Institutional Reform: from Vision to Reality *
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Institutional Reform: From Vision to Reality * A Policy Discussion Paper Prepared for the VIETNAM EXECUTIVE LEADERSHIP PROGRAM (VELP) Harvard Kennedy School, 13-17/4/2015 April 2015 * This research paper was written by: Vu Thanh Tu Anh ([email protected]), Laura Chirot ([email protected]) David Dapice ([email protected]), Huynh The Du ([email protected]), Pham Duy Nghia ([email protected]), Dwight Perkins ([email protected]), and Nguyen Xuan Thanh ([email protected]). The views expressed in this paper are those of the authors and do not necessarily reflect those of the Harvard Kennedy School, the United Nations Development Programme, or the Government of Vietnam. VELP 2015 Policy Discussion Paper Page 1 of 32 PART I: The time has come to implement institutional reform 1. Economic underperformance and its consequences For three decades since Economic Renovation (đổi mới kinh tế) from 1986 to 2015, Vietnam's economy has grown at an average rate of 6.5% per year.1 Given the fact that since World War 2, only 13 countries have been able to sustain an average growth rate of 7% or more for 30 consecutive years, the rate of growth of Vietnam is very impressive.2 However, if compared with the ―dragons‖ and ―tigers‖ in the region, this growth rate is still quite modest. In the three decades before the Asian financial crisis, Indonesia and Malaysia‘s average growth is 7.3%, Thailand 7.7%, and South Korea 9.3%. As for China, for the three decades since ―gaige kaifang‖ in 1978, China has achieved an average growth rate of 10%. Thus, although Vietnam‘s economy grows rapidly, it still underperforms compared to the successful economies in the region. Vietnam‘s performance relative to other major economies in the region can also be measured by the income gap. To be fair, thanks to the recent relatively high growth rate, Vietnam has narrowed the relative gap in per capita income with major regional economies (except China). However, the absolute gap in per capita income has been widening, as reflected in the increasing divergence in per capita income between the Việt Nam and other countries in the last quarter century (except India whose growth path is markedly similar to that of Vietnam). The diagram also reveals that while Vietnam and China were at the same level in terms of PPP per capita income in 1990, by 2013 the difference between the two was 2.3 times. Continuing economic underperformance and slowdown will induce serious consequences and intensify existing challenges. In particular, alongside the widely acknowledged economic challenges,3 Vietnam and the ruling Communist Party are facing three other major challenges: namely, a rising and assertive China, increasing public expectation for economic development and civil freedoms, and a diminishing legitimacy of the Party. First, challenges from a rising and assertive China have intensified. Located next door to a huge neighbor and in a strategic and geopolitical position, it is unavoidable that Vietnam will face significant influences from the northern giant in all aspects, be it economic and political or cutural and social. In order to develop, Vietnam needs to maintain stable diplomatic relations with China. However, with China nurturing a strong desire to change the region and world order, the hope to keep this interaction stable is proving difficult. Unless Vietnam maximizes efforts to boost its growth and strengthen its economic potential, China‘s economic dominance will subdue Vietnam further into its dependent path. 1 Data from Vietnam General Statistics Office and the World Bank both produce the same average annual GDP growth rate of 6.5 percent during 1986-2015. The GDP growth rate for 2015 in the range of 6-7 percent will not change this 30-year growth average. (The 2015 GDP growth target as approved by the National Assembly is 6.2 percent.) 2 The thirteen economies are Botswana, Brazil, China, Hong Kong, China, Indonesia, Japan, the Republic of Korea, Malaysia, Malta, Oman, Singapore, Taiwan, China, and Thailand. (Source: Commission on Growth and Development (2008). The Growth Report Strategies for Sustained Growth and Inclusive Development. Available at https://openknowledge.worldbank.org) 3 Such as growing old before growing rich, the low technology or low value-added trap, and the middle-income trap. VELP 2015 Policy Discussion Paper Page 2 of 32 Figure 1. Per capita income of Vietnam and major countries in the region 35000 30000 Korea, Rep. (5.3%) 25000 Malaysia (5.9%) Thailand (4.5%) 20000 China (9.9%) 15000 Indonesia (5.1%) Per Capita Income (current US$ in PPP) in US$ (current Income Capita Per Philippines 10000 (4.0%) India (6.4%) 5000 Vietnam (6.8%) Average annual 0 GDP growth 1990-2013 1998 2011 1991 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 1990 Source: Authors‘ calculation from the World Development Indicators Secondly, despite some