Download Vietnamese economic reforms, socialist versus social orientation

German Development Cooperation
Sustainable Economic Development
Vietnamese economic reforms, socialist versus social
orientation - a policy debate -
Vietnamese economic reforms, socialist versus social orientation
- a policy debate -
Introduction
During the cold war, two antagonistic economic models were advocated by the two political
blocks: The model of a centrally-planned economy and that of a decentralized market economy
were part of an ideological confrontation that did not allow for discussion. With the end of the
cold war, many countries have opted for market-based economic systems. This also applies to
the Socialist Republic of Vietnam. As a transition country, it is now in the process of transforming
its economic system from a planned to a market economy. This article portrays the Vietnamese
dynamic process of economic transition and illustrates its unique concept of a market economy
with a socialist orientation. As the socialist aspect of the Vietnamese economic system has not
been clearly defined, the authors discuss whether the German social and ecological market
economy may serve as a model for the future economic and social development of the country.
Vietnam’s market economy with a socialist orientation
After failing to reach economic output targets under the centrally-planned economy in the 1980s
the country faced serious financial, economic and social problems. In response to this acute
state failure 1, in 1986 (at the 6th Party Congress) the Vietnamese political leadership formally
abandoned the centrally-planned economy and began introducing market-oriented policies.
These so-called Doi Moi (renovation) reforms initiated a development process, during which
Vietnam has not only achieved high economic growth performance 2 but has also made
impressive progress in reducing poverty:
•
Vietnam has already achieved five of the ten Millennium Development Goals 3 (MDGs) –
most notably MDG 1 4 – or will do so in reasonable time (except MDG 9 “Ensure
environmental sustainability.”)
•
Moreover, the country is expected to graduate from the status of a low income country to
a middle income country by 2010 5 and in the five-year plan it is projected that Vietnam
will become a ”modern industrial country by 2020” 6.
1
State failure describes a situation when State interventions in market processes lead to sub-optimal results.
With GDP growth rates of 7 to 8% on average Vietnam is one of the star performers in Asia and the world.
3
www.unmillenniumproject.org.
4
MDG 1 aims to halve poverty by 2015. Vietnam’s poverty rate is now below 20% compared to 58% in 1993.
5
According to the World Bank Atlas method economies are divided in three main groups: low income, GDP/capita
$905 or less; middle income, $906 - $11,115; and high income, $11,116 or more.
6
The Socialist Republic of Vietnam: The five-year socio-economic development plan 2006-2010.
2
Historical Background, Doi Moi versus Coi Troi:
Several measures have been taken to reform the state’s role in economic management to
ensure it does not inhibit the functioning of the market mechanisms and to enable it to move
from detailed management tasks to more indirect interventions via the legal system or
macroeconomic regulatory instruments. Four main stages of development can be
distinguished:
1) 1986 Land reform: Directly after introducing Doi Moi, the government decided to give
Vietnamese farmers more rights on land and for the first time the right to decide what
to produce on their own. As a result, agricultural output increased so much that within
2 years, Vietnam was transformed from a rice-importing to an exporting nation.
2) 1990/91 Recognition of private ownership: For the first time, Vietnam has officially
recognized the lawful existence of non-state economic sectors by issuing the
Company Law and the Private Enterprise Law.
3) 1995/96 Liberalization of foreign trade: The re-establishment of formal diplomatic
relations with the USA constituted the starting point for an opening of international
economic relations – allowing private enterprises to engage in import/export activities.
4) 1999 Right of business freedom: Clarification of entrepreneurs’ basic rights to
operate in any and all business arenas not explicitly forbidden by law.
Looking back it becomes clear that the Vietnamese reform process is not only about
renovation (Doi Moi) of existing institutions, rather the Vietnamese have been freed to
engage in economic activity. Therefore, colloquially the reform process is often called Coi
Troi (release).
Even two decades after initiating Doi Moi the Communist Party continues to advocate a market
economy with a socialist orientation. A renunciation of the socialist ideals is not to be expected
as the Communist Party itself has closely linked its fate to their implementation. However, the
term socialist ”remains opaque”, as Vietnamese Communist Party and government officials
admit. 7 In several regards, today’s practices clearly contradict the historic concept of socialism,
for example regarding the ownership of factors of production which, in theory, must be owned by
the workforce. Political think tanks, such as the Ho-Chi-Minh Academy, are thus busy developing
new interpretations for the term socialism, “adjusting” the political ideology to the changing
environment. In a modern definition the term socialist applies to a process in which the people’s
interests are paramount as the state’s main guiding principle.
