Introduction: Another Vietnam

‘The Hidden Charm’ is Vietnam’s seductive tourist slogan. Many Vietnamese

don’t like it, but it teases foreigners’ yearning for adventure and discovery.
The phrase conjures an image which sums up the country: the peasant girl
looks up, tips back the brim of her conical hat and reveals her shy smiling
face beneath. The straw-coloured hat, the bright green paddy fields and the
black buffalo grazing all around – a world pure and beautiful, hidden and
charming. Make the effort, implies the slogan, and your reward will be a vision
of tranquillity, grace and beauty. This Vietnam promises everything your
modern world has left behind: delicate women, simple living and unspoilt
landscapes. The country once torn apart in prime time has been reborn, its
essence untouched by the predations of foreigners. Now it is available to the
discerning visitor with the patience to find it.
Those without the time or the patience can still capture it – on canvas in
one of the big-city sidewalk ateliers. Paint, tapestry and photography repro-
duce images of a country we know instantly is Vietnam: bicycle-riding girls
in white ao dai, sun-aged women porting bamboo shoulder poles, boys
astride buffalo and sampans piled high with fruit. It’s overwhelmingly an
aesthetic of details – paddy fields, peasants and pagodas – not wide land-
scape shots. The image of Vietnam we foreigners seek is a close-cropped
study in ‘otherness’. Zoom out from the girl in the conical hat and the newly
erected pylon intrudes on the view. Turn away from the buffalo boy and the
scene is ‘spoiled’ by his parents’ new concrete house. Vietnamese develop-
ment planners don’t share the western tourist aesthetic. Call it socialist, call
it proletarian or just call it ugly; they’d rather see an electricity substation

xii
 IN TR ODUCT I O N xiii

than a pre-industrial rural landscape. The people want progress and pros- 1
perity. The fantasy country we seek is the one they want to leave behind. 2
We care about Vietnam for one reason above all. Through all the horrors 3
the modern world could throw at it, it prevailed. No other country name has 4
the same resonance: ‘the lesson of Vietnam’, ‘the ghost of Vietnam’, 5
‘another Vietnam’ – we know instantly all that these phrases imply. This 6
‘Vietnam’ has become an abstract place, trapped in a blood-soaked decade 7
between 1965 and 1975. It lives on in daily discourse. ‘Vietnam’ has become 8
a shorthand reference for so many cleavages within American society that 9
on most days searching the newswires for ‘Vietnam’ will return more stories 10
about the United States than Southeast Asia. A civil rights law will be 1
described as ‘Vietnam-era legislation’, a motorist in an accident might be 2
routinely described as a ‘Vietnam veteran’ and politicians and commenta- 3
tors wield ‘the lessons of Vietnam’ as a blunt instrument to defend their 4
position on a gamut of foreign policy issues. Americans understand that 5
these phrases imply far more than simply a faraway country. 6
This book isn’t about that ‘Vietnam’; it’s about a country in Southeast 7
Asia with almost 90 million inhabitants, the 13th most populous country in 8
the world, the country which moved and inspired me and where I lived for 9
a while until I was told to leave. It doesn’t claim to be a view of the country 20
untainted by all the different visions others have projected upon it, nor a 1
vision of some ‘essential’ Viet Nam which exists behind these projections. 2
Vietnam keeps its secrets well. Foreigners can live there a long time and fail 3
to understand why things happen the way they do until Vietnamese friends 4
patiently explain what, to them, is blindingly obvious – and things slowly fall 5
into place. Many times I would finish a news report and think that I had 6
made a breakthrough, that this time I really understood what was going on 7
– only to have a friend or colleague, often from the BBC’s Vietnamese 8
Service, point out some vital element of the story that I had no idea even 9
existed. Many times I felt I was just describing ripples on the surface, while 30
beneath great currents were at work. This book is an attempt to describe 1
those currents. 2
Vietnam is in the middle of a revolution: capitalism is flooding into a nomi- 3
nally communist society, fields are disappearing under new industrial parks, 4
villagers are flocking to booming cities and youth culture is blooming. Dense 5
networks of family relationships are being strained by demands for greater 6
personal freedom and traditions are being eroded by the lure of modern living. 37
 xiv IN T RODUC TI O N

1 It’s one of the most breathtaking periods of social change anywhere, ever.
2 Vietnam is a very different place, even from a decade ago. When Robert
3 Templer wrote Shadows and Wind in the late 1990s, Vietnam was a sclerotic
4 country mired in economic crisis and unwilling to make the changes necessary
5 to unleash its innate dynamism. It still faces mighty challenges and it does
6 so with a severely strained political system but it is also a country in the
7 middle of – to use the official slogan – renovation. There is ambition every-
8 where: from the kids crammed into after-school English classes to the political
9 leaders who want their country to catch up with the Tigers of East Asia. The
10 question is whether the leaders’ ambitions will match those of the masses. Can
1 Communist Party-ruled Vietnam meet the aspirations of its people?
2 The signs, so far, are broadly positive. Vietnam has made great strides –
3 delivering basic education, healthcare and a rising standard of living to
4 almost everyone. Political leaders have passed on power without violence or
5 crisis and are actively thinking about what they must do to remain in change
6 of a young, vibrant and ambitious society. Vietnam is proof that develop-
7 ment can work; that a poor society can become better-off, and in a dramati-
8 cally short period of time. International development agencies flourish
9 there, basking in the reflected glory of the country’s achievements. They
20 hold up Vietnam as a model of economic liberalisation and political reform.
1 The truth is not so straightforward.
2 Many people have assumed that, with billions of dollars of foreign invest-
3 ment piling into Vietnam, political change will inevitably follow. But liberal-
4 isation only began because of the need to feed and employ a burgeoning
5 population and even now its limits are rigorously policed. The trappings of
6 freedom are apparent on every city street but, from the economy to the
7 media, the Communist Party is determined to remain the sole source of
8 authority. Beneath the great transformation lurks a paranoid and deeply
9 authoritarian political system. Vietnam’s prospects are not as clear as they
30 might first appear to outsiders. The risks of economic mismanagement, of
1 popular dissatisfaction and environmental damage – made more dangerous
2 by an intolerance of public criticism – mean the country’s prospects are far
3 from assured. Everything depends upon the Communist Party maintaining
4 coherence and discipline at a time when challenges to stability are growing
5 by the day.
6 The problem for the Party leadership is how to stay in control. The Party
37 has never been a monolithic organisation; its rule depends on balancing the
 IN TR ODUCT I O N xv

competing interests of a range of factions – from the army, to the bosses of 1

state-owned enterprises and its rank and file members. In the past this gave 2
it the flexibility to adapt and survive but now seems to prevent it from 3
confronting the new elite who are twisting the country’s development in 4
their own favour and laying the ground for future crisis. As well-connected 5
businesspeople build top-heavy empires with cosy links to cheap money and 6
influence, people at the bottom are being squeezed by increases in the cost 7
of living. The system often looks like, in the words of Gore Vidal, ‘free enter- 8
prise for the poor and socialism for the rich’.1 9
Vietnam has come a long way in the past 30 years but its evolution has 10
often been through crisis. The contradictions inherent in simultaneously 1
having communist control and eating capitalist cake have come to breaking 2
point near the end of each decade: 1979, 1988, 1997 and 2008. Each time, 3
the Party has found a peaceful way through but the resolution has only set 4
the stage for the next battle. Future outcomes will depend on the balance of 5
forces within the Communist Party and between the Party and outsiders. 6
Anyone who has witnessed the motorised armadas of youth which circulate 7
Vietnamese cities at weekends can appreciate the challenge the Party 8
leaders face. Over the next few years a less hobbled society and vested inter- 9
ests will test and re-test the limits of what is possible while the Party centre 20
tries to recapture power. Every day, petty conflicts are being fought in fields, 1
cybercafés and offices. Whatever happens next is unlikely to be dull. 2
3
4
5
6
7
8
9
30
1
2
3
4
5
6
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1
2

Me k
n
Sa Pa er ds C H I N A
3

on
h n
rt a

g
4 o hl Quang Ninh Province
N i g ed Thai Nguyen

R
R
5 H ive
r Haiphong
6 Hanoi
Ha Long Bay
7 Thai Binh G u l f o f

V
8 To n k i n
L Pu Mat
9 National Park Red River
Delta
Meko ng

10 A Hainan

I
1 O
2
S

E
3 Vientiane
4 South
T
Mekong

China
5
Hue Sea
6
Danang
7

NC e n t
T H A I L A N D
8
9
ra
A
20 l H
1
igh
Bangkok
2 M
lan
Mekong

3 Tonle Sap
ds

4
5 C A M B O D I A Nha Trang
6 Phnom
Binh Duong Province
7 Penh
Dong Nai Province
8 Ho Chi Minh City
Chau Doc
9 Gulf of
Ben Tre Province
30 Thailand Can Tho
g
1 on
e k lt a
M e
2 0 100 miles
D
3 0 200 kms

