy. Trade is a very important diplomatic tool to promote meaningful friendship and peace; and China is in position to do that if it is true to its “peaceful rise” claims. Of the three individual powers - China, Japan, and the US - that Vietnam considers most important in its foreign policy approach, it enjoys significant trade surpluses with the latter two. China can show significant diplomatic goodwill towards the ordinary Vietnamese people if it joins America and Japan in this regard.

With respect to the thorniest issue, any solution to the territorial dispute in the sea should be reached in a transparent manner and in accordance with accepted international principles. How China approaches this problem will be the utmost test of its adopted “peaceful development” stance. Meanwhile, there must not be any use of deadly force (on any side) against ordinary fishermen in the disputed area. They are defenseless and must be treated as such.

At any rate, some may argue that it is wishful thinking to suggest the above approaches to the three current developments identified. But it is hard to see how beneficial bilateral relations and stability would be fostered if they were to be ignored. As a rising power on the world stage with potential economic and political influences throughout the continents, China has every interest to materially show the world that its rise is indeed peaceful. It can do that by showing first its sincerely good gestures towards Vietnam.

Although being on vigilance as usual, the Vietnamese are astute enough to embrace those gestures for the sake of peace and economic development while continuing to reinforce their hard-earned national identity.

Anh Le Tran is a professor at Lasell College (the United States), where he teaches economics and management.

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Vietnam bauxite plan opens pit of concern

By Duy Hoang

Asia Times Mar 17, 2009

One of Vietnam's most verdant regions faces severe ecological damage if the government moves ahead with its multi-billion dollar plans to mine and process bauxite. The perceived risk has sparked a rare public outcry in Vietnam's government-controlled society, with residents, scientists, state media, bloggers and even military officers lodging vocal protests.

Though apparently not coordinated, their collective dissent is part of a budding Vietnamese environmental movement, notable for challenging the state's traditionally unquestioned authority in implementing large-scale economic development projects. In recent months, a number of local scientists have written thoroughly researched articles, some published in state-controlled media, exposing weaknesses in the government's mining plans. A state-sanctioned domestic news site, vietnamweek.net, has been at the forefront of probing the issue, while bloggers have provided even more critical analysis.

Prime Minister Nguyen Tan Dung has called bauxite exploitation "a major policy of the party and the state", and he has approved several big mining projects for the country's central highlands. The government's master plan calls for investments of around US$15 billion by 2025 to tap Vietnam's rich bauxite reserves, estimated to be the third-largest in the world.

Over the past decade, Vietnam's rise as an agricultural exporter has come in large part from increased cultivation of coffee and other cash crops in the central highland's fertile plateau. It is an area of stunning beauty with rich eco-tourism potential. Thus many Vietnamese question the economic rationale and environmental wisdom of converting what is already an economically productive area into an open pit mine.

Bauxite is converted through a toxic process to alumina, the raw material for making aluminum. Known by environmentalists as "red sludge", the waste product, if not properly managed, can contaminate water supplies and choke off vegetation. For every ton of alumina produced, three tons of red sludge is given off, according to international experts.

Australia, a world leader in aluminum production, addresses the problem by disposing of its red sludge in remote outback areas with little rainfall, thus mitigating the risk of waterway contamination. Vietnam, which has a comparatively wet climate and is densely populated, does not have the luxury of vast tracts of unused land.

Nor is the country recognized for its expertise in managing hazardous industrial waste. Vietnam's emerging environmental movement fears the toxic residue from processing bauxite could run off into rivers that flow into heavily populated areas, including the Mekong Delta in the country's southern region.

To be commercially viable, bauxite processing usually requires access to cheap electricity. Because Vietnam faces mounting power shortages, the economics of bauxite mining and its low-margin exports are in doubt and will likely require heavy state subsidies just to cover costs.

The government has already announced plans to build a dedicated rail line to transport the produced alumina 250 kilometers to the Pacific coast. There a yet-to-be-built port will be installed to serve exclusively the bauxite projects.

Those plans, too, have underscored environmental concerns that the government's alumina export plans are an ill-begotten scheme devised simply for the sake of state-led industrialization. Other critics have questioned whether officials close to Prime Minister Dung and Deputy Prime Minister Hoang Trung Hai have personal stakes in the big-ticket ventures.

