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a Short but Panic gripped Vietnam this month. On Jan. 12, the country's 79-year-old leader, Nguyen Phu Trong, did not meet with the visiting Indonesian president. Trong's name was removed from the official schedule without explanation. Rumors spread that he had died. For three days, noodle shops raged with speculation about who would succeed him: a corrupt figure? Or someone pro-China? The secretive ruling Communist party would not reveal anything.
Then on January 15, state media showed a frail-looking Trong attending a dreary parliamentary session in Hanoi, seemingly screaming, like a Monty Python plague victim, “I'm not dead!” Whether the party leader's absence was due to illness or something else will never be known, but it was no surprise that his absence marred meetings with world leaders. Everyone wants to be Vietnam's friend these days.
There are geopolitical reasons for this, too. Vietnam, with a population of 100 million, is located halfway between China and the United States, and both powers have been courting hostings. In 2023, it was the only country to receive official visits from both Joe Biden and Xi Jinping. In September, it upgraded its relationship with the United States to a “comprehensive strategic partnership,” putting it on a level with Russia and China.
Vietnam's ruling party has much in common with China, but ordinary Vietnamese are deeply suspicious of their larger, more intimidating neighbor. China has illegally claimed parts of the South China Sea as Vietnamese territory, and its ships have attacked Vietnamese fishermen and oil exploration vessels. According to an Asian Barometer poll, only 25% of Vietnamese have a favorable view of China, compared with 85% who have a favorable view of the United States. The Biden administration, eager to stop Chinese expansion, is supplying Vietnam with coast guard ships to protect its waters. The United States is keen to offer more assistance, but Vietnam has rejected a formal alliance.
Vietnam's growing geopolitical importance is due to its favorable economic performance and geography. When Vietnam began its open-door policy in the mid-1980s, its annual per capita income was half that of Kenya. Thanks to pragmatism and a pro-business approach, it has since grown six-fold to $3,700. The government's ambition to make Vietnam a wealthy country by 2045 is within reach. Economically, Vietnam has probably never faced a more benign global environment.
Geopolitics is driving investments towards China. The US is seeking to decouple from China, and private companies of all nationalities are watching which way the wind blows. Most manufacturers cannot easily move out of China. But they can diversify their risk by manufacturing elsewhere to reduce the cost of trade barriers (a strategy known as “China + 1”). Many manufacturers also want to reduce the impact of arbitrary Chinese policies, as memories of painful zero-COVID lockdowns are still fresh. “The pandemic has shown us that we are too concentrated in China,” points out a foreign manufacturer in Ho Chi Minh City.
Companies that export to the West are moving their production bases to Vietnam. Brands such as Samsung and Apple manufacture their gadgets in Vietnam. Suppliers, including from China, are flocking around them. “Our customers have been pushing us to move to Vietnam for geopolitical reasons,” says the president of an electronics company. “We were already thinking about it, because labor costs in China are rising and young Chinese people don't want to work in factories anymore.” In the first three quarters of 2023, foreign direct investment in Vietnam will grow by 1.5% in the first three quarters of 2023, 2.5% in the second quarter of 2023, 3.5% in the third quarter of 2023, 4.5% in the fourth quarter of 2023, 5.5% in the fifth quarter of 2023, 6.5% in the sixth quarter of 2023, 7.5% in the seventh quarter of 2023, 8.5% in the eighth quarter of 2023, 9.5% in the first quarter of 2023, 1.5% in the first quarter of 2023, 2.5% in the second quarter of 2023, 3.5% in the third quarter of 2023, 4.5% in the fourth quarter of 2023, 5.5% in the fifth quarter of 2023, 6.5% in the fourth quarter of 2023, 7.5% in the fifth quarter of 2023, 8.5% in the fourth quarter of 2023, 9.5% in the fourth quarter of 2023, 10.5% in the fourth quarter of 2023, 11.5% in the fourth quarter of 2023, 12.5% in the fourth quarter of 2023, 13.5% in the fourth quarter of 2023, 14.5% in the fourth quarter of 2023, 15.5% in the fourth quarter of 2023, 16.5% in the fourth quarter of 2023, 17.5% in the fourth quarter of 2023, 18.5% in the fourth quarter of 2023, 19.5% in the fourth quarter of 2023, 20.5% in the fifth quarter of 2023, 20.5% in the fourth quarter of GDP It is estimated to be twice the size of Indonesia, the Philippines and Thailand. cLSA, Bank (see diagram).
If the world continues to fragment into rival trading blocs, the global economy could suffer severely, he said. IMF. Given that many products labeled “Made in Vietnam” contain a significant percentage of Chinese-made parts, it's unclear how much the U.S. is actually reducing its dependence on China by shifting its supply chains there, but so far the change has been a positive for Vietnam.