4
1 A General Map of Vietnam.
5
6
37

xvi
 1
C H I N A 2
TAIWAN 3
Re
d 4
5

Ri
Hong Kong

ve
B U R M A Hanoi
6

r
Haiphong
L 7
A Gulf of
Vientiane O Tonkin Haina n 8
S
Yangon
Me Former DMZ between north Lu zo n 9
k and south Vietnam
on
g Hue 10
Danang
THAILAND Paracel Islands Manila 1
Bangkok VIETNAM 2
South 3
CAMBODIA PHILI PPINE S
China
4
Sea
Phnom Penh
Ho Chi Minh City 5
Gul f
of
6
T h ai land Spratly Islands 7
Sulu 8
Sea
9
20
B RUN E I 1
Kuala Lumpur
2
M A L A Y S I A
3
SINGAPORE
4
Sumatra 5
B o r n e o 6
Ce le b e s 7
8
I N D O N E S I A
Java 9
Jakarta Sea 30
Indian
1
Ocean
0 200 miles
Java 2
0 400 kms
3
4
2 Vietnam, the frontier between East and Southeast Asia. The South China Sea (or as 5
Vietnamese call it, the East Sea) is highly contested territory.
6
37

xvii
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2
3
4
5
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7
8
9
10
1
2
3
4
5
6
7
8
9
20
1
2
3
4
5
6
7
8
9
30 3 Map by the German geographer Herman Moll drawn in 1720 of the European
1 perception of ‘Indochina’. It shows Cambodia in control of the Mekong Delta and the
now defunct kingdom of Champa in southeastern Vietnam.
2
3
4
5
6
37

xviii
 1
2
1 3
4
★ 5
6
7
The communist capitalist playground 8
9
10
1
2
3
Autumn is wedding season in Vietnam. The temperatures dip, the humidity 4
slackens, everyone’s ready for a party. It was a Sunday evening and 5
the streets of central Saigon were filled with the weekend parade – the 6
motorised celebration of youth, noise and exhaust fumes. Young men and 7
women biked down the wide boulevards, exulting in the freedoms of their 8
new urban culture. Starting on Le Duan Street, named after Vietnam’s last 9
Stalinist leader; they rode past the United States Consulate (the old 20
embassy long demolished); up to the gates of the Reunification Palace, the 1
old Saigon seat of power; down to the huge traffic circle by Ben Thanh 2
Market and then a triumphal roar up Le Loi Street to the Opera House – 3
completed by the French colonists in 1900, once home to the National 4
Assembly of the old southern regime and now hosting music again. At the 5
Opera House they divided. Some went north, past the Continental Hotel – 6
where Graham Greene sat on the veranda to write The Quiet American – and 7
up towards the Notre Dame Cathedral to rejoin the crowds at Le Duan. It 8
was a tour of Vietnam’s recent past: from partition and war, through poverty 9
and out into new-found prosperity. Those who headed south down Dong 30
Khoi Street – the old Rue Catinat – might just have caught sight of a 1
wedding party arriving at the Caravelle, Saigon’s first luxury hotel and once 2
home to newsmen and women covering the ‘American War’. But as they 3
sped down to the Saigon River it’s unlikely they gave too much thought to 4
the significance of the couple getting married. 5
Although the Caravelle is no longer the only luxury hotel in town, it sits 6
at the pinnacle of aspiration for Saigon’s new elite. (Few people in Saigon 37

1
 2 V I ETN AM

1 call the place Ho Chi Minh City.) The elegance of its interior, the quality
2 of its catering and its sheer exclusivity mean there is nowhere smarter to
3 get married and the hotel can charge a small fortune. With every expense
4 included, a wedding here can easily cost $40,000. But if you invite the
5 right guests, the costs can be covered by the contents of the envelopes
6 they leave behind. On 16 November 2008 the young couple who came to
7 celebrate their match weren’t short of cash. The groom was 36-year-old
8 Nguyen Bao Hoang, Managing General Partner of an investment firm, IDG
9 Ventures Vietnam, and his bride was 27-year-old Nguyen Thanh Phuong,
10 Chairperson of another investment firm, VietCapital. Between them, their
1 two companies controlled around $150 million of investments in Vietnam.
2 That two such young people should be in charge of such huge amounts of
3 money is evidence of the extraordinary change in Vietnam over the past two
4 decades. More than half the population is under the age of 26, the country
5 is yearning to catch up with its Asian neighbours, life is improving rapidly
6 for most of its people and those who are best placed to make the most of the
7 opportunities are the young.
8 But there was something more than a bit special about this wedding.
9 Nguyen Thanh Phuong isn’t just an investment banker; she’s the daughter
20 of the Prime Minister, Nguyen Tan Dung – and the man she was marrying
1 isn’t just an investment banker either; he’s an American citizen, the child of
2 parents who fled Vietnam in 1975 to escape the Communists. If anyone
3 needs proof that a new Vietnam has emerged, this surely was it – the union
4 of the Vietnamese communist daughter and the American-backed venture
5 capitalist. There were 200 guests at the celebration, the most the hotel can
6 accommodate – though this was later ascribed to the couple’s choice for a
7 ‘small’ wedding. Apart from a tiny article in a Saigon paper, the wedding
8 received no official coverage in Vietnam. But in another sign of how the
9 country is changing, it was quickly picked up by bloggers who discussed it as
30 any western gossip column might.
1 What kind of society is ‘The New Vietnam’ becoming? It’s still nominally
2 communist but it certainly isn’t communist in the way North Americans and
3 Europeans usually think of the word. It’s not drab or depressing – it’s bright,
4 exciting, fast-moving and colourful. Its leaders came to power fighting French
5 colonialism, American imperialism and domestic capitalism, yet under their
6 direction the country has opened its doors to corporations from France, the
37 United States and every other country, and allowed private enterprise to
 TH E CO M M UN I S T CA PITA L IST P L AYG ROU ND 3

flourish: the World Bank calls Vietnam a ‘poster boy’ for economic liberalisa- 1
tion. So, what has happened to the Party’s socialist ideals? Many visitors, and 2
even some commentators, see Vietnam’s breathtaking transformation and 3
assume that the country has opted wholeheartedly for capitalism and that 4
any pretence to socialism is a vestige of a dying creed. The change has 5
certainly been profound. In the course of a generation unpaved city streets 6
have become neon-lit avenues of commerce, peasants have swapped buffalo 7
ploughs for motorbikes, and paddy fields have become assembly lines. The 8
sick have to pay for healthcare, parents have to pay for schooling and the 9
unemployed are left to fend for themselves. But this is not the whole story. 10
Capitalism is highly visible but the froth of petty trading is distracting. 1
Vietnam has not developed in the way it has – balancing rocketing 2
economic growth with one of the most impressive reductions in poverty 3
anywhere, ever – by completely liberalising the economy. Yes, restrictions 4
on private enterprise have been lifted, markets have been allowed to flourish 5
and foreign investment has been encouraged – but Vietnam’s success is far 6
from being a triumph of World Bank orthodoxy. Some might snigger at the 7
official description of a ‘socialist-oriented market economy’ but it’s not an 8
empty slogan. Even today, the Communist Party retains control over most 9
of the economy: either directly through the state-owned enterprises which 20
monopolise key strategic sectors, through joint ventures between the state 1
sector and foreign investors or, increasingly, through the elite networks 2
which bind the Party to the new private sector. 3
More important to the Communist Party than economic dogma is self- 4
preservation. Everything else: growth, poverty reduction, regional equality, 5
media freedom, environmental protection – everything – is subordinate to 6
that basic instinct. To survive, the Party knows it has to match a simple, but 7
terrifying, figure: one million jobs a year. Every year Vietnam’s schools 8
produce a million new peasants and proletarians, the product of a huge post- 9
war baby boom which is showing little sign of slowing down despite an 30
intense ‘two-child’ policy. Growth is vital, but not at the expense of creating 1
too much inequality. So is reducing poverty, but not at the expense of 2
impeding growth too much. Over the past 30 years policy has swung back 3
and forth, sometimes favouring growth, sometimes stability. The benefici- 4
aries have been the peasants and proletarians. Vietnam’s achievements in 5
reducing poverty are impressive. In 1993, according to government figures, 6
almost 60 per cent of the population lived below the poverty line. By 2004 37
 4 V I ETN AM

