Vietnam’s New Prime Minister Quietly Turns the Wheels of Economic Reform

By Chau Hoang —

Nguyen Xuan Phuc (right), then deputy prime minister, shakes hands with World Bank President Jim Yong Kim during the latter’s visit to Hanoi in February 2016. With considerable training in economic management, Phuc has made business reform and anti-graft the key priorities of his government’s economic agenda. Source: WorldBank's flickr photostream, used under a creative commons license.

Nguyen Xuan Phuc (right), then deputy prime minister, shakes hands with World Bank president Jim Yong Kim during the latter’s visit to Hanoi in February 2016. With considerable training in economic management, Phuc has made business reform and anti-graft the key priorities of his government’s economic agenda. Source: WorldBank’s flickr photostream, used under a creative commons license.

In April, Nguyen Xuan Phuc became Vietnam’s prime minister with a mandate bestowed by the leadership of the ruling Vietnamese Communist Party to promote the country’s integration into the global economy. In recent years, Vietnam’s economy has seen a new wave of foreign investment and an information technology boom, and Vietnam has signed onto several major free trade agreements. Yet persistent corruption and a tenuous fiscal standing continue to hinder economic growth, threatening to slow the country’s global economic integration.

Phuc took office in the shadow of a highly charismatic predecessor — former prime minister Nguyen Tan Dung — and many in the government and media expected little more from his tenure than a continuation of previous policies. With a focus on straightforward, practical economic measures, however, the new government has quietly embarked on a series of promising reforms.

Q1: What are the main economic challenges currently facing Vietnam?

A1: Phuc will need to grapple with a number of challenges facing the economy, including a gaping fiscal deficit, a drought-stricken agricultural sector, rising labor costs in the leading manufacturing industry, and an inefficient state-owned sector.

Vietnam’s fiscal performance has deteriorated in recent years: falling crude oil prices since 2015 coupled with a recent rise in military expenditures have widened the government’s budget deficit, now equivalent to 6 percent of the country’s gross domestic product (GDP). Meanwhile, public debt continues to creep toward the mandated ceiling of 65 percent of GDP.

These fiscal woes may hurt the government’s ability to alleviate economic damage caused by the recent drought and salinization in the rice-growing Mekong Delta — the worst to hit Vietnam in nine decades. The drought has harmed production of two of Vietnam’s most profitable crops — rice and robusta coffee beans — posing an immediate danger to its agricultural export economy. The country is currently the world’s largest producer of robusta beans and second-largest rice exporter.

Meanwhile, Vietnam’s thriving manufacturing sector faces a pressing challenge from rising labor costs. Rising minimum wages and social insurance fees mean that Vietnam risks losing its main competitive edge as a manufacturing hub — its cheap labor force. Without a corresponding increase in labor productivity or an upward shift in the global manufacturing value chain, rising labor costs may gnaw away at Vietnam’s export profit margins.

The new government will also need to tackle the inefficiency of state-owned enterprises (SOEs), which together account for one third of the country’s GDP and dominate a wide array of industries. Weighed down by a bulky, centralized management structure, weak governance, and a vast network of powerful interest groups, these behemoths have been lumbering along the path to privatization since 1992. Despite a long-term reduction in the number of SOEs, progress under the previous government was underwhelming, and political barriers to effective SOE privatization will most likely remain for Phuc.

Q2: What have been the most significant reform measures implemented by Phuc?

A2: Since taking office, Phuc has made supporting businesses a top priority of his economic agenda. Unlike his predecessor, who backed mammoth state-owned conglomerates in hopes of turning them into South Korean-style chaebols, Phuc has focused on aiding small and medium-sized enterprises, which he called the engine of Vietnam’s economic growth. Vietnam’s private sector, which remains underdeveloped compared to the state-owned and foreign-invested ones, has grown steadily in recent years. The country now is home to more than 500,000 private businesses — compared to 15,000 private enterprises before 1986 — employing half of Vietnam’s workforce.