GDP Growth has been choppy, dipping during the pandemic before rebounding to 8% in 2022, plunging to 4.7% in 2023 amid the credit crunch, and expected to rebound to 5.8% this year. Still, Vietnam is well-positioned to continue attracting investment, argues Tony Nafte of Vietnam Investment Bank. CLSA. It is more open to trade than many Southeast Asian countries, with trade expected to grow by an astounding 186% in 2022 compared to the previous year. GDP, In Indonesia it was 45%, in the Philippines 72% and in Thailand 134%.
Vietnam has a large, young manufacturing workforce that is hardworking, well-educated and half the cost of workers on China's coast. Unlike Indonesia and the Philippines, Vietnam is free of Islamist terrorism, factory managers point out. Vietnam offers generous incentives to foreign investors, both explicit (tax cuts, cheap land) and de facto (high-tech workers get first-dose COVID-19 vaccines). Like China, it is a one-party state, but friendlier. Whereas expats in Beijing complain of an atmosphere of fear, expats in Vietnam seem calmer.
But the country has a major political problem: a government paralyzed by indecision. Chung must step down by 2026, and as the panic over rumors of his demise reminded everyone, no successor is known. Unsure of who to please in the next few years, officials are hesitant to make any big decisions.
The roaring furnace-like corruption crackdown launched by Mr. Chung has made them even more nervous, leading to hundreds of arrests and forcing the president, the No. 3 in the hierarchy, to resign last year. Lower-level bureaucrats have been reluctant to approve big projects for fear of being exposed as corrupt. Any whiff of scandal in the upcoming personnel changes could ruin their careers or worse. Many have concluded that the safest option is to do nothing.
Consider energy: Vietnam has done a good job of connecting homes to the grid (nearly 100% of rural homes have electricity, up from 14% in 1993). But as industry grows, so does demand for electricity. Supplies can be unreliable; last year's blackouts were “horrible,” says one manufacturing executive.
And foreign investors are increasingly keen to tell customers and shareholders they're using clean energy. Vietnam is in a tough spot: Heavily reliant on coal, Hanoi's air is worse than Shanghai's. A push to install solar panels has helped somewhat, but promises of net-zero carbon emissions by 2050 seem unrealistic unless the country harnesses the winds of its 3,000-kilometre windswept coast.
That could happen, but it will take time. The approval process for surveying the seabed and finding suitable sites is “very slow,” complained the wind executive, adding that authorities are “cautious about making any decisions at this point.” There is little clarity in the legal framework for installing turbines or selling power to the grid, he sighed. The ministries involved barely talk to each other and everything has to go through the state-run electricity supplier. eVN, As agile as Jabba the Hutt, environmentalists complain that vested interests (i.e., the bigwigs who invested in coal) are impeding the country's energy transition. Some environmentalists have even been jailed, typically for “tax evasion.”
Some in the ruling party, including Prime Minister Pham Minh Chinh, understand how Vietnam is seriously at risk from global warming. The Mekong River delta, which covers much of southwest Vietnam, is sinking while sea levels are rising, and could eventually be swallowed by the ocean.
Pragmatic government officials argue that if Vietnam wants to become an industrial powerhouse, it must bet on the clean technologies of the future, not the polluting ones that much of the world is trying to phase out. So the government is tacitly backing VinFast, the ambitious but loss-making electric-vehicle unit of Vietnam's largest private conglomerate. But Vietnam needs to reform faster if it is to meet its climate change commitments and prepare for a warmer world.
Vietnam is heavily dependent on trade, and the global business environment is changing rapidly, so policymakers need to keep up. But sometimes they can't. For example, Vietnam's tax breaks for foreign investors have become less attractive since 2010. OECD, With the club of rich nations agreeing to set the world's lowest corporate tax rate at 15 percent, multinational companies that pay little or no corporate tax in Vietnam could find themselves facing higher taxes elsewhere, a manager of a foreign manufacturer in Ho Chi Minh City has warned.
Rather than cutting taxes, he says the government should simplify rules. “The opportunities are big, but bureaucracy is the biggest problem,” agrees Bruno Jaspert, director of Deep C industrial park in Hai Phong. Regulations are often contradictory, and some projects require approval from 12 ministries. Better infrastructure would also help: public transport remains poor and traffic in big cities is slow.
Despite crackdowns, corruption still hurts business, with one foreign entrepreneur complaining that he has to play by two rules: formal ones, like paying taxes and making sure his warehouse doesn't catch fire, and informal ones, like bribing local officials to avoid being shut down during inspections.
Vietnam has gone from extreme poverty to moderate prosperity in a generation. But reforms need to continue. Geopolitical winds are shifting. Rivals may become more competitive. Vietnam is rapidly aging, with one estimate indicating that the working-age population will decline after 2038. And if living standards do not continue to improve rapidly, people may tire of the ruling party. Like leaders, governments do not last forever. ■