1 that figure was down to 20 per cent. The country has met most of its
2 Millennium Goals, the development targets set by the United Nations, early
3 and escaped the ranks of the poorest countries to join the group of ‘middle-
4 income states’. People’s living standards are soaring, their horizons are
5 widening and their ambitions are growing. But there is danger in this
6 success. ‘The New Vietnam’ is different to the old. The marriage of state
7 control and liberalisation, of Party and private interest, is distorting the
8 economy towards the wants of the few rather than the needs of the many.
9 And these networks of ‘crony socialism’ are becoming a threat to Vietnam’s
10 future stability. Vietnam risks the fate of many of the World Bank’s previous
1 poster boys – boom followed by bust.
2
3 * * *
4
5 But is Vietnam really a poster boy for World Bank orthodoxy? The conven-
6 tional explanation of Vietnam’s economic success goes something like this:
7 an economic crisis in the early 1980s forced a conscious choice to embrace
8 market forces at the Sixth Communist Party Congress in December 1986,
9 after which the economy was liberalised, with World Bank advice, until
20 Vietnam eventually joined the World Trade Organisation in 2007. At best,
1 that’s only half the story. To understand the other half you have to start
2 history earlier and change focus. A better explanation for Vietnam’s success
3 is that reform was begun to protect the state sector, not to dismantle it; that
4 the state’s involvement has remained consistently high throughout reform;
5 and that, until recently, World Bank policy advice has been ignored, except
6 where it fitted with the Communist Party’s own priorities. To understand
7 this fully we need a short detour into economic history.
8 United Vietnam’s first economic crisis came just four years after
9 Communist tanks crashed through the gates of the Presidential Palace in
30 Saigon, ending both the ‘American War’ and two decades in which Vietnam
1 had been divided into north and south. The rural economy was in ruins, the
2 north had been bombed back to a pre-industrial age and the war had killed,
3 wounded or displaced millions. Victory, however, seemed to prove the superi-
4 ority of the communist model: it had beaten the capitalists and their American
5 backers. But triumph didn’t last; Vietnamese state socialism couldn’t deliver.
6 By 1979 heavy industry was swallowing resources without much effect on
37 output, light industry was contracting and agriculture stagnating, as peasants in
 TH E CO M M UN I S T CA PITA L IST P L AYG ROU ND 5

the newly communist south resisted attempts to collectivise them. The country 1
was forced to import 200,000 tonnes of rice just to prevent starvation. To cap 2
it all Vietnam invaded Cambodia, and China attacked Vietnam and cut off all 3
economic aid. Those parts of the economy dependent on Chinese imports fell 4
into crisis. Something had to be done. The decision which the Communist 5
Party leadership took in August 1979 was intended to preserve the communist 6
economy they’d spent a quarter of a century building but ultimately would 7
unravel it. Centralised economic planning and the allocation of resources by 8
the state – all this dogma would eventually dissipate. The leadership called for 9
production to ‘explode’. State-owned enterprises still had to meet their 10
commitments to the central plan – but they were now allowed to buy and sell 1
any surplus independently. Farmers could also sell any rice they had left over 2
once they’d supplied their allotted quota to the state.1 In 1979, before China 3
and the Soviet Union opened the door to industrial capitalism, Vietnam’s 4
communists had already started experimenting with it. 5
The purpose of the policy was not to abandon socialist planning, but to 6
try to save it. Some State Owned Enterprises (SOEs) were already trading 7
informally, and some even doing business with foreigners, just to pay the 8
bills. By tacitly approving these informal transactions the Party leadership 9
hoped to control them and gradually rein them in. Instead the opposite 20
happened. Illegal trading doubled from 20 per cent of the market in 1980 to 1
40 per cent two years later.2 This became known as pha rao – fence-breaking 2
– the bending of rules to get things done.3 In January 1981, the leadership 3
tried to get tough. It issued Decree 25–CP, ordering all state firms to 4
register their market trading. It was an attempt to control the black market 5
but at the same time it allowed SOEs to ‘self-balance’ – to buy and sell inde- 6
pendently – once they had fulfilled their commitments to the official 7
Economic Plan. It was the real beginning of economic reform. Provincial 8
bosses in the south pushed things even further. At the end of 1985 Ho Chi 9
Minh City’s authorities ignored national law and unilaterally allowed firms 30
to use ‘new methods’ of management. Economic liberalisation was well 1
under way long before the ‘official’ start of reform in 1986. 2
And in that year a lot of things happened at once. Growth fell, as did food 3
output, and inflation hit almost 500 per cent.4 Le Duan, the Stalinist Party 4
boss who’d formally led the country since Ho Chi Minh’s death in 1969 5
(and informally for at least a decade before that), died. The Party called a 6
national Congress and all the pressures that had been building up inside it 37
 6 V I ETN AM

1 for a decade exploded. The driving force was partly a group of economic
2 reformers within the Party, but mainly the bosses of the state enterprises
3 who were now enjoying the fruits of their fence-breaking and wanted to
4 legitimise their freedom to trade. They forced the Party leadership to
5 abandon central planning and let the market have greater influence – the
6 process now known as doi moi: literally ‘change to something new’, but
7 more usually translated as ‘renovation’. Gradually the parallel ‘free’ market
8 became dominant, allowing a transition away from old-style central plan-
9 ning far gentler than in any other state socialist country. A vast land reform
10 programme gave farmers control over their fields, agricultural output
1 (which still accounted for 40 per cent of the economy)5 boomed, Vietnam
2 pulled its troops out of Cambodia and restored relations with China, which
3 in turn allowed cheap imports to resume across the northern border.6 Peace
4 allowed big reductions in military spending and the fall in Soviet aid forced
5 bigger cuts in public spending generally. By 1991, inflation had fallen to
6 manageable levels.
7 But if the transition was gentle, it was also slow, confused and contradic-
8 tory. It’s ironic that Vietnam is frequently held up as a shining example of
9 economic liberalisation. The reality is in some ways the opposite. Vietnam’s
20 transition was marked by rising state involvement in the economy, by strong
1 efforts to direct the economy from the centre and the Communist Party’s
2 determination to take an independent path, regardless of the advice of the
3 World Bank, the International Monetary Fund and other advocates of
4 laissez-faire capitalism. At every crisis and juncture the Party’s priority has
5 been its own survival. The needs to buy off dissent, spread the benefits
6 of growth and mitigate regional disparities have always trumped calls for
7 too-great liberalisation, deregulation or the singular pursuit of economic
8 growth. The result has, so far, been a combination of economic growth,
9 poverty reduction and political stability unmatched by any other developing
30 country. In the words of Ho Chi Minh, it has been ‘success, success, great
1 success’.
2 When Communism collapsed in Europe, it was foreign capitalists and
3 international donors who maintained Communist Party control in
4 Vietnam. In 1981, aid from the Soviet Union funded about 40 per cent of
5 the Vietnamese state budget. In 1991, it was cut off completely. The Party
6 declared Vietnam open for foreign investment and the combination of low
37 wages, under-used factories and a great geographical location was too
 TH E CO M M UN I S T CA PITA L IST P L AYG ROU ND 7

tempting for overseas corporations to miss. But even at this point, the state 1
remained in control, and foreign investment was directed into joint ventures 2
with state firms. In every other communist country that has embarked 3
on economic transition, the proportion of the economy controlled by the 4
state has fallen. In Vietnam it actually rose: from 39 per cent in 1992 to 5
41 per cent in 2003 – and these figures exclude foreign-invested firms, 6
which were usually joint ventures with SOEs.7 But unlike many other coun- 7
tries, state control did not mean economic torpor – growth rocketed to 8
8 per cent a year. The boom was particularly strong in the south. By the end 9
of the decade, state firms in Ho Chi Minh City contributed about half of the 10
national state budget. In effect Saigon and its surroundings had taken over 1
the role performed by the Soviet Union two decades earlier. 2
In almost every other country where the state’s share of the economy 3
has risen, the consequences have been stagnation, fiscal crisis and hyper- 4
inflation. Vietnam was different because its state enterprises operated largely 5
without state support; so much so that their ‘owners’ – government ministries, 6
provincial authorities, Party structures and so on – treated them as, in effect, 7
private companies, albeit ones with privileged access to borrowing from state 8
banks and protection by state agencies. Adam Fforde, a leading economic 9
analyst of Vietnam, calls them ‘virtual share companies’. They made profits, 20
they expanded and diversified: Vietnam’s exports increased fourfold between 1
1990 and 1996.8 Their managers made deals, paid off their protectors and 2
prospered. It was easy for those with the right connections to shut down 3
competition from rivals, imports or newly arrived foreigners. Corruption 4
became endemic, state banks lent money with abandon and some of the firms 5
tried to turn themselves into mini-empires – to the extent, in some cases, that 6
they formed unofficial joint ventures with secretive investors well beyond the 7
scrutiny of the state which was supposed to own them. In the worst cases 8
some of these corporations became outright criminals. 9
This was not what international donors had been pushing for. Ever since 30
1993, when the end of the US embargo allowed the World Bank to resume 1
lending to Vietnam, it – and the IMF – had been attempting to persuade the 2
government to follow its traditional recipe of economic liberalisation. In 3
1996 the Bank, the government and the IMF had even agreed a joint Policy 4
Framework Paper setting out the steps which would be undertaken. It was 5
never implemented. There were plenty in the Party who objected to any 6
attempt to undermine the position of SOEs or to open up the economy to 37
 8 V I ETN AM

