Vietnam's moment of truth

Michael Richardson (Visiting Senior Research Fellow, Institute of South East Asian Studies in Singapore)

Vietnam has done remarkably well in reducing deprivation. Almost a third of the total population of 80 million was lifted out of poverty in less than a decade. Those living below the poverty line fell to 29 per cent in 2002, from 58 per cent in 1993. The World Bank describes this as "one of the greatest success stories in economic development". It says only China and Ireland have seen faster growth of gross domestic product per capita than Vietnam in recent years, with the exception of a few countries recovering from civil war or economic havoc.

Indonesia, too, did well in raising living standards in the 1980s. What were the keys? Clearly it was not the political complexion of government. Ireland is a democracy while Vietnam, China and Indonesia have had authoritarian regimes for all or much to the time that poverty rates fell fastest.

The Asian trio also had weak legal systems, only partly open markets and human rights records that were frequently criticised in the west. But Ireland, Vietnam, China and Indonesia had in common sustained rapid economic growth and governance that worked to alleviate poverty.

In Vietnam, the economy expanded by an average of 6 per cent each year between 1993 and 2002, despite the East Asian financial crisis. The household measure of poverty in Vietnam is based on an income per capita of US$128 per year, enough for an individual to consume 2,100 calories of food per day and have $36 left over for other essentials, such as clothes and housing. By another, perhaps more realistic, guideline - purchasing parity power (PPP), which measures what a dollar actually buys in different countries - the poverty rate in Vietnam (defined as those living on less than one PPP dollar per day) fell to 11 per cent of the population last year, from 51 per cent in 1990.

Vietnamese and foreign officials attribute Vietnam's success in cutting poverty to a combination of factors. They came into play after the government made the strategic decision in the late 1980s to relax the command economy and open the market. Early gains in poverty alleviation were linked to the distribution of agricultural land nationwide to rural households.

In a country where the vast majority of people were farmers, this land reform was an incentive to increased farm production even though it did not include the right of freehold land ownership. By the late 1990s, the driving forces behind poverty reduction were job-creation by a burgeoning private sector and the increased integration of agriculture in the market economy, as farmers produced more for sale than subsistence.

Other poverty-reduction factors included the commitment of Vietnam's governing Communist Party to improve the lot of the poor, an administration able to deliver services such as primary education, health care and electricity down to the village level, high literacy rates and a relatively low population increase.

But the government is in danger of losing its pro-poor focus. As in China, official corruption is rife at all levels of administration. As the private sector gets larger and business leaders more influential, there is a growing risk of crony capitalism emerging. The Vietnamese government is wary of freeing the economy to spark competitive growth, partly because it fears worsening inequality, but also because it wants to maintain its grip on economic and political power.

There are nearly 5,000 state-owned firms and they get priority in loans and land from the government. As a result, credits that are not being repaid have accumulated to a level that some foreign economists are now warning could cripple the state-dominated banking system.

Michael Richardson, a former Asia editor of the International Herald Tribune, is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore. The views expressed in this article are those of the author.

(Originally appeared in the June 25, 2004 issue of South China Morning Post in Hong Kong, reproduced here with permission.)