China factor

There is also a touchy strategic dimension to the ventures. Chinese interest and cooperation in Vietnam's bauxite industry was established through a joint statement issued after a meeting last June between Communist Party secretary general Nong Duc Manh and China's President Hu Jintao. In subsequent agreements between the Aluminum Corporation of China Ltd and state-owned Vietnam Coal and Mining Industry Group, it has become clear that China will be the primary market for Vietnamese alumina exports.

As part of those arrangements, thousands of Chinese workers are to be stationed permanently in Vietnam to assist in the production, according to local Vietnamese authorities. According to a recent fact-finding trip in Lam Dong province organized by the pro-democracy Viet Tan party, Chinese guest workers are appearing in growing numbers in the central highlands. Pictures obtained by Viet Tan show rows of newly constructed housing for Chinese workers and roadside restaurants with signs in the Chinese language.

Vietnamese bloggers, many critical of China's encroachment on the Paracel and Spratly Islands and perceptions that Beijing bullied Hanoi into accepting an inequitable border treaty this year, have questioned why Chinese guest workers are required in a country with a labor surplus and growing unemployment.

Bloggers have also expressed concerns that undercover Chinese military and intelligence agents could mix in with the workers. Vo Nguyen Giap, the famed communist military leader and later sometimes government critic, sounded the same alarm about the potential strategic threat of unregulated Chinese workers in an open letter in January to communist party's politburo.

The 97-year-old Giap referred to the central highlands as the strategic gateway to Vietnam, where previous wars have been won and lost through gaining control of the region's high ground. A month after Giap's warning, which only one newspaper in Vietnam was willing to publish, a second retired general issued a similar letter calling on the party leadership to reconsider allowing a permanent Chinese presence in the middle of the country.

Most of Vietnam's ethnic minorities live in the central highlands and they are the people likely to bear the environmental brunt of the government's bauxite scheme. They risk losing their lands with little or no compensation and subsequent exposure to mismanaged industrial waste.

Nor is it clear that the jobs created by bauxite production, even if they went to local Vietnamese rather than imported Chinese workers, would be enough to replace those lost with the forced elimination of pre-existing coffee, tea and cashew fields. It's from these ill-conceived government plans that Vietnam's grassroots environmental movement and calls for more sustainable development are being heard.

Duy Hoang is a US-based leader of Viet Tan, an unsanctioned pro-democracy political party active in Vietnam.

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Vietnam changes course

By David Brown

Asia Times Apr 12, 2011

Those who wrote off Vietnam's economic management as hopelessly sclerotic during January's 11th Communist Party Congress would be wise to take a second look. Though inflation in is on the rise, Vietnam's economy is suddenly looking up.

Held every five years, the party conclave sorts out the pecking order of the Vietnamese political elite. Finding the congress a yawner, many reporters turned their attention to criticizing the Hanoi government's economic management, echoing notes sounded the previous month by the Wall Street Journal.

Unable to shake their fixation on "growth at any price", feckless policymakers had triggered runaway inflation, the Journal had opined. Vietnam's economy was in the bucket and prospects were dim that the congress had changed anything, according to many reporters' assessment.

But in fact, much has changed. Buoyed by a fresh mandate for a second five-year term, Prime Minister Nguyen Tan Dung has sharply tightened credit, reined in state spending and begun to wring out inflationary expectations. Additionally, Dung has served notice that the government is going to impose discipline and economic sense on the nation's investment decision-making.

If Dung gets his way, the year-long run-up to the congress could be seen as a watershed, the moment when the enormous economic costs of allowing state enterprises and provincial governments to allocate most of the nation's investment capital at last became too evident to ignore.

Before the party congress, Dung's hands were tied by the political imperative of wooing delegates, including large blocs representing state enterprises and local party chapters. Foreign advisors and some of the nation's best economists were dismayed when Dung told audiences late last year that state enterprises would continue to play a leading role in the economy and were a strategic instrument of state policy.