1 excessive foreign influence. Trying to do so in 1997, when previous World

2 Bank poster boys like Indonesia were in economic meltdown, reinforced the
3 difficulty. The Bank offered $300 million in Structural Adjustment Credits.
4 Vietnam simply turned it down. The country had very little debt and was
5 making enough money from exports and commercial foreign investment
6 not to need the cash. The World Bank, not used to being given the brush-
7 off, walked away with its tail between its legs.
8 By late 1998 the Bank was back. It and other donors offered Vietnam
9 $500 million in extra assistance (on top of $2.2 billion in unconditional
10 funding) if it agreed to implement a timetable to sell off the remaining
1 SOEs, restructure the state banking sector and introduce a trade reform
2 programme. The government agreed to the deal but then took no action
3 to implement it. The demands were too much for the mainstream of
4 the Party to accept. In December 1999 the donors pledged even more –
5 $700 million – if the country followed its recommendations. The response
6 was uncompromising. Minister of Planning and Investment, Tran Xuan
7 Gia, told journalists, ‘You cannot buy reforms with money . . . no one
8 is going to bombard Vietnam into acting.’9 There could hardly be a
9 clearer demonstration of the Party’s priorities. Over the course of three
20 years it turned down a total of $1.5 billion because it placed political stability
1 ahead of the promises of economic liberalisation. Although the Bank
2 continued to lend large sums of ordinary aid which came without strings
3 attached, it failed to enforce its conditions. Vietnam had gone eyeball-
4 to-eyeball with the mighty institution from Washington and won. The
5 Bank came to the conclusion that it was easier to work with the Party rather
6 than against it.
7 But while the battle with the Bank was raging, the Party began to realise
8 that, even with foreign investment, the state sector wasn’t going to be able
9 to provide the necessary million jobs a year. It took an historic decision: to
30 let private industry flourish. In May 1999 a new Enterprise Law was passed,
1 abolishing most of the cumbersome bureaucracy which had prevented
2 private companies from formally registering themselves. The impact, once
3 it came into effect on 1 January 2000, was almost instantaneous: over the
4 following five years 160,000 enterprises were registered. Most of these were
5 existing businesses which had been operating without licences and took
6 advantage of the new law to register. However, the law meant the private
37 sector had finally arrived in Vietnam – 20 years after the start of economic
 TH E CO M M UN I S T CA PITA L IST P L AYG ROU ND 9

reform. With hindsight, perhaps the long build-up gave these small ‘mom 1
and pop’ enterprises the time to build up capital and experience before 2
the rude shock of unrestrained market forces steamrollered them into the 3
ground. Vietnam has done much better in this regard than many other 4
‘transition’ economies. 5
Having unleashed the private sector, the final big fight in the Party was 6
about how wide to open the doors to international commerce. It crystallised 7
around whether to sign a Bilateral Trade Agreement with the United States. 8
Talks had begun in 1995, been terminated by Hanoi in 1997, but later 9
resumed. After nine long rounds of negotiations – the final session in July 10
1999 lasting 17 hours – the two sides agreed what was described as the most 1
complex trade deal in American history, 100 pages long. A key figure on the 2
Vietnamese side was the then Deputy Prime Minister, Nguyen Tan Dung. 3
Time and again when talks appeared to have reached an impasse the 4
Americans spoke directly to him and the blockage was removed.10 But 5
Dung’s deal didn’t please those elements of the Party still hostile to foreign 6
trade and the United States. A formal signing ceremony was arranged for 7
that year’s Asia-Pacific summit – but was cancelled at the last minute 8
because key figures demanded the text be reviewed by the Party’s policy- 9
making body, the Central Committee. It took until July 2000 before the 20
Committee would agree to sign. It was a momentous meeting. Not only did 1
the Central Committee agree the BTA, it also approved the opening of a 2
stock market in Ho Chi Minh City. From this point onwards growth in the 3
private sector began to outstrip that of the state sector and has continued in 4
the same direction ever since.11 Vietnam was set on a path towards interna- 5
tional economic integration which would culminate (after long negotia- 6
tions) in its admission to the World Trade Organisation in January 2007. By 7
then Nguyen Tan Dung, the man who had helped the Americans negotiate 8
the BTA, was the country’s Prime Minister and leading reformer and his 9
daughter was an investment banker. 30
1
* * * 2
3
Looking at the teeming streets of big-city Vietnam – Hanoi, Danang, 4
Haiphong and Ho Chi Minh City – it’s easy to think that Vietnam is all 5
market and no socialism. A riot of advertising overhead, a mêlée of traders 6
below, every alleyway a potential noodle stall and every shady tree a possible 37
 10 V I ETN AM

1 barber’s shop. Development is literally ‘free wheeling’; borne on the back of

2 care-worn motorbikes. But the frenetic activity exaggerates the importance
3 of the indigenous private sector. It provides plenty of jobs and a lot of excite-
4 ment but there are few private businesses of any size. From the peasant
5 women who clog up junctions in the old quarter of Hanoi trying to sell fruit
6 and vegetables to the shop owners who watch them with disdain, most
7 private enterprises survive on low margins.
8 The history of Vietnam’s private sector is literally built into one shop on
9 the corner of Hang Chieu (‘mat-selling street’) and Nguyen Thien Thuat
10 (named after an early resistance fighter against the French) in the Old
1 Quarter. Above the efflorescence of consumer packaging, passers-by can see
2 its heritage. The socialist stucco lettering over the front still declares the
3 building a government store. This was where people once queued to buy the
4 meagre rations of food available under the old state-subsidy system. Nguyen
5 Quang Hao was one of the shop’s administrators then and he remembers
6 those days well. ‘Under the subsidy system you could only buy your assigned
7 portion,’ he says. ‘People brought their ration cards. They could only have
8 15 kilos of rice each per month.’ Hao is now a relatively prosperous man,
9 wearing a pair of designer spectacles to inspect the mountain of locally made
20 and imported convenience foods piled up around his till. He took over
1 the store in 1989 and now runs the place as the owner of a successful private
2 business. Hao is very happy with economic reform. ‘These days you can buy
3 whatever you want, so long as you have the money,’ he says with a grin.
4 There are bigger private firms but they’re few in number. Although 350
5 companies are now listed on the country’s two stock exchanges, 99 per cent
6 of the country’s businesses are still small or medium sized. In 2005 there
7 were just 22 domestic privately owned firms among the top 200 companies
8 and, as we’ll see later, ‘private’ is a debatable term.12 More important to the
9 country at the moment is the international private sector. If you head due
30 east from Hao’s shop, over the Red River on the Chuong Duong Bridge and
1 out to the city limits, you’ll quickly understand the significance of foreign
2 direct investment to Vietnam. The highway between Hanoi and Haiphong
3 once ran through rice fields. Now the fields are mostly hidden behind a
4 chain of industrial parks and manufacturing sheds stretching almost the
5 entire 50 miles between the two cities. On the outskirts of Haiphong, one of
6 those great sheds is home to the Taiwanese-owned Stella Shoe Factory.
37 Within its massive compound 7,000 workers toil in four vast halls. Two or
 TH E CO M M UN I S T CA PITA L IST P L AYG ROU ND 11