fluctuations, the 20 years after the launch of Doi Moi reforms were a period of continued development for Vietnam marked by many laudable achievements. Millions of lives have changed for the better thanks to improved living standards, while hundred thousands of businesses mushroomed due to the establishment of the right to do business. These successes have led to higher expectations from the public for a more prosperous life, and from the business community for greater freedom to do business. Meeting this rising optimism is a challenge to the State and Party. However, since 2008, as the country has become more integrated with the outside world, both the business community and the public at large have increasingly sensed the lagging and underperforming nature of the economy relative to others in the region. If reform continues to stagnate, causing Vietnam to lag further behind, the public will eventually lose their patience and the Government and Party will suffer from diminishing legitimacy. Thirdly, the legitimacy of the ruling Party is not limited to the economic sphere. A lack of understanding and representation of the people‘s desires can jeopardize the Party‘s political authority. Up till now, the Party has earned its legitimacy through its ability to abide by the desires of the people; this legitimacy in turn enables the Party to mobilize popular support at critical moments. Given current developments in Vietnam and in the international arena, the Communist Party of Vietnam is again facing a critical juncture, where right choices and decisive policies are needed to restore the people‘s faith in the Party. VELP 2015 Policy Discussion Paper Page 3 of 32 In reality, the Government and Party are aware of these challenges. Yet, there is a long road from recognizing challenges to realizing the urgency of the threat to actually mobilizing political will to implement sound policies to deal with these challenges. The risk of backwardness that was warned of in the Midterm Conference of the 7th Party Congress (1994) has now become a reality. The three major growth bottlenecks, namely the quality of institutions, infrastructure and human resources, have been discussed for more than 10 years but have not yet been overcome in any significant manner. More recently, although restructuring the economy and reforming the growth model have been prioritized by the Government and Party following the recent macroeconomic instability, the actual implementation has been sluggish and ineffective, failing to improve the economy as per initial expectations. At critical moments in the past thirty years, the State and Party have made bold and pragmatic reforms, starting with the adoption of Doi Moi, the Law on Encouraging Foreign Investment (1987), the Law on Private Enterprise (1990), and the Company Law (1990) in response to what the Party called the ―comprehensive social and economic crisis‖ of the early to mid-1980s.4 A decade later, when the Asian Financial Crisis caused FDI, exports and thus growth to drop precipitiously, the 1999 Enterprise Law was instituted; as a result, the domestic private sector became the leading force in Vietnam‘economic development. The question today is whether Vietnam‘s leadership can again muster the political will to turn words into actions through the implementation of institutional reform. 2. About this paper This paper is intended to provide context for the policy discussions that will take place during the fifth Vietnam Executive Leadership Program (VELP). Over the course of the weeklong VELP 2015, it is hoped that the arguments and ideas presented in this paper will be discussed, debated, and challenged, and that the paper will contribute constructively to the debate around critical questions facing the Vietnamese leadership and Vietnamese society more broadly today. The paper consists of the introduction, four main parts, and the conclusion. Part 2 discusses the middle-income trap and different development models. Vietnam and several other countries in Southeast Asia have had periods of rapid economic growth. They have, however, failed to develop their institutions as rapidly as their economies. Since more sophisticated economies need better institutions to continue growing, some of these nations are likely to slow down well before they attain high-income status. To go back to the 7.5-8 percent growth path in the next 10 years, Vietnam has come to a critical juncture; it needs to transition toward a new development model, and the way to support that transition is to implement institutional reforms. Part 3 defines the goals of inclusive growth and institutional reform, which includes three main elements, all of which have been laid out in the 2013 Constitution: enlarging political participation, enhancing the role of the National Assembly, and reforming the judiciary. It then discusses public governance, arguing that increased accountability, debate, and transparency can contribute to better policies.