Vietnam’s New Money

On Nov. 16, 2008, two of Vietnam’s new entrepreneurs were married in the Caravelle, Ho Chi Minh City’s first luxury hotel, once home to journalists covering the "American War." The groom was 36-year-old Nguyen Bao Hoang, managing general partner of an investment firm, IDG Ventures Vietnam, and his bride was 27-year-old Nguyen Thanh Phuong, chairperson of another investment firm, VietCapital. Between them, their two companies controlled around $150 million of investments in Vietnam.

But the wedding wasn’t just another story about new money in Vietnam. Nguyen Thanh Phuong isn’t just an investment banker — she’s the daughter of the prime minister, Nguyen Tan Dung. The man she was marrying is an American citizen, the child of parents who fled Vietnam in 1975 to escape the communists — now returned to wed the daughter of one of them.

Their union encapsulates many elements of the new Vietnam where, despite an influx of new wealth, the Communist Party still dominates both the public and private sectors. Many "private" businesses are either former state-owned enterprises (SOEs) or still have some state ownership, and most are still run by party members. Most of the controllers of the commanding heights of the private sector are party appointees, their family, or their friends. The Communist Party elite are turning Vietnamese capitalism into a family business. And if this week’s conviction of four pro-democracy activists on subversion charges is any sign, the consolidation of party power is a very frightening development for Vietnam’s future.

There are many examples of the family relationship between money and power in today’s Vietnam: One of Vietnam’s richest men, Truong Gia Binh, is chairman of the country’s biggest indigenous IT firm, FPT. He’s also the only man in Vietnam routinely referred to with the prefix "former son-in-law" because he was once married to the daughter of Vo Nguyen Giap — war hero, retired army commander, and former deputy prime minister. During the 1990s, if a business needed contacts in the army’s extensive array of companies, or in construction or communications, Giap was the man to see.

Another example is Dinh Thi Hoa, Vietnam’s first Harvard University MBA graduate. In the early 1990s, when the World Bank wanted to stimulate private-sector development in Vietnam, it awarded many scholarships to young people, including Hoa. On her return, Hoa used her newfound knowledge to found a company called Galaxy that now owns a PR agency, most of the good Western-style restaurant chains in the country, a big cinema in Ho Chi Minh City, and a film production company. In many ways it’s a model of private-sector success. But Galaxy didn’t just spring up out of nowhere. It’s one of the many firms created by the children of the party elite. When the World Bank chose Hoa for the scholarship, her father was deputy foreign minister.

The story of Vietnam’s economic liberalization has been, to quote Ho Chi Minh on national unity, "success, success, great success." In 1993, according to government figures, almost 60 percent of the population lived below the poverty line. By 2004 that figure was down to 20 percent. The country has met most of its Millennium Development Goals, development targets set by the United Nations, escaping the ranks of the poorest countries to join the group of "middle-income states." People’s living standards are soaring, their horizons are widening, and their ambitions are growing.

But the state’s control over Vietnam’s expansion is troublesome. The marriage between party and private interest is distorting the economy toward the wants of the few rather than the needs of the many. And networks of crony socialism are becoming a threat to Vietnam’s future stability. Vietnam risks the fate of many of the World Bank’s previous poster children — boom followed by bust.

The biggest state corporations are setting up unaccountable funding channels to finance projects with minimal economic logic. By June 2008, 28 SOEs had spent around $1.5 billion establishing or buying controlling stakes in fund management companies, stock brokerages, commercial banks, and insurance firms. Three-quarters of Vietnam’s finance companies are now owned by the biggest SOEs (those known as general corporations). Many also have bought securities companies dealing in shares. Add all this together, and several of Vietnam’s biggest general corporations have the potential to become self-financing black boxes with opaque funding arrangements.

Although the days of the soft loan from a state bank are largely past, there are plenty of other ways to channel money to SOEs. The state’s Vietnam Development Bank (subsidized by aid from foreign governments) and its Social Insurance Fund (expected to become the biggest investor in the country by 2015) seem to act as unaccountable slush funds for the benefit of the state sector. Clearly SOEs have a significant, if not necessarily bright, future ahead.

The Vietnamese Communist leadership wants to run the country along the lines of Gaullism in France — where the commanding heights of the public and private sectors are coordinated by an elite trained in such institutions as the École Nationale d’Administration. Under "Vietnamese Gaullism," a behind-the-scenes elite (the party) is supposed to set the overall direction of policy and then delegate its implementation to the state (which is controlled by the party). The government then draws up the laws and uses whatever resources are available to it — the state bureaucracy, SOEs, the private sector, foreign investors, international donors, etc. — to see the policy executed. Behind the scenes, the party monitors, corrals, and presses the various actors to make sure that its policy is followed. That, at least, is what the party would like to have happen. The reality is usually something quite different.

With easy money around, it’s not hard to bribe patrons, officials, and regulators to turn a blind eye to breaches of the law. The party members in charge of the SOE tail end up wagging the party policy dog. But this isn’t the whole story. What is remarkable about Vietnam is the way, at moments of crisis, the Communist Party can discipline its errant members and bring the economy back under central control. But how much longer can it do so?

Until recently, Vietnam had shared the benefits of growth more equitably than any of its neighbors. The party’s socialist orientation still meant something. But in the future, redistribution will mean taking wealth away from the party’s biggest supporters. Does the party leadership have the ability to stand up to its newly rich citizens and demand they hand over part of their wealth through taxation to benefit poorer people in faraway provinces? Do the convictions this week signal that the corrupt networks of party, power, and privilege have already gotten out of control? If so, Vietnam’s new money could collapse under its own weight.