three long conveyor belts run the length of each hall under signs revealing 1
who the footwear is being made for: boots for the American outdoor brands 2
Timberland and Merrell, shoes for the British company Clarks and even 3
designer-wear for a well-known Italian label. Clarks – one of Europe’s 4
biggest footwear brands – makes a third of its world output in Vietnam. 5
Machines stamp and tenderise the leather, prepare the soles and finish the 6
sealing but most of the other work is done by hand. Stretching the leather 7
over the lath and precisely hammering in nails are tricky jobs. The noise is 8
intense and the work unrelenting, but as shoe factories go, it’s a nice one. It’s 9
bright, cool and the workers have access to a clinic and welfare services. 10
Graeme Fiddler, the Vietnam Manager for Clarks has been to plenty of 1
other shoe factories in Vietnam that his company would never work 2
with. ‘Clarks owners are Quakers, which means they try to live up to ethical 3
standards,’ he explains. 4
Graeme has watched the factory develop, literally, from a greenfield site 5
in just a few years. Its first employees came straight out of the rice paddies 6
and had to be trained from scratch. Many had never used a modern toilet 7
before and would instead bring their own banana leaves to work. But they 8
slowly acquired the skills necessary to make sports shoes and then, as their 9
abilities improved, leather footwear. In mid-2006 each worker earned, on 20
average, between $60 and $80 per month. In Europe and North America 1
that would be below subsistence, but at the time it was double the minimum 2
wage in Vietnam. It was also much more than any local farmer could earn. 3
Vu Thi Tham, a worker on the children’s shoes production line, didn’t 4
appear to be overjoyed with her job, but it paid better than being a peasant. 5
‘Binh thuong,’ she said in Vietnamese: ‘It’s OK. I’m working here because 6
the income is stable. Before I was a farmer and my income depended on the 7
weather. If it was good, I could make good money. But if it was bad, I 8
couldn’t. Even in good times I could only make $30 per month but working 9
here I can make $60 or more if I do overtime.’ 30
Low-skilled and labour-intensive industries like footwear are traditionally 1
the first stop for any industrialising country. In Vietnam they have created 2
hundreds of thousands of jobs and underpinned its boom. But to sustain 3
growth the country needs to attract higher-skilled industries which pay better. 4
Vietnam has been very lucky in that it opened its economy at just the time 5
when multinational corporations began to doubt the wisdom of relying too 6
much on China. Many have put huge amounts of investment into factories 37
 12 V I ETN AM

1 along China’s southern and eastern coasts but are now making provision in
2 case the situation there ever turns against them. This ‘China+1’ strategy has
3 brought many big firms to Vietnam. The Japanese electronics giant Canon is
4 one of them. It now makes more than half its computer printers in a complex
5 of plants around the city of Bac Ninh, north-east of Hanoi. In 2005 it was the
6 thirteenth-biggest company in Vietnam.13 Beginning with relatively simple
7 ink jet printers, it has now expanded output to include more sophisticated
8 laser printers.
9 The factories are big, grey, windowless boxes. Security is a major
10 concern; strangers aren’t allowed inside lest they see the company’s techno-
1 logical secrets. Within, everything is highly disciplined. When the gates
2 open early in the morning, hundreds of workers ride in on their bikes,
3 change into their company overalls and stand in line to sing the company
4 song. This is the way Vietnamese children start school every day, so it’s been
5 easy for Canon to find the right kind of worker. The company’s General
6 Director in Vietnam, Sachio Kageyama, is clear about why Canon chose to
7 locate in Vietnam. ‘Firstly there’s a very stable political situation here, very
8 stable economic growth and a very intelligent workforce. These are big
9 advantages.’ Most of Canon’s workers in Vietnam only assemble compo-
20 nents which are manufactured elsewhere. All day big trucks pull up at the
1 factory gates bringing in parts from abroad. ‘For the moment we import the
2 vast majority of our parts from south-eastern China because industry in
3 Vietnam is still immature,’ explains Mr Kageyama. ‘However, we are making
4 efforts to raise the ratio of domestic parts and we are also making some key
5 components inside our factory.’ Potentially more significant for Vietnam
6 than the big trucks at the gates are the few small ones bringing small quanti-
7 ties of components from other manufacturers who’ve set up locally to
8 supply Canon’s assembly lines.
9 And Canon isn’t alone. Vietnam is attracting more and more hi-tech
30 companies. Samsung of South Korea is constructing a $700 million mobile
1 phone plant nearby. The US chip-maker Intel has built a billion-dollar
2 factory outside Ho Chi Minh City; Hon Hai, a Taiwanese company making
3 iPods for Apple and computers for Dell and Hewlett-Packard, has opened a
4 billion-dollar plant near Hanoi; and many others, including NEC, Foxconn,
5 Brother and Matsushita have joined them. In 2006 Vietnam exported
6 merchandise worth $40 billion – most of it from the foreign-invested
37 sector.14 The country is doing well.
 TH E CO M M UN I S T CA PITA L IST P L AYG ROU ND 13

But growth has exposed Vietnam’s weaknesses. Manufacturers regularly 1

complain that roads are falling to pieces and ports are too congested. More 2
seriously, when Intel started to recruit staff it discovered that out of 2,000 3
applicants, just 40 were qualified to work in its factory, the lowest propor- 4
tion of any country where it operates. Other foreign technology companies 5
reported similar problems. Although Vietnam has been very successful 6
in spreading literacy – official statistics show literacy levels of more than 7
90 per cent – university education has long suffered from corruption and 8
over-emphasis on Marxist-Leninist studies and national defence training. 9
The requirements for getting a degree from a Vietnamese state university 10
typically include being able to sprint 100 metres and fire an AK-47. There’s 1
less emphasis on vocational skills. The Education Ministry says it plans to 2
double the proportion of university lecturers with doctorates to 30 per cent 3
by 2015. Whether that will solve the problem or simply make it worse by 4
encouraging universities to hire staff with fake doctorates may not be 5
discovered until it’s too late. 6
Another major problem for foreign companies in Vietnam is the fragile 7
state of the law, as the then twentieth largest bank in the world, the Dutch- 8
owned ABN Amro, found out during 2006. The story began with a woman 9
called Nguyen Thi Quynh Van. In March 2006, shortly before her 36th 20
birthday, Van was arrested on suspicion of ‘causing serious losses to the 1
state’ in her role as Deputy Head of Trade Financing at the Haiphong city 2
branch of Vietnam’s fourth largest bank, the state-owned Industrial and 3
Commercial Bank of Vietnam: Incombank for short. She was alleged to 4
have lost $5.4 million in a series of speculative currency deals with ABN 5
Amro and at least two other foreign banks based in Vietnam. In most coun- 6
tries this would have been a relatively straightforward case of prosecuting a 7
‘rogue trader’. But in Vietnam, losing state resources is a crime carrying the 8
death penalty. Rather than focus on the alleged misdemeanours of its 9
employee, Incombank chose to sue ABN Amro for the return of its money, 30
insisting, in the words of one official, that ‘Many kinds of currency have 1
been illegally withdrawn and it is our policy that once someone has inten- 2
tionally caused damage to our company, they have to be responsible for the 3
return of what they have taken.’ ABN Amro maintained that ‘The trades 4
were valid and all the trades were settled’ and refused to pay. What ensued 5
over the following eight months was a demonstration of the limits both of 6
Vietnam’s market economy and of the rule of law, as Incombank used the 37
 14 V I ETN AM

1 state and its security forces in what looked like a campaign of blackmail
2 against ABN Amro. The trader and the bank clearly enjoyed the protection
3 of what Vietnamese call an ‘umbrella’ – someone with power.
4 Six weeks after Van’s arrest, police detained two of ABN Amro’s local
5 back office employees on the grounds that they had helped Van misappro-
6 priate the money. Its Country Executive, De Pham, a Vietnamese-
7 American, was barred from leaving the country despite being pregnant and
8 needing to travel for check-ups, as was another expatriate executive. In July,
9 two more local ABN Amro employees were arrested, both of them currency
10 traders, and a date was set for Incombank’s case in the Hanoi court. At this
1 point Incombank’s case rested on a highly obscure piece of legislation: a
2 directive issued by the State Bank of Vietnam (SBV) seven years before but
3 not implemented until after the arrests had been made. Under Decision
4 101/QD–NHNN of 23 June 1999, foreign exchange dealers were obliged
5 to register with the State Bank and, according to the Incombank official,
6 ‘The people involved at our branch weren’t registered and persons at the
7 other bank knew about this and still undertook transactions with them, so
8 it’s clear that they were wrong as well.’ ABN Amro argued that the regula-
9 tion was intended to apply to banks selling currency to the public – not to
20 deals done between banks – and pointed out that the SBV had only asked
1 banks to register their traders well after the case had become controversial.
2 The SBV refused to explain its actions, despite being officially responsible
3 for financial regulation. One very senior official would only say, ‘The inves-
4 tigation is the responsibility of the Police Economic Crime Department. We
5 have to wait for their results.’
6 The general assumption among businesspeople in Hanoi was that Van
7 and Incombank were being protected by people with connections running
8 deep into the Ministry of Public Security. The police simply barged the
9 State Bank out of the way. What mattered was not the law but raw power.
30 With six ABN Amro employees either in prison, under house arrest or
1 barred from leaving the country, power was clearly in the hands of the
2 Ministry of Public Security. But then came the first signs of a tussle. The
3 foreign business community, which had been noticeably silent about
4 the case, started to speak up. The Chairman of the American Chamber of
5 Commerce Tom O’Dore said he was concerned by the ‘criminalisation of
6 normal business transactions, and the lack of involvement by the State Bank
37 in legal proceedings involving financial institutions’, and warned that this
 TH E CO M M UN I S T CA PITA L IST P L AYG ROU ND 15

