Vietnam needs second, more radical wave of reforms: economist

Vietnam has reaped positive results after nearly 40 years of Doi moi (reform), but the country’s “new context” needs an even more comprehensive and radical second wave, says Tran Dinh Thien, former director of the Vietnam Institute of Economics.

The Doi moi process was initiated by the Communist Party of Vietnam in 1986. What would you say are Vietnam’s major achievements after nearly 40 years of the reform?

In his testament, President Ho Chi Minh outlined the vision of building a Vietnam "more prosperous and beautiful," standing "shoulder to shoulder with major powers in the five continents."

We can say that the most outstanding achievement in line with his vision is the creation of a "more prosperous" nation. This is reflected in our remarkable growth in GDP, per capita income, trade, urbanization, and other indicators.

These accomplishments are unprecedented in history and have been realized in less than 40 years of the reform process. The transition to a market economy - though not yet fully complete - has genuinely transformed the nation. People have moved beyond poverty to enter a trajectory of wealth and development.

However, President Ho Chi Minh also emphasized an equally important goal: rising up to "stand shoulder to shoulder with the major powers in the five continents." In the past, Vietnam acted alone, but now, as we join the rest of the world to address issues facing humanity, Vietnam has the opportunity and need to "stand shoulder to shoulder with the major powers."

Today, in terms of this criterion, Vietnam has opened up and integrated on a scale and at a level that few countries have achieved. Vietnam’s integration into the world and its sharing of global responsibilities represent a particularly important achievement.

Along with the reform process, Vietnam has elevated itself in line with humanitarian values. This is the essence of "standing shoulder to shoulder." Today, major, developed and influential countries are all strategic partners of Vietnam.

That’s impressive, indeed. What about limitations that need to be fixed?

One of the main limitations is the development of a fully-fledged market economy. Many countries have not yet recognized Vietnam as a "complete market economy." In other words, we have not reached a level that even countries that might be critical of us would acknowledge this status.

The reform process has been described as a revolution, with businesses - both domestic and foreign-invested - at its core. Can you comment?

Indeed! After the reform began, the private sector, once freed from constraints, quickly became a lifeline for the economy. Thanks to its resurgence, the economy, which was in a state of crisis, experienced a miraculous revival, marking the successful onset of the reform process. The policy of developing a multi-sector economy, gradually transitioning to a market economy and emphasizing the role of private enterprises has proven to be absolutely correct.

However, the reform process has not followed this trajectory consistently. There have been many problems including discrimination, weak competition, “ask-give” mechanism and prolonged administrative procedures.

In the early stages of reform, while the private sector was still weak, state-owned and collective economies played a predominant role. This was appropriate. However, during that period, we should have made greater efforts to promote development of the private sector to make it reach its full potential. That did not happen.

Now, the private sector remains relatively weak, although its resilience could be considered unrivalled. Globally, few market economies have maintained prolonged high-interest rates like Vietnam, yet its private sector has managed to survive. This indicates that the internal strength of the private sector is substantial. With better policies and more practical solutions, this sector could record extraordinary accomplishments.

The contribution of domestic private enterprises to our GDP is around 10%, while that of FDI companies is 22-23%. FDI firms also account for over 70% of our export-import turnover. What do these figures indicate?

The crucial foundation of a market economy is the domestic private sector, with private enterprises serving as its backbone. Over nearly 40 years of reform, the Vietnamese private sector has faced significant challenges. The average lifespan of Vietnamese private enterprises is relatively short. While we often say that "internal strength is decisive," this internal strength is not merely about resources or land; it fundamentally means the entities that drive the Vietnamese market economy - Vietnamese enterprises or the domestic private sector.

It is evident that there have been shortcomings in policy directions and mechanisms such as discrimination and bias against the domestic private sector.

FDI is undeniably important, but it must be viewed in relation to the position of the domestic economic sector. Neglecting the local force would be one of the biggest strategic mistakes.

So vis a vis the domestic private sector, the FDI sector has been playing a more significant role in Vietnam's development?

There is no doubt about that. Vietnam is well aware of this fact. The country has been working hard to attract FDI since early on. After the Foreign Investment Law was enacted in 1987, with favorable conditions and an open vision, Vietnam succeeded in attracting many foreign investors, surprising the world.