That statement came after the debt-ridden state-owned Vietnam Shipbuilding Group (Vinashin) defaulted on a US$600 million syndicated loan to international lenders. At the time, The Economist wrote "if the government does not take the state-owned enterprises by the scruff of the neck, it will be able to do little else."

Dung was personally embarrassed by the Vinashin debacle, which made global headlines and sparked criticism of his government's economic management. He had been instrumental in the group's formation and in facilitating huge loans intended to establish Vietnam as a global shipbuilding power. When Vinashin was caught overextended in a global recession downdraft, the prime minister acknowledged failures of oversight.

Many state enterprises have flouted Hanoi's central guidance by "diversifying" into financial services, real estate and other sectors outside of their core businesses. Less reported but equally galling was their refusal to trade in dollar holdings for Vietnam's local currency when foreign exchange shortages began to drive down the dong a year ago.

Where foreign critics generally err is in the assumption that, inasmuch as Vietnam is a single party state, all the central government needs to do is issue orders. However, Hanoi's failures to bring nominally subordinate bodies into line doesn't imply a deficiency of desire so much as a lack of capability.

With state enterprises in mind, Martin Rama, the former chief economist at the World Bank's Hanoi office, often warned of the danger of "state capture" by political-economic bodies deemed "too big to fail". By one count, there are still some 1,473 companies, large and small, that are solely owned by the state. Additionally, the state still holds a majority share in many more so-called "equitized" companies.

These firms are the legacy of Hanoi's 30-year effort to build a "socialist" economy on the Soviet model. Though Vietnam swerved gradually onto the capitalist road between 1986 and 1991, many enterprises retained and cultivated close ties to government organs at both central and local levels. The Soviet-trained managers in both the enterprises and the ministries have regarded these relationships as unexceptional and, indeed, highly useful.

Until now, state enterprises have enjoyed extremely easy access to credit. Vietnam's banks have perceived loans to even loss-making state enterprises as risk-free because of the implicit government guarantee. Loans to state enterprises are said to account for around 40% of Vietnamese bank assets.

The banks' eagerness to channel funds to the state sector has not only starved the private sector but also undermined government efforts to direct capital chiefly to projects that promise a high rate of return. And it has made a mockery of the level playing field supposedly established by the enterprise and investment laws of 2005.

Last month, the government announced that it would cut subsidies to the state-owned sector this year by nearly 19%, or about 2.5% of gross domestic product (GDP). Subsequently it said that these funds would be redirected to public employees - one salaried worker in three, if public enterprises are included - in the form of a 14% wage increase to offset higher living costs.

Profligate provinces

Dung and his colleagues must also impose greater discipline over spendthrift local governments. Like the state enterprise sector, provincial administrations have in recent years achieved the ability to ignore inconvenient directives from Hanoi.

Strong economic growth in a dozen or so of Vietnam's 61 provinces and self-governing cities has established a robust tax base and freed them of dependence on handouts from the central government. Moreover, leaders in all localities are able to invoke the support of patrons higher up in the party structure when important interests are at stake.

What seemed to be an enlightened policy to decentralize decision-making back in 2005 has in the implementation turned out badly for Hanoi. In that year, authority to approve most investment proposals was ceded by the ministry of planning and investment (MPI) to provincial governments.

In short order, province after province built a surfeit of industrial parks and granted rights to build steel mills, cement plants, seaports, luxury hotels, resort developments and whatever else foreign promoters were peddling, no matter how redundant or uneconomic these ventures were on a national scale.

Abetted by lax credit, Hanoi's failure to discipline investment decisions has driven down significantly the efficiency of capital. Vietnam's incremental capital output ratio (ICOR, a measure of how much new productivity is created by an increment of capital) has steadily deteriorated over the 20 years since the nation committed to "market socialism".

Though a phenomenal 45% of GDP was invested according to the regime's statistics, 2010 economic growth was a mere 6.9% - a result far inferior to the statistics posted by China or comparable Southeast Asian neighbors.

A widely noted study by researchers at Vietnam's respected Central Institute for Economic Management calculated ICOR for the economy as a whole at 8.78 for the period 2001-2009. Effectively the measure showed that it took nearly $9 of new investment to generate annually $1 of new wealth. The state sector proved most inefficient with an its ICOR for the period of 17.55.