7
Dinh Van An: Building Institutions for a Market Economy with Socialist Orientation in Vietnam, in: Vietnam Economic
Management Review, Nr. 1, Winter 2006, p. 19.
Legal framework:
The initial decision to transform the Vietnamese economic system was followed by a reform
of the legal framework that defines the roles of the state and the market.
1) Existence of Enterprises: With the issuance of the Law on Foreign Investment
(1987), the Company Law, the Private Enterprise Law (1990), and State-owned
Enterprises (1995) Vietnam has recognized the existence of non-state economic
players. The Law on Enterprises (2005) and Common Law on Investment (2005) have
created an “equal playing field” for investors.
2) Foreign Trade Liberalization: Since 1988 foreign enterprises have been allowed to
conduct import/export activities and the application process for licenses has been
continuously simplified. After 11 years of negotiation and further process in trade
liberalization Vietnam has become a member of WTO in 2007.
3) Macroeconomic Management: The move from a one-tier to a two-tier banking
system (1997) 8 was crucial for the implementation of sound monetary policy.
However, the legal system has not yet created conditions for the necessary
independence of the State Bank. In 1992 and 2002, Vietnam loosened the existing
price controls. The majority of prices are now market-based.
4) Production Factors: The labour code (1994) forms the first legal base for the labour
market by recognizing the right to free job search and the right to free employee
selection. Efforts are ongoing regarding the real estate market (i.e. unification of
registration regulations, increased transparency regarding land use planning).
5) Planning Law: Currently, the Government of Vietnam is drafting a Law on Planning
for the National Assembly’s approval. This law will provide the basis for the country’s
strategic planning as well as the plan’s implementation and monitoring – and will
ensure that the state is not involved in the micro-management of the planning process
but rather issues directives.
A multitude of challenges remain for the Vietnamese legal system: (i) it is often
incomprehensive and laws may be of low clarity; (ii) several legal documents were issued but
lack enforcement 9 and (iii) the law drafting process lack democratic and public participation.
8
In 1997, the National Assembly passed the Law on the State Bank of Vietnam and the Law on credit organizations.
Based on the provisions of the law, four state commercial banks gained their independence from the State Bank and a
series of joint stock banks, joint venture banks and foreign branches appeared on the Vietnamese financial market.
Currency-printing and credit supply functions were separated institutionally.
9
For example, up to now, only one case has been tried based on the Competition Law, which was passed in 2004.
The Vietnamese party and government aim at achieving socialist ideals (e.g. equality and
solidarity) by relying on market principles. This understanding is depicted in the 2006-2010 fiveyear socio-economic development plans’ overall objective: “Boost the economic growth rate,
achieving rapid and sustainable development ... significantly improve people’s material, culture,
and spiritual life…”
The basic concept of the German social and ecological market economy
The authors would like to stress that several countries have opted not to adhere to the model of
a liberal market economy. 10 In contrast to liberal market economies, the guiding principle of a
social market economy goes beyond offering an economic regulatory framework for society by
including both economic and social aspects. Historically, the concept of a social market economy
is something of a cross between liberalism and socialism and is based on the following general
principles – which are reflected in the German legal framework and in ongoing policy debates:
ƒ
Competition among best performers as the path towards innovation and economic wealth
(Leistungswettbewerb),
ƒ
Equal
opportunities
for
everybody
to
participate
in
the
economic
process
(Chancengleichheit),
ƒ
Fair shares for everybody of the economic gains (Verteilungsgerechtigkeit),
ƒ
Private ownership of assets and entrepreneurship calling for social responsibility towards
the less fortunate (Eigentum verpflichtet),
ƒ
Solidarity among members of society to share individual risks (Solidaritätsprinzip),
ƒ
Dialogue and compromise as characteristics of social bargaining processes.
Historical Background:
In the aftermath of World War II the concept of a Social Market Economy was developed by
German economic researchers such as Walter Eucken and Andreas Müller-Armack. Ludwig
Erhard (1949-1963: Minister of Economics; 1963-1966: Chancellor) was probably the most
influential politician in shaping the German social market economy and the economic miracle
of the 1950s and 1960s. At that time the model presented an alternative to the socialism
advocated by German left-wing parties.