However, it seems that maintaining an outdated policy approach (though initially good) for too long has led to a mismatch between FDI attraction strategies and the rapidly evolving development conditions. Many FDI projects have focused on leveraging Vietnam’s existing advantages such as raw materials and cheap labor, resulting in low technological competition with Vietnamese firms.

Vietnam has signed numerous free trade agreements (FTAs) to open up its market and further attract FDI by capitalizing on the advantages these agreements provide. In practice, this strategy has been quite successful.

Meanwhile, Vietnamese private enterprises, despite their size, have been slow to grow, and some were even reluctant or afraid to expand. Starting from a low baseline, they have faced numerous constraints and not received the necessary policy attention though they are considered the major force of the market economy.

As has been observed, our institutional framework often restricts Vietnamese companies. They endured interest rates 2-3 times higher, not to mention more complex and cumbersome administrative procedures, leading to very high transaction costs. It’s not surprising that we often say that Vietnamese enterprises are at a disadvantage even on their home turf.

We maintained preferential policies for FDI enterprises, yet some continued to report persistent losses, while our domestic private enterprises, despite their struggles, managed to survive. This is something we need to reflect on.

There’s no doubt that the FDI sector plays a crucial role in the economy. However, we must honestly recognize that as the contribution of the FDI sector increases, their influence grows stronger, while the domestic private sector remains weak. This trend may have major, negative impacts.

We have never fully calculated the economic damage caused by the slow growth of Vietnamese enterprises. The crux of the issue is the unequal market economy framework between the two groups. Our challenge is to create a more favorable environment for domestic enterprises, to level the playing field with the FDI sector, rather than trying to bring down the latter. For example, efforts should be made to reduce interest rates so that Vietnamese enterprises can access capital at rates comparable to those available in the region and the world.

Recent cases involving Saigon Commercial Bank (SCB) and real estate developer Van Thinh Phat have tarnished the image of Vietnamese private enterprises. Can they play a leading role, still?

The issue lies within the institutional framework. The fundamental problem is systematic improvement of mechanisms. Why did enterprises commit such violations? Individuals and organizations must be punished for their violations, but it’s crucial to ensure that the market mechanism continues to function effectively.

After nearly 40 years of reform, has Vietnam become more market-oriented or is it more socialist-oriented?

In fact, both orientations are relatively limited. When we choose a market economy to address development issues, it embodies the core of what is called "socialist orientation." This means that as the market develops, the socialist orientation also evolves. The private sector plays a crucial role in maintaining the socialist orientation, as it is the main force creating jobs and generating income for workers.

If we weaken the market or obstruct its development, no socialist orientation will be effective. Socialist orientation will help our country "stand shoulder to shoulder" with major powers in the world through opening up and furthering the integration process.

Without a market, who would we integrate with? No market means no socialist orientation. We strive for fairness based on market principles rather than uniformity. We pursue democracy within the framework of the market rather than state protectionism.

Directing summarization of 40 years of reform, Party General Secretary and President To Lam said it was important to unify our perception of the new context that is opening a new era, the era of Vietnam's rise. What’s the new context and what are its orientations and solutions?

The new context includes new forces, new positions and new capabilities. Our GDP has increased significantly, wealth has grown, and our intellectual capacity has risen. Vietnam is on an upward trajectory, actively engaging with the world and drawing global attention to itself. The country's position on the global stage is growing, leading to greater recognition and respect. Given Vietnam's current status and position, we must adapt to a new scale and a new era.

There are two crucial terms: "era" and "world." "Era" refers to the level of development, while "world" relates to the spatial structure, conflict and competition. The current era is markedly different. Artificial Intelligence (AI) is replacing many tasks done by human intellect. We are in an era of semiconductors, renewable energy and post-Covid developments. This new era demands different capabilities and a fresh perspective rather than the old trial-and-error approach. Today’s requirements involve creative intelligence, modern perspectives and advanced development structures.

In the current context of global conflict and cooperation, adaptability and resilience are essential. To be resilient, we must be on par with global peers, recognize trends of the era, and select the right leaders to guide us.

Party General Secretary and President To Lam has highlighted the importance of recognizing the right issue: this is an opportunity to change and transition to new development thinking, vision and methods. This is a significant opportunity, but also a challenge for creativity and development, demanding a different mindset.

The results achieved after 40 years of reform are commendable, but they are not sufficient to address future issues. We must prepare new, different approaches.

The second wave of reform needs to be more thorough. It must address not only internal issues but also global pressures in the new context we are part of.