Shortly after taking office, Phuc met with business leaders in Ho Chi Minh City to seek their feedback and recommendations on reforms to create a legal environment more favorable to private enterprises and foreign investment. Out of this meeting came Resolution 35, which outlined plans to back competitive domestic firms, foster sustainable development, and create one million private businesses by 2020. In addition, the document proposed regulatory reforms that would increase the private sector’s share of Vietnam’s GDP to 49 percent, up from the current 43 percent. The government in late July released 50 government decrees clarifying guidelines for enterprises and removing around 3,500 regulations, the most ambitious cutting of red tape ever made by Hanoi.

However, more work remains to be done. Business leaders maintain that some 40 laws — especially a number addressing tax regulation—need to be revised in order to spur the growth of private enterprises and attract more foreign investment. Still, the steady pace with which Phuc has implemented reforms gives reason to hope that a more open business environment is slowly taking hold.

The new leadership has vowed to tackle what it considers the root cause of Vietnam’s economic ills: corruption. Enabled for decades by Vietnam’s opaque legal system, corruption plagues every level of governance, creating inefficiency within Vietnam’s public sector and barriers to private enterprise. Phuc has promised significant anti-corruption reforms in his speeches and has featured anti-graft on the government’s 2016-2021 economic agenda.

The prime minister for instance vowed to build a “government of integrity,” stressing that corruption must be overcome at both central and local levels. Thus far, the new anti-corruption campaign has taken the form of a major cooperation initiative with Singapore on anti-graft goals and plans for online government service and information platforms meant to enhance transparency.

Phuc has also initiated a number of high-profile investigations into potential wrongdoing by state-run firms. For example, the state inspectorate is in the middle of a large-scale probe into the recent purchase of a 95 percent stake of Audio Visual Global JSC, a private television service provider, by state-owned telecommunications giant MobiFone. Another investigation in July exposed a $403.5 million scam at the Vietnam Construction Bank, whose leader now faces a 30-year prison sentence.

Q3: What would the U.S. failure to ratify the Trans-Pacific Partnership (TPP) mean for Vietnam?

A3: Among all members of the U.S.-led trade deal, Vietnam is projected to reap the most economic benefits. Once in force, the TPP will grant Vietnam preferential access to U.S. markets, which is expected to dramatically expand Vietnam’s GDP and attract more foreign investment in high value-added manufacturing industries. Failure by the U.S. Congress to ratify the agreement would be a hard pill for Hanoi to swallow.

Without the TPP, Vietnam’s export industry will be denied uninhibited access to U.S. markets, as well as the capacity-building mechanisms offered by the United States and Japan to help it move up the global value chain. This would leave Hanoi with few options but to continue to rely on China to supply imports and components for its assembly lines. As is, China is Vietnam’s largest trading partner, with bilateral trade in 2015 reaching $66 billion. To avoid over-dependence on its northern neighbor, Hanoi will likely seek other trade partnerships—such as with Thailand, South Korea, the European Union, and perhaps with its old ideological kin, Russia, through the Eurasian Economic Union.

In addition to concrete trade benefits, the TPP provides Hanoi with a strong incentive to reform its economic regulations and legal system. While it remains uncertain whether Vietnam will scrupulously uphold the bilateral labor implementation plan it signed with the United States, the pact, which was signed by the 12 TPP countries in February, has already spurred the government toward liberalizing reforms in areas such as SOE privatization and finance. If the TPP is not passed, this incentive will be lost.

Yet as Vietnam’s other fiscal and labor challenges demonstrate, the absence of the TPP does not remove altogether the need for reform. Phuc’s rhetoric and initiatives signal that meaningful reform in the coming years may arise not in response to external promptings but from a genuine wish within the leadership to move the country forward.

Ms. Chau Hoang is a researcher with the Southeast Asia Program at CSIS.


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