No turning back the reform clock for Vietnam

Party congress' message is clear: Continue to prepare for TPP, speed up economic reforms

After a dramatic week-long power struggle in a country where politics is normally carefully scripted, Vietnam has decided that Mr Nguyen Phu Trong will remain as the Communist Party's general secretary, the country's supreme leadership post. There has been much speculation about the imminent departure from power of Prime Minister Nguyen Tan Dung, an ambitious pro-business reformer who was widely believed just two months ago to be a front runner to become the new general secretary.

Some ruminate that the ascendancy of the more conservative and historically pro-China Mr Trong - who has frequently butted heads with Mr Dung - could lead to lessening support for market-opening reforms with worrisome implications for the Trans-Pacific Partnership (TPP) ratification and a cooling of the recently strengthening US-Vietnam ties. These concerns are misplaced.

It is no longer accurate to paint Vietnam's leadership as riven by deep divisions over ideology, or economic development approaches. There is little evidence that there is meaningful dissent about the country's direction among the senior ranks of the country's leadership. The party is keenly and broadly aware that it needs to continue delivering high growth rates and rising prosperity if it is to forestall rising domestic dissent and challenges to its authority.

The reasons for the sudden fall in the fortunes of Mr Dung are subject to a good deal of social media gossip. A credible theory for Mr Dung's political demise centres on the Vietnamese elite's historic aversion to strongman rule and any weakening of the bonds of collective leadership.

With Mr Dung in the dominant general secretary role and a protege as prime minister, he would have been able to operate largely free of the checks and balances that have been an integral part of Vietnam's leadership structure in the past. Few in the elite would be keen to experience a local version of the anti-corruption house-cleaning China's powerful President Xi Jinping has been undertaking in Beijing.


Mr Trong (foreground), the Communist Party General Secretary, is followed by President Truong Tan Sang, Mr Dung, the Prime Minister, Mr Nguyen Sinh Hung, National Assembly chairman, and other party politburo members as they walk down from the podium to cast their ballots in the election to the party's central committee on Jan 26. PHOTO: AGENCE FRANCE-PRESSE

One strong impetus to hasten reforms is Vietnam's bright prospects in the TPP. As the country that stands to benefit most from the TPP, there is also almost across-the-board alignment on the view that the pact is necessary for Vietnam to stay competitive as a manufacturer, to attract higher rates of foreign investment, and to integrate more deeply into the global economy.

But despite wholesale personnel changes at the top, Vietnam is set to continue its path towards a more open, competitive economy and a more "diversified" (read: less China-dependent) foreign policy posture. The economic message coming out of the party congress was clear and consistent: Vietnam will accelerate its pace of economic reforms and continue to prepare for the TPP.

Although Vietnam was the best- performing Asean economy last year, posting a growth rate of 6.6 per cent, there was little sense of complacency at the party's conclave. The congress approved Vietnam's 2016-2020 economic blueprint which calls for more reforms to create "favourable conditions" to support the private sector, including a level playing field with equal access to credit, land, and other resources.

The blueprint targets an average annual 6.7 per cent GDP growth and an increase of GDP per capita to US$3,750 (S$5,266) by 2020, a hike of 83 per cent from 2014 levels. Furthermore, the party communique was filled with unusually clear and critical language on the need to do more to combat corruption, and to open the democratic space, albeit not to the extent of threatening the party's monopolistic hold on power.

One strong impetus to hasten reforms is Vietnam's bright prospects in the TPP. As the country that stands to benefit most from the TPP, there is also almost across-the-board alignment on the view that the pact is necessary for Vietnam to stay competitive as a manufacturer, to attract higher rates of foreign investment, and to integrate more deeply into the global economy.

The World Bank estimated that over the next 20 years, the TPP could add as much as 8 per cent to Vietnam's GDP, 17 per cent to its real exports, and 12 per cent to its capital stock. Tariff reductions in the TPP are expected to boost Vietnam's labour-intensive and low-cost manufacturing, especially in sectors that currently face high import tariffs such as textile, apparel, footwear, and to a less extent, food processing and electronics.

While the party largely acknowledges the positive impacts of TPP on Vietnam, implementation will require many more structural and economic reforms. As just one example, around 90 per cent of bad debts under the Vietnam Asset Management Company still needs to be resolved.

Equitisation of troubled state-owned enterprises (SOEs), which use almost 50 per cent of Vietnam's public investment while contributing to just a third of GDP, has been slower than expected. Most transactions to date involve only minority share divestment of smaller SOEs with the government seemingly hesitant to dilute SOE ownership in sectors it deems too sensitive for foreign ownership.

On the international front, Vietnam's participation in the TPP plays a large role in its balancing act with China, and to an extent, in capitalising on the US pivot to Asia. There is general consensus in the party that Vietnam needs to take a stronger stand in its relations with China. In contrast to the warming of relations with the US, Vietnam's relationship with China has been strained since China moved an oil rig off Vietnam's coast in 2014. Last month, Vietnam lashed out against China for again towing a US$1 billion oil rig into disputed waters.

The party central committee, which met before the party congress, took the unusual step of issuing a statement recognising the International Tribunal for the Law of the Sea's jurisdiction to hear the Philippine's claim against Chinese encroachment into Philippine waters. The statement will have little practical impact, but the symbolic gesture won't be appreciated by Beijing.

Party leaders are also rightly anxious about the impact of China's slowing and debt-burdened economy on Vietnam. However, implementation of the reforms embedded in the TPP agreement should make Vietnam less dependent on what is today one of its largest trading partners. Vietnamese exports would be expected to replace an increasing share of Chinese exports to key TPP markets, notably the US and Japan - a trend already taking place.

Vietnam's new leaders will undoubtedly take some time to learn the ropes in their new positions, and that may well cause some reform slowdown. But the clear message coming from the party congress is that both Vietnam and its ruling Communist Party have little choice but to continue down the path of market-opening reforms and to build closer relationships with a broader range of countries.

• The writer is CEO of Asia Group Advisors, a Singapore-based advisory firm.

A version of this article appeared in the print edition of The Straits Times on February 03, 2016, with the headline 'No turning back the reform clock for Vietnam'. Print Edition | Subscribe