Nor were the results posted by foreign investors particularly impressive with an ICOR of 11.14 over the same nine year period. The leader in terms of ICOR was Vietnam's indigenous private sector, which required only $4.62 of new investment to generate another one dollar of annual output.

To be sure, Vietnam's government does not lack for advice on macroeconomic strategy. It gets plenty of it from the Asian Development Bank (ADB), the International Monetary Fund (IMF), Japanese growth guru Kenichi Ohno and a platoon of Harvard University professors as well as from its own economists. Prescriptions vary in detail but all agree that unless Hanoi makes radical changes to its development model, growth is doomed to slow and perhaps stall as Vietnam falls into a so-called "middle income trap".

Grossly simplified, the argument is as follows: Vietnam has put paid to widespread poverty by putting more workers and more resources into productive use. Today the average citizen of this nation of 88 million can consume $3,000 worth of goods annually - a level of wealth the previous generation could only dream of. However, to advance to the next economic level, Vietnam must march up the value chain.

The Dung government's commitment to achieve "rapid and sustainable development" is set out in a strategic document that was circulated well in advance of the party congress. It's a coherent and clear narrative of what ought to be but was lacking in specifics. Except for the bit about retaining the state enterprise sector, it's the sort of plan that gladdens the hearts of World Bank, ADB and IMF staffers.

The government seems persuaded that what's been achieved so far - a quadrupling of national income over the past 20 years - is indeed fragile, vulnerable to the whims of foreign companies looking for the cheapest place to stitch together a product. Enterprises of this sort are assigned some of the blame for Vietnam's balance of payments troubles - a consequence of the necessity to import a high percentage of the inputs for the manufactured goods they export. It's a situation that has necessitated successive devaluations of the dong to maintain competitiveness.

However, an economic paradox has emerged. Vietnam has become highly attractive to foreign businesses that originally went to China to set up low-skilled, labor-intensive production but now find themselves squeezed by rising rents and labor costs. Vietnam's local jurisdictions are happy to welcome such enterprises but the central government is lukewarm to further growth in the low-wage sweatshop sector of the economy.

Instead, Hanoi increasingly says it wants to lure investments that provide "sustainable growth". This, policymakers believe, will flow from the partial privatization of state enterprises (presumably making them more sensitive to market disciplines) and the recruitment of multinationals committed to upgrade local technology and managerial skills as well as promote backward integration in industrial production.

Hanoi has recently scored some notable successes in attracting knowledge-intensive manufacturing investments, including big multinational commitments from Intel, Canon, Nokia, Samsung and First Solar, the US leader in solar panel fabrication. That's raising concerns in regional countries such as Thailand and Malaysia, which compete for the same foreign investments and have a considerable head-start in industrializing their economies.

Inferior infrastructure

More high tech firms may be induced to produce for export in Vietnam if Hanoi is able to address pressing infrastructure needs.

Vietnam's transportation infrastructure is notoriously ill-coordinated and overtaxed. Too often new roads lead to nowhere, bridges are unused because proper approaches haven't been built and moving goods from the plant onto a container ship generally takes too long for today's just-in-time production requirements. Vietnam reportedly needs $16 billion annually for roads, ports, highways and other infrastructure; at best, it can supply only half of that amount from public funds.

Meanwhile, the nation's electric power system is unable to satisfy demand that's recently been growing at 15% per annum. Pricing is a big part of the problem. For years, Hanoi required the national power company, the state-owned Electricity of Vietnam (EVN), to sell power dirt-cheap to help spur economic activity and alleviate poverty.

With prices kept artificially low, EVN wasn't able to mobilize funds to invest in new power plants. Absent price guarantees, foreign investors were unwilling to help meet the capacity shortfall. In early 2010, the government, EVN, Vinacomin (the state-run coal and minerals conglomerate) and a number of foreign investors reached agreement in principle on raising the price of electricity to more economic levels. As a result, there's been a recent surge in power plant construction, with new facilities expected to come on line as early as 2013.