10
Models of non-liberal market economies are: (i) „Rheinischer“ Capitalism (in Germany, the Netherlands, Belgium
and Austria), (ii) State Capitalism (in France and Italy) and (iii) Scandinavian Capitalism (Sweden, Norway and
Denmark).
Recognising that growth should not take place at costs to the environment – especially as
this impedes long-term growth prospects - the German Green Party in the 1990s
conceptualised the ecological market economy. It aims at combining both economic and
ecological objectives by implementing environmental protection with market economy
instruments. In 2002, the concept was codified in the German Basic Constitutional Law.
The term social market economy describes a market economy with a set of systemic regulations
that guide the individuals’ activities in such a way that both maximum personal freedom and
social equity are realised. Like in a liberal market economy, the fundamental economic decisionmaking (what is to be produced, where, how, with which inputs and for whom) is left to the
individual. Production and consumption are coordinated through the market, based on the belief
that it is the best mechanism for allocating resources. State intervention in the economic process
is only considered justified due to:
ƒ
The self-destructive potential of the market (that leads to the creation of monopolies,
cartels – i.e. market failure). In economic theory, a well-functioning market increases the
welfare of a country’s inhabitants,
ƒ
The danger of market failures (esp. regarding externalities 11 and the provision of public
goods 12) and
ƒ
The market’s indifference to social and ecological problems 13.
Based on the principles mentioned above, a regulatory framework was designed to ensure both
market efficiency (issues 1 & 2) and social and ecological sustainability (issue 3) and then
codified in the German Basic Constitutional Law. This regulatory framework recognizes the interdependence, and guarantees the compatibility, of the legal, social and economic order. It also
defines the interventions which have to be designed not to distort competition and disturb
(efficient) market processes. Only the distribution of the results of economic processes may be
re-adjusted. Such adjustments are advocated in order to foster social balance. 14
11
In economics, an externality is a cost or benefit resulting from an economic transaction that is borne or received by
parties not directly involved in the transaction. An externality occurs when a decision causes costs or benefits to third
party stakeholders, often, although not necessarily, from the use of a public good. For example, manufacturing that
causes air pollution imposes costs on others when making use of public air.
12
In economics, a public good is a good that is non-rivalries and non-excludable. This means: consumption of the
good by one individual does not reduce the amount of the good available for consumption by others; and no one can
be effectively excluded from using that good.
13
Environmental goods are considered public goods and therefore their utilization is managed by the state.
14
The following motives are considered justified: i) Support economically weaker members of society in case of
existential risks, ii) Ensure equal opportunities for all to participate in economic processes, and reduce imbalances
between generations and ecological sustainability.
Legal Framework:
A short selection of those laws that form the basis of the German social and ecological
market economy:
1) German Basic Constitutional Law
ƒ
Specifies that the Federal State has a responsibility towards social equity
both among individuals and provinces 15 (the German Federal State is a
“social state” 16),
ƒ
Ascertains the objective of macroeconomic stability,
ƒ
Promotes ecological protection. 17
2) Competition Law (Gesetz gegen Wettbewerbsbeschränkungen) (1958)
ƒ
Including the prohibition of cartels
3) Law for Stability and Growth (Stabilitäts- und Wachstumsgesetz)
ƒ
4 objectives: (1) stable price levels, (2) high employment rates, (3) foreign
trade equilibrium and (4) adequate & constant growth (evidently, some of
these objectives conflict with each other in the short run).
ƒ
The achievement of the 4 objectives specified in the law for stability and
growth (1967) ensure the macroeconomic stability stipulated in the German
Constitution.
4) Stakeholder orientation
ƒ
In contrast to shareholder capitalism the German corporation law
(Aktiengesetz) requires all large corporations to have a supervisory board
(Aufsichtsrat) composed of members who are elected by the shareholders
and employee representatives in equal shares.
ƒ
An not-formalized dialog giving various interests a voice (capital, labour,
consumers, public etc.) and often leads to formal social partnerships like
alliance for jobs or the initiative for more junior training positions.
5) Ecological Tax (Green Tax)
ƒ
Since 1998 several laws have been passed in Germany towards a more
ecologically-friendly taxation system.
ƒ
The most prominent example is a tax on energy consumption (resource
tax), whose revenues are partly fed into the social security system.