‘could freeze business in Vietnam and negatively impact Vietnam’s financial 1

markets in general and foreign exchange markets in particular’. The case 2
began to receive coverage in the international media and the Prime Minister 3
ordered an investigation. Shortly afterwards De Pham was allowed to fly 4
abroad for medical treatment, on condition that she deposit $10,000 in 5
bail and promise to return. But at the same time the Vietnamese media 6
began to report that charges against her would be dropped, ‘If the Dutch 7
bank repaid the losses to the Vietnamese bank’. To foreign observers this 8
looked extremely unsavoury. If the authorities believed a crime had been 9
committed they should have pursued the allegation or dropped the charges. 10
The position they adopted seemed more like extortion. 1
In September 2006 the Dutch government sent its Development Co- 2
operation Minister to Hanoi to express its concern but the only response 3
from the police was to widen the criminal investigation. Major-General 4
Pham Quy Ngo, head of the investigation, tried to rebut allegations that the 5
police were criminalising normal business operations but his comments in a 6
news conference appeared to demonstrate that his team had little under- 7
standing of modern banking; he expressed surprise that ‘500 [foreign 8
exchange] contracts were conducted without money changing hands’; the 9
practice of ‘netting off’ profits against losses over a particular time period 20
appeared to be unknown to him. However, he then introduced a new allega- 1
tion: that some of the deals between Incombank and ABN Amro had been 2
at rates outside the permitted bands for foreign exchange trading. This, he 3
argued, ‘was a new form of criminal activity’. At the time banks were only 4
allowed to trade the US dollar and the Vietnamese dong within a band of 5
0.25 per cent either side of a rate set by the State Bank. (Nevertheless, it was 6
widely understood in the financial community that trades regularly took 7
place outside that band through the use of options and other financial 8
instruments.) But, he again suggested, ‘If ABN Amro repays the money, De 9
Pham is not likely to be charged with any criminal offence.’ 30
This seemed to be the killer move. The State Bank fell into line with the 1
police, declaring at the end of October that its ‘Inspection of the ABN 2
Amro’s Hanoi branch and an initial police investigation confirmed that 3
ABN Amro’s Hanoi branch seriously violated Vietnamese law and interna- 4
tional practices.’ There were also suggestions that the State Bank might start 5
to investigate ABN Amro’s transactions with another state-owned institu- 6
tion, the Bank for Agriculture and Rural Development, which was said to 37
 16 V I ETN AM

1 have lost over $18 million. ABN Amro began to see the writing on the wall.
2 With the law so vague that it could not prove its innocence and with its staff
3 still in various forms of detention, it gave in. At the end of November 2006
4 it announced it had transferred $4.5 million to a police custody account. Its
5 only public comment was to say that it ‘didn’t wish to profit from illegal
6 actions of others’. Shortly afterwards all the ABN Amro staff were freed
7 from their various forms of detention and the Vietnamese government
8 announced that the Incombank trader was not facing the death penalty.
9 Things went quiet for a bit and then, seven months later, the Government
10 Inspectorate announced the results of its investigation into the affair. It put
1 the entire blame on the State Bank of Vietnam and its governor Le Duc
2 Thuy, saying that the ‘Discrepancies were due to a lack of proper regulations
3 on trading foreign currencies among banks’ – exactly what ABN Amro had
4 been saying for the previous year. That seems to have been the end of
5 the case, except that in April 2008 Incombank changed its name to
6 Vietinbank. Businesspeople in Hanoi suggested it was partly because of the
7 international notoriety it had earned during the case. On Christmas Day
8 2008 Vietinbank became the second state-owned bank to float on the stock
9 exchange.
20
1 * * *
2
3 The foreign-invested sector is a highly visible part of the economy,
4 employing millions of people and providing plenty of tax revenue, but it
5 doesn’t dominate the commanding heights. They are still, in theory at least,
6 controlled by the state. In 2005, 122 of the 200 biggest firms in Vietnam
7 were state-owned. The figure has changed only marginally since then,
8 although some privately owned banks are now marching up the league. For
9 the Party, a strong state sector is the way it can maintain national independ-
30 ence in an era of globalisation. It means the Party can still set the big goals –
1 like its decision, in December 2006, to develop the country’s ‘maritime
2 economy’ – a catch-all concept covering everything from oil to fish and
3 ships. It is also determined to maintain high degrees of state control over
4 strategically important sectors such as natural resources, transport, finance,
5 infrastructure, defence and communications.
6 The Party has learnt from the mistakes of the past: keeping state enter-
37 prises insulated from the outside world does the country no favours – to
 TH E CO M M UN I S T CA PITA L IST P L AYG ROU ND 17

thrive they need new investment and modern technical and managerial skills. 1
It’s prepared to use all the tricks in the capitalist book to keep the socialist 2
part of the economy sailing. Corporations have been free to form joint 3
ventures with foreign partners and sell stakes to overseas investors, even to 4
‘equitise’ (the word ‘privatise’ is still politically suspect) – just so long as the 5
management, as a whole, does the Party’s bidding. In return, they get access 6
to preferential government support. One of the best examples, although far 7
from being the only one, is the Vietnam Shipbuilding Industry Group: 8
VinaShin. VinaShin has benefited from an extraordinary amount of state 9
support. When Vietnam issued its first sovereign bond worth $750 million in 10
2006, the proceeds didn’t go to build roads or universities but to VinaShin. 1
When Prime Minister Dung made an official visit to Germany in 2008 2
one tangible result was a $2 billion loan from Deutsche Bank – also for 3
VinaShin.15 The Swiss bank Credit Suisse lent the company another billion. 4
VinaShin has an ambitious goal: to make Vietnam the world’s fourth- 5
biggest shipbuilder by 2018. One of the ways it’s doing this is by using that 6
state financial support to build ships cheaper than anywhere else. One of the 7
beneficiaries is a British company, Graig. Based in the Welsh capital, Cardiff, 8
Graig specialises in commissioning bulk carriers and then contracting them 9
out as workhorses of the international sea trade. Their 53,000 deadweight 20
ton ‘Diamond 53s’ ships have been particularly successful. Most have been 1
built in China, but in 2004 VinaShin won a contract to build 15 of them for 2
a total price of $322 million. The deal would never have happened without 3
state backing. VinaShin’s facilities and skill levels were initially so poor that 4
Graig needed a guarantee it would get its money back if the ships didn’t 5
float. But private banks wouldn’t provide the guarantee and initially nor 6
would the state-owned ones. It was only when the Prime Minister himself 7
directly ordered the state banks to put up the guarantees, on the day before 8
the deal was due to be signed, that it went ahead. 9
By April 2006 the first vessel was ready to launch at the Ha Long shipyard in 30
the far north-eastern province of Quang Ninh. It was a huge occasion. 1
The Florence was the largest ship ever built in Vietnam. On launch day its 2
190-metre-long black and red hull towered 30 metres over the assembled 3
crowd. The workers who’d built the ship went quiet, the higher-ups who’d 4
come to see the big day were all in place. It was a crucial moment for Vietnam’s 5
maritime industry. The order was given and the Florence slid down the slipway. 6
Everyone cheered – for a while. But a few hours later the cheering was 37
 18 V I ETN AM