Now the onus is on Hanoi to pass sharply higher power costs to the consumer. As another dry season of widespread outages and brownouts drew near last month, Dung announced a 15% increase in the household electricity tariff. That's a heavy hit for consumers already reeling from price increases in basic food stables and transportation. (Inflation in March hit 14% year on year). But even if the power price hike is adjusted for inflation, the boost in revenue will be nowhere near enough to fund the increases in generating supply that are needed.

One approach that may help close infrastructure gaps is public-private partnerships (PPP). Japan, South Korea and the European Chamber of Commerce have all urged Hanoi to supply enough public financing to make it economic for foreign firms to invest their own funds and mobilize loans for transport infrastructure projects, an approach common in neighboring nations. In November 2010, Vietnam established a PPP framework that has been hailed as a solid first step towards the establishment of a system that meets the requirements of international lenders.

Reining in state enterprises has been on the agenda of Vietnamese reformers for years. So far their successes have been minimal as the cozy and profitable alliance between state enterprise managers and party apparatchiks has been relatively impervious to the economic and financial arguments advanced by inner-party technocrats.

However, last year's Vinashin debacle seems to have catalyzed a new resolve at the top to tackle the state sector. Dung seems at least rhetorically to have embraced thorough reform of state enterprises, including accelerated privatization of its stronger members - firms like Vietnam Airlines and Petrolimex, the motor fuels retailer - and closer scrutiny of how its weaker members use public funds.

With the object lesson of Vinashin's meltdown still vivid and the forward momentum of Dung's re-appointment to a second five-year term at this year's congress, now is clearly the time to act. To be sure, it is common in Vietnam for the state to issue edicts it can't enforce, including the government's latest drive against a distortion-creating currency black market.

A March 16 Politburo resolution endorsed the government's efforts to deal with macroeconomic imbalances but on the subject of state enterprises said only that there should be reforms with a view toward equitization and that state companies should stick to their main lines of business. The new Central Committee elected in January has yet to convene and thus hasn't weighed in on the need for sweeping state sector reforms.

Yet Dung has clearly set a new tone by putting a brake on credit and spending and announcing his intention to rationalize the country's investment decision making. It's a message that the regime hopes global money managers put on their radar and visiting foreign reporters take note.

David Brown is a retired American diplomat who writes on contemporary Vietnam. He may be reached at nworbd@gmail.com.

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New model needed in Vietnam

By Anh Le Tran

Asia Times Sep 8, 2010

Vietnam glided through the global recession, with economic growth hitting 5.3% last year and expected to expand 6.5% in 2010. Nonetheless, a sharp deterioration in the country's external finances, rising concerns about the banking sector's health and a highly inconsistent macroeconomic policy framework have driven a creeping devaluation of the local currency and a recent credit-rating downgrade.

Government leaders are said to be increasingly worried about the country's economic growth prospects, with particular concerns about the quality of recent investments. Ahead of next year's pivotal 11th Party Congress, where key Communist Party policies and appointments will be determined in the one-party state, some have called for a new reform strategy that maintains fast growth while minimizing market-driven risks, including rising disparities in wealth.

With a sharp reduction in poverty rates and an average annual growth rate among the highest in the world over the past two decades, Vietnam has been widely hailed as a market-reform success story. Foreign investors, including major United States-based manufacturers such as Intel, have committed major capital outlays to the country's low-cost, fast-growing economy.

To achieve high annual growth targets, the government has consistently pumped up investment. Total investment, which accounted for less than 33% of gross domestic product (GDP) in 1999, increased to nearly 43% last year. However, the outlays have become less productive, as reflected in Vietnam's rising Incremental Capital Output Ratio (ICOR), an indicator of investment efficiency. There are many reasons for the statistical slide, but chief among them is the laggard state sector, which accounts for over 40% of total investment and significantly crowds out the private sector.

In a bid to attract ever-rising amounts of foreign direct investment (FDI), economic managers have not been strategically selective in their approval processes. As a result, many FDI projects in Vietnam have been geared to take advantage of the country's abundant cheap labor, lax environmental standards and regulatory loopholes. This phenomenon can be seen clearly when provinces compete to attract more FDI to boost short-term economic performance, often for the vested interests of local political leaders.

