Economic Woes Imperil Vietnam’s Leaders

A year ago, in August 2007, Vietnam's

Prime Minister Nguyen Tan Dung confidently addressed a gathering of regional businessmen

at an Asean 100 Leadership Forum at the Melia Hotel in downtown Hanoi.

He gave a typically punchy speech about how Vietnam valued its membership in

Asean, how it was increasingly integrating with the global economy after its

recent induction into the World Trade Organisation, and most importantly, how

its economy was humming along nicely with continued high rates of growth and

investment.

At the end, after answering a few soft questions, Dung paused, eye-balled

his admiring audience, and said: "One thing I can guarantee you –

political stability."

The executives en masse and applauded loudly and vociferously, almost as if

they were cheering a stock market bull run, not the unelected prime minister of

an undemocratic communist regime.

Nothing particularly unusual about that, of course – businessmen the world

over love the stability and certitude of authoritarian, states like Vietnam, China

and Singapore.

What a difference a year can make. The suits are not cheering Vietnam's

performance so much these days and the country's chastened prime minister is

not sounding half so confident. Since Dung spoke last August, not only has Vietnam's

economy stopped purring, but its political stability is no longer guaranteed.

Nor, for that matter, is the PM’s own position as secure as it appeared back

then.

In a nutshell, Vietnam's economy has crashed and Dung's government has

failed to ameliorate the effect on the general population, which has, in turn,

grown more disillusioned with the performance of the ruling Vietnam Communist

Party.

From the economic point of view, the most ominous and continuing

manifestation of that disillusionment is the ever-increasing number of strikes

all over the country. At the latest count, there have been around 400 since the

start of the year, most of them at manufacturing plants owned by foreign

investors.

Last week, in a typical stoppage, 14,000 workers at a South Korean shoe

factory near Ho Chi Minh City

downed tools in response to the management's failure to adequately increase

their wages. The workers want $18 a

month more, but the company has only offered $12. It may not sound like much of

a difference, but when workers on wages of around $50 to $60 a month, are faced

with inflation of around 30 percent, it is critically important. Representatives

from top investing nations from South Korea,

Taiwan, Singapore and Japan

have told Dung's team to do something about Vietnam's surging labor unrest

before their companies cut back on their investments or even start to pull out.

Last month, Theodore Huang, who heads Taiwan's

Chinese National Association of Industry and Commerce, complained at a business

seminar that the spread of wildcat strikes was the most critical aspect of Vietnam's

current economic downturn. Already, the volatile labor scene is starting to

negatively affect investment. Officially, despite the recent economic slide, Hanoi still claims that

foreign direct investment ‑ reportedly worth more than US$30 billion so far

this year – continues to pour in.

The reality is somewhat different because the official figure only indicates

registered or planned investments, which may or may not materialize. When it

comes to actual disbursed investments, the amount is just US$5 billion – and

that was committed before the crash. There are now signs that many companies

are pausing before making further investments.

But for the government, the immediate problem is how to appease restless

workers, disgruntled rural peasants, and the small but increasingly influential

urban middle-class while maintaining social and political stability. It will

not be easy. Internal surveys conducted by the communist party itself have

indicated that an astonishing 80 percent of the population now think the party

is no longer serving the needs of the people.

Perhaps it is not so astonishing. After all, since the prime minister's

speech a year ago, inflation has risen every month, hitting 27 percent in July,

the highest recorded figure since 1991. Food prices rose by 73 percent, petrol

and gas by 46 percent, rents and housing by 25 percent.

It has become a running joke that supplies of White-Out ink are getting

scarce in Vietnam

because cafés have to change the figures on their menus every day. Landlords

tell tenants that the rent will be doubled or tripled, mid-lease, accept it or

move out. Sales of bicycles have surged as workers can no longer afford to pay

for petrol for their motorbikes.

And things are certain to get worse before they get better. Last month,

Dung's government, faced with a dangerous drop in the level of reserves at the

central bank, had to remove the more than 30 percent subsidies on gasoline that

were draining the bank's coffers. That long-overdue, but politically-sensitive

move will almost certainly ensure that inflation this month surges above 30 percent

and further inflames low-income workers and farmers – the party’s traditional

support base.

