Evaluate the relative success of economic liberalization efforts in Vietnam.
Opening Case: Economic Transformation in Vietnam
QUESTION 1: Evaluate the relative success of economic liberalization efforts in Vietnam. How have these actions improved life for everyday citizens in the country? What prospects may allow Vietnam to continue on its path of economic development?
QUESTION 2: How has Vietnam balanced the economic reforms with the social and cultural changes that result from such actions? What are some of the challenges that the country’s leaders will face if it continues as a more market-based economy?
Country Focus: Putin’s Russia p.42
QUESTION 1: Discuss the implications of corruption on the development and growth of a country. How can Russia’s current political system best be described? What conclusions can you draw regarding Russia’s economic prospects?
QUESTION 2: Discuss the pros and cons of investing in Russia. As a CEO of a company in the oil industry would you invest in Russia? How does a stable government affect a country’s ability to attract investment?
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Economic Transformation in Vietnam
OPENING CASE
Vietnam is a country undergoing transformation from a centrally planned socialist economy to a system that is more market orientated. The transformation dates back to 1986, a decade after the end of the Vietnam War that reunited the north and south of the country under Communist rule. At that time, Vietnam was one of the poorest countries in the world. Per capita income stood at just $100 per person, poverty was endemic, price inflation exceeded 700 percent, and the Communist Party exercised tight control over most forms of economic and political life. To compound matters, Vietnam struggled under a trade embargo imposed by the United States after the end of the Vietnam War.
Recognizing that central planning and government ownership of the means of production were not raising the living standards of the population, in 1986 the Communist Party embarked upon the first of a series of reforms that over the next two decades were to transform much of the economy. Agricultural land was privatized and state farm collectives were dismantled. As a result, farm productivity surged. Following this, rules restricting the establishment of private enterprises were relaxed. Many price controls were removed. State-owned enterprises were privatized. Barriers to foreign direct investment were lowered, and Vietnam entered into trade agreements with its neighbors and its old enemy the United States, culminating in the country joining the World Trade Organization in 2007. Today Vietnam is one of the signatories of the Trans Pacific Partnership, a trade agreement that, if ratified, could further liberalize its economy.
The impact of these reforms has been dramatic. Vietnam achieved annual economic growth rates of around 7 percent for the first 20 years of its reform program. Although growth rates fell to 5 percent in the aftermath of the 2008-09 global financial crisis, by 2015 Vietnam was once again achieving growth rates of around 7 percent. Living standards have surged, with GDP per capita on a purchasing parity basis reaching $5,700 in 2014. The country is now a major exporter of textiles and agricultural products, with an expanding electronics sector. State-owned enterprises now only account for 40 percent of total output, down from a near monopoly in 1985. Moreover, with a population approaching a 100 million and an average age of just 30, Vietnam is emerging as a potentially significant market for consumer goods.
For all of this progress, significant problems still remain. The country is too dependent upon exports of commodities, the prices of which can be very volatile. Vietnam’s remaining state-owned enterprises are inefficient and burdened with high levels of debt. Rather than let prices be set by market forces, the government has recently reintroduced some price controls. On the political front, the Communist Party has maintained a tight grip on power, even as the economy has transitioned to a market-based system. Vietnam bans all independent political parties, labor unions, and human rights organizations. Government critics are routinely harassed and can be arrest and detained for long periods without trial. The courts lack independence and are used as a political tool by the Communist Party to punish critics. There is no freedom of assembly or freedom of the press.
To compound matters, corruption is rampant in Vietnam. Transparency International, a nongovernmental organization that evaluates countries based on perceptions of how corrupt they are, ranks Vietnam 112 out of the 167 countries it ranks. Corruption is not a new problem in Vietnam. There is a well-established tradition of public officials selling their influence and favoring their families. However, critics say that the problem was exacerbated by privatization processes that provided opportunities for government officials to appoint themselves and family members as executives of formerly state-owned companies. Although the ruling Communist Party has launched anticorruption initiatives, these seem to be largely symbolic efforts. Many observers believe that widespread corruption has a negative impact on new business formation and is hamstringing economic growth.
COUNTRY FOCUS: PUTIN’S RUSSIA
The modern Russian state was born in 1991 after the dramatic collapse of the Soviet Union. Early in the post-Soviet era, Russia embraced ambitious policies designed to transform a communist dictatorship with a centrally planned economy into a democratic state with a market-based economic system. The policies, however, were imperfectly implemented. Political reform left Russia with a strong presidency that—in hindsight—had the ability to subvert the democratic process. On the economic front, the privatization of many state-owned enterprises was done in such a way as to leave large shareholdings in the hands of the politically connected, many of whom were party officials and factory managers under the old Soviet system. Corruption was also endemic, and organized crime was able to seize control of some newly privatized enterprises. In 1998, the poorly managed Russian economy went through a financial crisis that nearly bought the country to its knees.