Although rising exports have been an important source of economic growth, fast expanding trade has given rise to new problems. Many of the country's major exports derive from the exploitation of natural resources, and relentless efforts to boost trade and fuel growth have come at a rising cost to the environment. For manufacturing, Vietnam imports a stubbornly high percentage of its inputs, including machinery and spare parts, for export production. A rising reliance on China for cheap inputs has crippled the development of local industries.

This has contributed to a persistently high trade deficit. Fitch Ratings, a credit risk agency, estimates Vietnam's current account deficit will top 11% of GDP this year, a significant rise from last year's 7.4%, and indicative of "elevated risks" of a possible current account crisis. Meanwhile foreign exchange reserves dwindled from US$24.2 billion in 2008 to $16.8 billion last year. The government suspended publication of reserve statistics in October 2009, a key contributing factor to Fitch's decision to downgrade its credit rating from BB- to B+ in August this year.

Sliding competitiveness

As Vietnam bids to integrate with the global economy, facilitated by its accession to the World Trade Organization (WTO) in 2007, domestic losers from trade are on the rise. Among the hardest hit have been farmers unable to compete with an influx of cheap, often Chinese-produced imports. For labor-intensive export products to remain price competitive, real wages have been suppressed at the expense of workers' living standards. Together, these factors have contributed to rising income inequality, even as poverty levels continue to come down.

Vietnam has in recent years fallen on the World Economic Forum's Global Competitiveness Index. Vietnam ranked 68th in the 2007-2008 Index but slid down to 75th in the 2009-2010 rankings. That's significantly below Vietnam's Association of Southeast Asian Nation peers and rivals, including Thailand, which ranked 36th, and Indonesia, which notched the 54th position in the most recent rating.

Prime Minister Nguyen Tan Dung recently asserted that Vietnam would continue to aim for "fast and sustainable" growth. To reach that broad goal, and in muted recognition of the public sector's drag on the economy, he called for the development of the private sector through all possible means.

This will not be easy considering the lack of consensus among powerful political decision-makers about the future direction and pace of market-oriented reforms. The state sector has been charged with playing a lead role in developing the economy, and it will be difficult to quickly shift course because of the powerful vested interest groups who guide state resources towards state-owned enterprises.

Without strong laws to ensure a level competitive playing field, the sale of public assets to politically connected private investors, often at below prevailing market prices, has raised questions about the equity of privatization. Others have reportedly profited at the state's expense through privileged information received from Communist Party politicians about impending reforms and policies.

A new economic strategy for Vietnam should prioritize building new institutions genuinely geared towards managing sustainable and equitable growth over enriching the associates and family members of politicians and officials in the name of reform. Those institutions would be tasked with improving national competitiveness and moving industry up the value-added ladder, including into more technology-driven sectors.

The success of any new growth model for Vietnam will depend largely on reining in endemic corruption. The country has arguably made little tangible progress, despite a growing economic pie and rising incomes. Vietnam ranked 120th on the Corruption Perception Index published by Transparency International last year, faring worse than most other East Asian countries, including China (79th) and Thailand (84th).

The negative effects of corruption are far reaching, ranging from undermining the quality of policy implementation to altering the efficient distribution of economic resources. Since the implementation of a Vietnam-US bilateral trade agreement and Vietnam's inclusion in the WTO, progress has been made in reforming the legal system, especially through the adoption of many new laws that regulate various economic activities. However, the country still faces a significant gap between what's legal and what's actually practiced.

An effective strategy to promote more sustainable growth will necessarily need to improve government transparency, reduce red tape, close legal loopholes, make public officials at all levels accountable for their decisions, and facilitate public participation in the policy-making process. Government leaders could justify these deep-reaching reforms against resistant vested interests by playing up the country's legal obligations to the WTO to further integrate with the global economy.

Harking to its command economy experience, Vietnam remains fond of setting and achieving social and economic targets. Instead of setting high - and increasingly unsustainable - annual economic growth targets, the country's leadership should consider implementing new corruption reduction and efficiency targets for state-owned enterprises at the upcoming Party congress. Without a more equitable distribution of the country's rising wealth, the risk will rise that poorly implemented reforms will lead the country into crisis rather than prosperity.

Anh Le Tran is a professor at Lasell College in Massachusetts in the United States.