15
Art. 107 Abs.2 Satz 1 Grundgesetz (German Basic Constitutional Law): The German variation of a Social Market
Economy also includes an elaborate financial equalisation scheme between the Federal Government and the Länder
(provinces), which aims at balancing the living standards across the country, and might be combined with structural
policy measures to raise living standards in those areas.
16
Art. 20 Grundgesetz (German Basic Constitutional Law).
17
Art. 20 a Grundgesetz (German Basic Constitutional Law).
6) Social Laws
ƒ
A first attempt by German imperial chancellor Otto von Bismarck to mitigate
poverty that had arisen in the course of industrialization in the 1800s. In
1883 health insurance and a year later accident insurance were founded.
An unemployment insurance was established in 1927.
ƒ
These and other insurances are funded by compulsory contributions from
both employers and employees.
Achievements of the German Social Market Economy
We would like to point out some of the achievements of the German social and ecological
market economy:
ƒ
High degree of macroeconomic stability,
ƒ
No major workers’ strikes (compared, for example, to France),
ƒ
Social freedom 18,
ƒ
Broad coverage of social security and high degree of social inclusion,
ƒ
Legitimacy of the economic and political system.
All of these issues have contributed to the recently improved competitiveness of the German
industry – by providing a well-educated workforce, which is prepared to accept wage cuts during
economic downturns, good infrastructure and a stable macroeconomic and political environment.
Conclusion
In the past, the Vietnamese growth process was of an inclusive nature – directly benefiting the
poor by offering basic economic opportunities (e.g. land use rights, right of business freedom).
The quality of future growth will be different as fewer people will benefit directly and
disproportionately (e.g. from trade liberalization and privatization). Disparities within the society
will probably widen due to the concentration of growth in certain geographic areas or within
specific groups of society – contradicting the official commitment to a market economy with a
socialistic orientation. In theory, the traditional notion of socialism even implies a redistribution of
economic gains towards equal shares for all members of society, going far beyond the objective
of the social market economy of fair shares for everybody. This unrealistic ambition might be the
reason, why the socialist character of the Vietnamese economic system has not yet been clearly
defined.
18
’Social freedom’ is the concept philosophers, political scientists, and also economists are often concerned with often without realizing it - when dealing with the subject of liberty.
Independent from the ongoing policy debate regarding the term socialism, the intentions of the
social and ecological market economy are not so different. It may serve as a model to the future
refinement of the Vietnamese economic system. Furthermore, it offers solutions for dealing with
unequal distribution, one of Vietnam’s most important problems:
ƒ
Intragenerational equity: a social security system to narrow the gap between rich and
poor individuals and enable society to carry individual risks has been developed. Another
redistributive mechanism is the process of fiscal equalization between different German
states 19 redistributing a certain percentage of revenue from richer to poorer states.
ƒ
Intergenerational equity: attempts to counter ecological problems which may inhibit future
economic activities.
However, simply copying the German mechanisms must be avoided, as both countries differ
widely in their approach towards the individual/the state. The German culture is more
individualistic – rating individual freedom and, consequently, self-responsibility highly – than the
Vietnamese, which expects and accepts a strong role played by the State, even influencing
individual lives. Among others, this explains why the Vietnamese State is very involved in the
economy and continues to play a considerable role in terms of organization, ownership,
management, and distribution.
For further information please contact the authors:
Axel Neubert
Katja Roeckel
Integrated Expert (CIM) / Adviser
GTZ Associate Expert
Central Institute for Economic Management
Macroeconomic Reform Program
Email: [email protected]
Email: [email protected]
19
Financial equalisation scheme between the Federal Government and the Länder (Länderfinanzausgleich).
Contact Information
Economic and Social Policy Component:
c/o Central Institute for Economic Management (CIEM)
68 Phan Dinh Phung Str., Hanoi
Tel.
: +84.4 734 5195
Fax
: +84.4 734 5194
E-Mail
: [email protected]
Public Finance Component:
4, Alley 1, Huong Chuoi Str., Hanoi
Tel.
: +84.4 971 9644
Fax
: +84.4 972 2768
E-Mail
: [email protected]
Financial Systems Development Component:
12 Trang Thi Str., Hanoi
Tel.
: +84.4 825 1928
Fax
: +84.4 824 6765
E-Mail
: [email protected]
Website : www.gtz.de/vietnam
www.macroreforms.org
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