Fast-forward to 2016, and Russia still has a long way to go before it resembles a modern democracy with a functioning free market–based economic system. On the positive side, the economy grew at a healthy clip during most of the 2000s, helped in large part by high prices for oil and gas, Russia’s largest exports (in 2013 oil and gas accounted for 75 percent of all Russian exports). Between 2000 and 2013, Russia’s gross domestic product (GDP) per capita more than doubled when measured by purchasing power parity. The country now boasts the world’s ninth-largest economy. Thanks to government oil revenues, public debt is also low by international standards—at just 9.2 percent of GDP (in the United States, by comparison, public debt amounts to 70 percent of GDP). Indeed, Russia has run a healthy trade surplus on the back of strong oil and gas exports for the last decade.
On the other hand, the economy is overly dependent on commodities, particularly oil and gas. This was exposed in mid-2014 when the price of oil started to tumble as a result of rapidly increasing supply from the United States. Between mid-2014 and early 2016, the price of oil fell from $110 a barrel to around $27. This drove a freight train through Russia’s public finances. Much of Russia’s oil and gas production remains in the hands of enterprises in which the state still has a significant ownership stake. The government has a controlling ownership position in Gazprom and Rosneft, two of the country’s largest oil and gas companies. The government used the rise in oil and gas revenues between 2004 and 2014 to increase public spending through state-led investment projects and increases in wages and pensions for government workers. While this boosted private consumption, there has been a dearth of private investment, and productivity growth remains low. This is particularly true among many state-owned enterprises that collectively still account for about half of the Russian economy. Now with oil prices tumbling, Russia is having to issue ever more debt to finance public spending.
Russian private enterprises are also hamstrung by bureaucratic red tape and endemic corruption. The World Bank ranks Russia 92nd in the world in terms of the ease of doing business and 88th when it comes to starting a business (for comparison, the United States is ranked 4th and 20th, respectively). Transparency International, which ranks countries by the extent of corruption, ranked Russia 119 out of 167 nations in 2015. The state and state-owned enterprises are famous for pushing work to private enterprises that are owned by political allies, which further subverts market-based processes.
On the political front, Russia is becoming less democratic with every passing year. Since 1999, Vladimir Putin has exerted increasingly tight control over Russian politics, either as president or as prime minister. Under Putin, potential opponents have been sidelined, civil liberties have been progressively reduced, and the freedom of the press has been diminished. For example, in response to opposition protests in 2011 and 2012, the Russian government passed laws increasing its control over the Internet, dramatically raising fines for participating in “unsanctioned” street protests, and expanded the definition of treason to further limit opposition activities. Vocal opponents of the régime—from business executives who do not tow the state line to protest groups such as the punk rock protest band Pussy Riot—have found themselves jailed on dubious charges. To make matters worse, Putin has recently been tightening his grip on the legal system. In late 2013, Russia’s parliament, which is dominated by Putin supporters, gave the president more power to appoint and fire prosecutors, thereby diminishing the independence of the legal system.
Freedom House, which produces an annual ranking tracking freedom in the world, classifies Russia as “not free” and gives it low scores for political and civil liberties. Freedom House notes that in the March 2012 presidential elections, Putin benefited from preferential treatment by state-owned media, numerous abuses of incumbency, and procedural “irregularities” during the vote count. Putin won 63.6 percent of the vote against a field of weak, hand-chosen opponents, led by Communist Party leader Gennadiy Zyuganove, with 17.2 percent of the vote. Under a Putin-inspired 2008 constitutional amendment, the term of the presidency was expanded from four years to six. Putin will be eligible for another six-year term in 2018.
In 2014, Putin burnished his growing reputation for authoritarianism when he took advantage of unrest in the neighboring country of Ukraine to annex the Crimea region and to support armed revolt by Russian-speaking separatists in eastern Ukraine. Western powers responded to this aggression by imposing economic sanctions on Russia. Taken together with the rapid fall in oil prices, this pushed the once-booming Russian economy into a recession. In 2014, the economy grew by just 0.6 percent, while the Russian ruble tumbled, losing half of its value against other major currencies. Despite economic weaknesses, however, there is no sign that Putin’s hold on power has been diminished; in fact, quite the opposite seems to have occurred.
REQUIREMENTS
Answer preview Evaluate the relative success of economic liberalization efforts in Vietnam.
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