Despite its extensive supplies of oil and gas and abundant harvests of rice,

vegetables and fruit, Vietnam’s

vaunted social and political stability is starting to look a little fragile in

the face of inflation. And Dung and his fellow party leaders know it. That is

why the leadership convened an extraordinary crisis meeting of the party's

161-member central committee last month. A key topic of discussion was how to

win back the support and confidence of young people, intellectuals and rural

peasants – three groups that have become especially disenchanted with the

party's performance in recent times.

The central committee also debated the economic downturn over the first six

months of this year and tried to hammer out remedial steps that could be taken

over the next six months.

Many senior party members expressed unhappiness at the government's earlier

stubborn push for continued high growth rates long after it had become clear

that the fight against inflation should take priority. They pointed out that

despite the fact that inflation hit double digits as far back as last November,

Dung's team continued to insist they could maintain annual growth of 9 percent,

while also enforcing belt-tightening measures to cut inflation. Only in March

this year, when a plunging stock market, a burgeoning trade gap and widespread

strikes triggered fears of a total economic collapse, was that stance shelved

and this year's growth target reduced to 7 percent and major government

projects canned. Few expect even that lower target will be met – the Asian

Development Bank now predicts growth will drop to 6.5 per cent this year.

Private analysts say it could fall as low as 5 per cent.

In early April, the Politburo, the highest body of the communist

party, issued public economic advice to Dung's men, effectively mandating more

belt-tightening, more curbs on liquidity and higher interest rates. Then came

last month's extraordinary central committee meeting, laying down the line that

the rot has got to stop – but without agreeing on how to do it.

In fact, there are deep-rooted divisions within the

leadership over how to proceed.

Party sources talk of splits in the Politburo between backers

of Dung's internationalist approach, and those who want a more nationalistic

line like party General-Secretary Nong Duc Manh and Deputy PM and former

finance minister Nguyen Sinh Hung.

The standoff is exacerbated by the fact that the root cause

of the economic mess is systemic.

As numerous analysts have pointed out, decision-making under Hanoi's communist regime,

particularly in the economic sphere, is fragmented to the point of paralysis. Neither

the conservatives, progressives nor anyone else in power is prepared to change

the system, because that would mean dismantling the absolute dominance of the

party.

So, in the near term, one of two things will happen: the party will close

ranks and try to ride out the storm, or it will sacrifice some top figures to

show that it is prepared to act decisively in the interests of the people. Since

no heads were chopped at the recent central committee meeting – except,

ironically, one of Dung's own acolytes in his home town of Ca Mau – it seems evident that closing ranks

is the favored option for now.

But if things continue to go pear-shaped, heads could roll. And while

figures like the state bank governor, the finance minister or the planning and

investment minister appear likely candidates, the carnage could ultimately

extend to Dung himself. The PM's

individualistic style was publicly tolerated – though often privately decried –

by a consensual party leadership as long as it appeared to be working. Now that

it has failed, he is in trouble.

His troubles are compounded by his lack of whole-hearted support in the

Politburo. A majority of its 14 members side with the conservative tendency led

by party boss Manh, Public Security Minister Le Hong Anh, Defense Minister

Phung Quang Thanh, DPM Hung and the party's head of personnel and organization

Ho Duc Viet. Hung and Viet, both from

central Nghe An province – home of the country's founding father Ho Chi Minh ‑ opposed

Dung's attempts to strengthen his position via a cabinet reshuffle last June

and the PM was forced to back down.

The best he could do was to partly defuse the clout of the Nghe An faction

by inducting a couple of reformist technocrats as new deputy prime ministers:

the Western-educated Hoang Trung Hai and Nguyen Thien Nhan. But neither has

performed auspiciously, and Nhan in particular is viewed as having been

woefully ineffective in the education portfolio.

As a result, Dung is now viewed as increasingly likely to have to put on

hold any notion of trying to take over the party leadership from Manh – and even

the fallback assumption that he will be a shoo-in for a second term as PM is

now questioned. It appears more probable that Manh's replacement as party

leader will be drawn from the conservative ranks. If not Viet, the most likely

candidate would be Truong Tan Sang, the head of the party Secretariat, or Pham

Quang Nghi, the current party boss of Hanoi.

Either way, Dung will lose out. And it is unlikely that he will give any

more guarantees about political stability, nor is he likely to hear any more

rousing cheers from businessmen in the near future.