1 replaced by blushes. The Florence had sprung a leak – compartment four (of
2 five) was half full of water. It wasn’t the kind of publicity VinaShin wanted on
3 the day that was supposed to mark Vietnam’s entry into the shipbuilding big
4 league. The press offered several explanations: that a block had fallen over
5 during the launch and punctured a metre-long hole in the hull; that the slipway
6 had been built too short and too steep so the hull cracked when it hit the
7 water.16 In spite of all the training and advice from Graig, VinaShin clearly had
8 something to learn about building ships.
9 However, the hole was repaired and the Florence is now safely sailing the
10 seas, along with several other Vietnam-built Diamond 53s. Since the unfor-
1 tunate launch, Graig has expanded its contract with VinaShin to include
2 29 Diamond 53s and 10 smaller Diamond 34s – worth $1 billion in total.
3 But the Harvard economist David Dapice wonders how Vietnam as a whole
4 will benefit from the contract, given the amount of state funding being
5 extended to VinaShin. He estimated the company could be losing up to
6 $10 million on each of the first 15 ships that it’s building for Graig and
7 questioned whether this was the best way for a poor country to spend its
8 money.17 But other priorities are setting the agenda at the moment.
9 VinaShin is a key part of the ‘maritime economy’ strategy so, for the time
20 being at least, it has plenty of leeway to do what it wants – such as make a
1 huge loss on a contract in order to build up the skills and experience it will
2 need in the future. But this isn’t the only thing that VinaShin has been doing
3 with its cheap money. Like many of the other big state-owned corporations,
4 VinaShin’s attention has wandered from its primary mission and roamed
5 into areas that potentially spell big trouble for Vietnam.
6 Some of the cheap money went into shipbuilding, but during 2007
7 VinaShin set up 154 subsidiary companies – one every one and a half days,
8 excluding weekends.18 Among its new investments were a brewery and a hotel
9 complex in the province of Nam Dinh. It was far from alone. PetroVietnam,
30 the state oil production monopoly, also moved into hotels, and other SOEs
1 developed luxury housing. During 2007 and 2008 investments like these
2 helped to inflate a huge property bubble. But more dangerous for the country
3 as a whole is the way SOEs have moved into finance. Vietnam is heading
4 down a familiar East Asian road. The biggest state corporations are setting up
5 unaccountable funding channels to finance projects with minimal economic
6 logic. By June 2008, 28 state-owned corporations had spent around $1.5
37 billion either establishing or buying controlling stakes in fund management
 TH E CO M M UN I S T CA PITA L IST P L AYG ROU ND 19

companies, stockbrokerages, commercial banks and insurance firms. Three- 1

quarters of Vietnam’s finance companies are now owned by the biggest SOEs 2
(those known as General Corporations). The cement, coal and rubber 3
monopolies all own at least one. Under Vietnamese law a ‘finance company’ 4
is almost the same as a bank, except it can’t settle payments. But some General 5
Corporations (GCs) now have stakes in banks too. VinaShin owns part of 6
Hanoi Building Bank (Habubank) and there are several other examples. 7
Many also have bought securities companies dealing in shares. 8
Add all this together and several of Vietnam’s biggest General 9
Corporations have the potential to become self-financing ‘black boxes’. 10
Funding arrangements are opaque. In late 2008, for example, Electricity 1
Viet Nam (EVN) owned 40 per cent of EVN Finance and 2
28 per cent of ABBank, which in turn owned 8 per cent of EVN Finance. 3
Completing the circle, both ABBank and EVN owned securities firms 4
which held stakes in EVN Finance. In the words of a recent report for the 5
UN’s Development Programme in Vietnam, ‘The General Corporation can 6
underwrite, purchase, trade, manipulate and profit from the equitisation 7
of its member companies’.19 The opportunities for unethical, criminal and 8
nationally destabilising behaviour are plenty. GC bosses think they can 9
make more money by dabbling in these areas than in their core business. As 20
a senior official in the oil monopoly PetroVietnam told a newspaper, ‘The 1
most important thing for businesses is economic effectiveness. Over 40 per 2
cent of income of our group comes from non-oil and gas industry. We know 3
that we have to focus on the major fields of business but if investment in the 4
major business fields is ineffective, why are we forced to invest in them?’20 5
Despite benefiting from state largesse, company bosses often place greater 6
emphasis on rewarding themselves than on being a national strategic asset. 7
The Communist Party leadership likes SOEs because they can imple- 8
ment its policies. The Party members who run them can be ordered to carry 9
out Party policies. But many bosses like running SOEs because they provide 30
plenty of opportunities for personal enrichment. Setting up a subsidiary 1
company and appointing oneself to the board is an easy way to make 2
money. Another is to set up a private company owned by a friend or relative 3
and either sell its assets at cheap prices or award it lucrative contracts. With 4
easy money around, it’s not hard to bribe patrons, officials and regulators to 5
turn a blind eye to breaches of the law. The Party members in charge of the 6
SOE ‘tail’ end up wagging the Party policy ‘dog’. But this isn’t the whole 37
 20 V I ETN AM

1 story. What is remarkable about Vietnam is the way, at moments of crisis,

2 the Communist Party can discipline its errant members.
3 To understand how this happens, it’s worth looking at the way the Party
4 operates. The Vietnamese Communist leadership wants to run the country
5 along the lines of something which resembles Gaullism in France. Under
6 ‘Vietnamese-Gaullism’ a behind-the-scenes elite (the Communist Party) is
7 supposed to set the overall direction of policy and then delegate its imple-
8 mentation to the state (which is controlled by the Party). The government
9 should then draw up the laws and use whatever resources are available to it
10 – the state bureaucracy, SOEs, the private sector, foreign investors, interna-
1 tional donors or whoever – to see the policy executed. And, behind the
2 scenes, the Party should monitor, corral and press the various actors to
3 make sure that its policy is followed. That, at least, is what the Party would
4 like to happen. The reality is usually something different. Sometimes the
5 Party acts as a cohesive force – taking a decision and enforcing it – and at
6 others it breaks into factions, partly over ideology but increasingly around
7 individuals and their patronage networks. No one gets elected to the CPV’s
8 leadership, the 15-person Politburo, without building up a network of
9 supporters and delivering them benefits in return. Working out whether a
20 particular decision is the result of ideology or patronage is often impossible.
1 In most cases it’s probably a bit of both.
2 Take the current President, for example – Nguyen Minh Triet. President
3 Triet rose to power through the structures of Binh Duong province, just
4 outside Ho Chi Minh City. He helped to turn it into an economic power-
5 house, attracting huge amounts of foreign investment, providing hundreds
6 of thousands of jobs and contributing a significant proportion of the
7 national budget. He did so by bending the rules, breaking fences, to please
8 investors. He cut through planning regulations to get industrial sites built,
9 he did deals over taxation to attract foreign companies and gave state enter-
30 prises a helping hand when they needed it. The reward for his success was
1 promotion within the Party, first to boss of Ho Chi Minh City and then to
2 head of state. But his base is still Binh Duong province and it’s now a family
3 fiefdom. His nephew has taken over as the provincial boss and his family
4 control many of its administrative structures. Vietnamese talk about being
5 under someone’s ‘umbrella’. Triet’s ‘umbrella’ shelters his family and
6 network in Binh Duong just as his colleagues’ umbrellas shelter theirs in
37 other places. This shelter gives provinces, state-owned enterprises and,
 TH E CO M M UN I S T CA PITA L IST P L AYG ROU ND 21

increasingly, the individuals in charge of them leeway to bend and break 1

rules, knowing they are ‘protected’ from the law. But there are limits to how 2
far any national leader can push the interests of their local networks. 3
National interests eventually have to prevail. Policy must be the result of 4
consensus: national, factional and local interests all have to be satisfied. But 5
reaching consensus usually requires ferocious in-fighting. 6
In early 2008 the government realised that the property and stock market 7
bubble had gone too far. The effects of wild times in the stock market were 8
spilling over into the wider world. In 2006 the main share index, the VNI on 9
the Ho Chi Minh City exchange, had risen 145 per cent. In the first two and 10
a half months of 2007 it rose a further 50 per cent. The dealing floors of big- 1
city brokerages were filled with people day-trading. Some brought in their 2
savings to gamble on the market. The optimism was unrestrained. On 3
12 March 2007 the VNI hit a lifetime high of 1,170 points. It never went 4
there again. It bumped around for a bit, ending the year still up about 20 per 5
cent. But then, in 2008, it crashed. The index fell a full 70 per cent – wiping 6
out many of those day traders and the families who’d gambled their savings. 7
Inflation rose to 30 per cent, urban households couldn’t make ends meet, 8
factories suffered strikes and discontent grew. It started to look like the 9
beginning of a threat to the Party’s rule. It was time for the leadership to 20
fight back. 1
In April 2008, Prime Minister Dung publicly urged SOEs to limit their 2
non-core business to 30 per cent of their total capital.21 The fact that the 3
government was reduced to ‘urging’ SOEs to follow the law revealed the 4
problems it was having in maintaining control. The SOEs didn’t listen; 5
behind the scenes in-fighting raged. The government was forced to try a 6
different route. The central bank, which had been giving the GCs an easy 7
ride with low interest rates and a generous money supply, was ordered into 8
line. Rates were raised and the flow of cheap money reduced. Protective 9
umbrellas had been put away; the leadership had been impelled to act in the 30
national interest. It worked, the economy cooled down and the crisis 1
abated. 2
The GCs were originally modelled along the lines of South Korea’s chae- 3
bols. The chaebols had many failings but some, like Hyundai and Samsung, 4
did become massive exporters. Vietnam’s GCs have been far less successful: 5
VinaShin has won orders by bidding below cost and PetroVietnam’s oil 6
deals in Cuba and Venezuela are more a product of government diplomacy 37
 22 V I ETN AM

