Copyright 2002 the Financial Times Limited

August 28, 2002, Wednesday

Vietnam's change of heart: The country's communist rulers are embracing private enterprise to consolidate their power.
By AMY KAZMIN
Tran Le Nguyen is a fully fledged capitalist - and a communist hero. Kinh Do, his fast-growing Vietnamese company, has 2,000 employees and last year made and sold an estimated Dollars 20m (Pounds 13.1m)worth of snacks, biscuits and cakes. He has built his brand with dazzling neon billboards that rival a Las Vegas casino and he is now diversifying into bottled water and other drinks.
For his business achievements, the 38-year-old Sino-Vietnamese entrepreneur - who also calls himself Dennis Tran - has been awarded a Red Star, a new honour dreamt up by a regime that once reserved its praise for soldiers and state factory workers. Communist authorities have also published Mr Tran's success story - with tales of other leading entrepreneurs - in an inspirational book. "Everyone in Vietnam can tell you the story of his background," says a Kinh Do executive. Private enterprise has a newfound respectability in Vietnam. Its Communist leaders aim to maintain their tight grip on power by delivering a vibrant economy that offers the youthful 79m population opportunities for material gain. "The government has realised that if you want to have some chance of jobs to keep people happy and preserve stability, it has got to be the private sector," said Mario Fischel, a Hanoi-based economist with IFC, the World Bank's private lending arm.
That change of heart may at last allow Vietnam to achieve the economic potential that has tantalised would-be investors since the early 1990s, when other south-east Asian countries grew more rapidly. "Vietnam is coming," says John Shrimpton, a director of Dragon Capital, which manages about Dollars 70m in assets in Vietnam. "Since it was written off in the mid-1990s, we've seen - out of the limelight - diligent application and the emergence of a very competitive economy."
For a decade after Hanoi first started tentatively relaxing its control over the economy in 1989, private business was merely tolerated, rather than actively encouraged. But Vietnam's constitution was recently amended to guarantee equal treatment for state and private companies, a significant shift. The registration of private companies has also been made automatic, allowing the creation of more than 40,000 private companies - and some 750,000 new jobs - in the past two years. The International Monetary Fund estimates that Vietnam's economy will grow 5.3 per cent this year, accelerating to 6.5 per cent next year and then 7 per cent in the following two years.
The new mood is palpable in Ho Chi Minh City, Vietnam's business capital, where restaurants, nightclubs and glitzy shops cater to an increasingly affluent middle class. NFO Vietnam, a market research group, says that about 17 per cent of urban households had monthly incomes of more than Dollars 500 last year, up from 9 per cent in 1999.
Hanoi is even allowing party members to engage in commercial activities and top officials have started to liken the quest for private profit to the effort to defeat US forces during the Vietnam war. "Your success in the marketplace is no less glorious than a victory on the battlefield," Pham Van Khai, the prime minister, told Vietnamese businessmen earlier this year.
Vietnam's economy is still dominated by bloated state companies, agriculture and informal household businesses, with registered Vietnamese-owned private companies contributing only about 8 per cent of gross domestic product. But the importance of local private business is rising rapidly. The World Bank estimates private industrial output grew about 20 per cent last year - far outpacing the 12.2 per cent growth by state and foreign-owned companies.
Nguyen Quoc Khanh, a 42-year-old entrepreneur who employs 600 people in his home furnishing and interior design business, is upbeat. "Before, the big concern was how to play with the government," he says. "But now, it is how to play with our business, how to survive with all the competitors. I am ready to expand as much as I can."
For all their exuberance, Vietnam's budding businessmen - and potential foreign investors - still face obstacles such as red tape, pervasive corruption and severe shortages of credit. "On the surface, you have a good emerging private sector but behind the scenes there are a lot of weaknesses and disadvantages," says Do Duc Dinh, a senior economist at Hanoi's Institute of World Economy.
Financial reforms are crucial. State-owned banks still remain reluctant to lend to private companies. Bankers sometimes face criminal prosecution if their loans go sour. So entrepreneurs tend to rely on personal savings - and funds from family and friends. "There's a lot of frustration," says Don Lam, a corporate finance specialist at PwC (Vietnam). "These guys are begging for money and nobody's willing to give it to them." The tax laws also retain a socialist quality. Personal income taxes are high and punitive taxes are imposed if a company's profits exceed a 25 per cent return on capital, a rule that has encouraged many small companies to distort their accounts. "If the environment requires you not to be just a risk-taker but also a scofflaw to succeed, that is not healthy," says Frederick Burke of the law firm Baker & McKenzie.
In addition, businesses routinely encounter obstruction from junior officials. "The central government is very concerned with the needs of business but when you come to lower-level implementation - either intentionally or out of ignorance - things just aren't getting done," says Henry Lam Van Hung, who left Vietnam in 1977 and now manages a steel company.
Vietnam's new capitalists are not remaining silent about their woes. Senior business leaders have joined together to lobby the government and have been joined by foreign investors. Hanoi appears willing to listen. At an unprecedented party conclave this year, Communist leaders set an ambitious reform agenda. If they can turn their words into action, some of the underlying barriers to private enterprise in Vietnam will be removed. Hanoi's Communists may then secure the country's capitalists as allies in their effort to remain in charge.