1 than corporate ability. Most of the state-owned textile industry is unprof-

2 itable and steel is pretty backward too. But the state sector remains a pillar
3 of the Party’s control – both as a tool of economic policy and as a way to
4 keep provincial supporters, trade unions and other interest groups happy.
5 Though many SOEs are being sold off, the Party has made clear its determi-
6 nation to hold on to the 100–150 most important ones. They continue to
7 benefit from the state’s largesse. Although the days of the soft loan from a
8 state bank are largely past, there are plenty of other ways to channel money
9 to them. The state’s Vietnam Development Bank (subsidised by aid from
10 foreign governments) and its Social Insurance Fund (expected to become
1 the biggest single investor in the country by 2015) seem to act as unac-
2 countable ‘slush funds’ for the benefit of the state sector.22 Clearly SOEs
3 have a significant, if not necessarily bright, future ahead.
4
5 * * *
6
7 The intertwined networks of Party and business are not confined to the
8 state sector. They dominate the private sector too. Many ‘private’ busi-
9 nesses are either former state-owned enterprises or still have some state
20 ownership and are still run by Party members. Even truly private companies
1 find it almost impossible to obtain licences, registrations, customs clearance
2 and many other vital documents without good connections. Businesses that
3 don’t play the game quickly get into trouble. Surveys suggest that even
4 privately owned banks prefer to lend to ‘connected’ people.23 Most of the
5 controllers of the commanding heights of the private sector are either Party
6 appointees, their family or their friends. The Communist Party elite are
7 turning Vietnamese capitalism into a family business. The new business
8 elite are not separate from the Communist Party but members of it, or
9 related to it.
30 One of Vietnam’s richest men for example, Truong Gia Binh, is the Chief
1 Executive of a company called FPT, which started out as the state-owned
2 ‘Corporation for Food Processing Technology’ before evolving into the
3 ‘Corporation for Financing and Promoting Technology’ and becoming the
4 country’s first IT firm. He’s also the only man in Vietnam commonly
5 referred to with the prefix ‘former son-in-law’ because he was once married
6 to a daughter of Vo Nguyen Giap – war hero, ex-army commander and one-
37 time Deputy Prime Minister. During the 1990s, if a business needed
 TH E CO M M UN I S T CA PITA L IST P L AYG ROU ND 23

contacts with the army’s extensive array of companies or in construction or 1

communications, then General Giap was the man to see. A useful connec- 2
tion for a company selling software and mobile phones. Binh now has other 3
connections: among the investors in his companies are US venture capital 4
firms Intel Capital and Texas Pacific Group. 5
There are many, many more examples. So many, in fact, that the 6
Vietnamese now have special phrases to describe them: ‘COCC’ and ‘5C’. 7
COCC is the junior tier of the new Party-business elite – the provincial 8
bosses and lower-level national Party and government officials. It stands for 9
Con Ong Chau Cha – literally ‘son of father, grandson of grandfather’ but the 10
meaning is obvious to anyone familiar with the traditions of Vietnamese 1
families – the young offer loyalty, the old offer protection. Those under the 2
umbrella of COCC can get away with almost anything, for their patrons 3
outrank the police and the courts. The real elite is known as 5C: they can get 4
away with absolutely anything. It’s even alleged that one 5C son murdered 5
another one, but the whole thing was hushed up. 5C stands for Con Chau 6
Cac Cu Ca – literally ‘all children and grandchildren of the great grandfa- 7
ther’. Cu is the most exalted position in the Vietnamese family and every 8
national President and Communist Party General Secretary is eventually 9
given the title. The umbrella of the 5C spreads wide – beyond direct descen- 20
dants to include more or less the whole family. 1
In Vietnam such relationships have a cash value. Companies – both 2
domestic and foreign – are prepared to pay large fees for introductions and 3
access to decision-makers. Those who already have access – through family 4
connections – have a big advantage. A good introduction to a key official 5
can be worth as much as $100,000. The money doesn’t usually go directly 6
to the politician, it goes to the facilitator – often a relative. Sometimes it’s 7
not money but a gift, even a free apartment, which is why state employees 8
on nominal salaries of $100 per month can enjoy a standard of living equiv- 9
alent to that of a successful business leader. Vietnamese talk of having ‘one 30
leg inside and one leg outside’ the system. A family member with a low-paid 1
job somewhere in the bureaucracy is a useful way to keep the connections 2
alive while wives, brothers and cousins fish for business outside. Official jobs 3
now also have a value. Heads of departments can charge several thousand 4
dollars for a junior position which offers opportunities and connections. 5
But making introductions is just one way to make money. Family 6
members of senior officials have found niches all over the business world. 37
 24 V I ETN AM

1 From the beginning of economic reform the Party elite have sent their chil-
2 dren abroad to study and allowed them to leverage their position into busi-
3 ness advantage. These children have returned home well qualified and ready
4 to take jobs with foreign investors and the new private sector. In the early
5 1990s, when the World Bank wanted to stimulate private sector develop-
6 ment in Vietnam, it awarded many scholarships to young people, including
7 one to a woman called Dinh Thi Hoa who became socialist Vietnam’s first
8 Harvard MBA. On her return she founded a company called Galaxy which
9 now incorporates a PR agency, most of the good Western-style restaurant
10 chains in the country, a big cinema in Ho Chi Minh City and a film produc-
1 tion company. In many ways it’s a model of private sector success. But
2 Galaxy didn’t just spring from nowhere. It’s one of the many firms created
3 by the children of the Party elite. The World Bank chose Hoa for the
4 scholarship in part because her father was Deputy Foreign Minister. From
5 the beginning reform has been encouraged by giving politicians a direct,
6 tangible stake in it.
7 It’s a common assumption among many observers of Vietnam that the
8 coming of capitalism will create a new force in society, a new middle class
9 with sources of income independent of the Communist Party and able to
20 stand up and defend itself. This may come in time, but it seems a long way
1 off. For the moment getting better off requires loyalty to the Party. The well
2 connected are exploiting their connections to become rich, and the rich are
3 exploiting their money to buy protection from the state. The result is
4 widening inequality between rich and poor. Official figures don’t reveal the
5 problem but there are good reasons for that. Vietnam’s Gini Coefficient, a
6 widely used measure of inequality, rose from 0.33 to just 0.36 between 1993
7 and 2006 – about the same as most European countries. However, the data
8 is based on small surveys – just 5,000 people in 1993 – and excludes many
9 of the poorest: people such as low-wage migrants. It also uses out-of-date
30 classifications of rural and urban districts – some once-rural districts are
1 now part of towns – and so fails to fully capture the real inequalities between
2 lifestyles in villages and in cities.24 More grounded measurements of depri-
3 vation tell a different story. Poor families have benefited less from falls in
4 infant mortality and malnutrition than better-off ones. A third of poor chil-
5 dren are underweight, compared to just 5 per cent of better-off ones. Bear in
6 mind that in Vietnam the ‘poverty line’ is around $15 per month. Anyone
37 earning over that is not classified as ‘poor’. A further problem is that most
 TH E CO M M UN I S T CA PITA L IST P L AYG ROU ND 25

wealth in Vietnam is hidden from view, usually because it has been obtained 1
through shadowy means. The gap between the top and the bottom of the 2
pile is wide and getting wider. 3
Until recently, Vietnam had shared out the benefits of growth more equi- 4
tably than any of its neighbours; the Party’s socialist orientation still meant 5
something. In the future though, redistribution will mean taking wealth 6
away from those who are its biggest supporters. Does it have the ability to 7
stand up to its own children and demand they hand over part of their wealth 8
through taxation to benefit poorer people in faraway provinces? We shall 9
see. On the edge of Hanoi the Bao Son – ‘Paradise’ – Company has built a 10
theme park. The company, which grew out of the Bao Son Hotel in central 1
Hanoi, owned by the family of a Party leader, features a re-creation of the 2
streets of old Hanoi: single-storey houses, tiled roofs and cobbled streets. 3
And there, for anyone who can afford the fee, it’s possible to be pulled along 4
in a rickshaw. The human rickshaw was seen as such a symbolic example of 5
colonial exploitation by the early communist revolutionaries that they 6
banned it after they seized power. Today, their children and grandchildren, 7
Vietnam’s nouveaux riches, are taking themselves for a ride. The question 8
must be, ‘Are they taking the country with them?’ 9
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