Current Issues and Policies 2019-05 (February 12, 2019)

 

Vietnam’s Đổi Mới Policy and Rapprochement with the U.S.:

Lessons for North Korea

 

 

Cho Kyung Hwan

Visiting Research Fellow, the Sejong Institute

kwhancho@sejong.org

 

 

Introduction

Vietnam was announced as the venue for the second North Korea-U.S. summit scheduled to be held on February 27 and 28. On February 7, U.S. State Department Deputy Spokesperson Robert Palladino commented, “Vietnam is a close friend and partner of the United States. … The history of our two nations reflects the possibilities for peace and prosperity. We move past conflict and division towards the thriving partnership that we enjoy today.”

Hence, Vietnam has emerged as ‘a role model for the North Korean economy as it achieved rapid economic growth after improving relations with the United States’. While Chairman Kim Jong-un of North Korea repeatedly mentioned that North Korea will follow the example of China’s reform and opening up policy at meetings with Chinese President Xi Jinping, the adoption of the new strategic line of ‘concentrating all its efforts on the socialist economic construction’ in April 2018 partially resembles Vietnam’s Đổi Mới policy – internally pursuing economic reforms and opening-up while maintaining one-party rule.

The U.S. already alluded to the emphasis on Vietnam when U.S. State Secretary Mike Pompeo made a remark in Hanoi on July 8, 2018. Meeting with businesspeople, he suggested Vietnam’s miracle as an example for North Korea to tread the path to prosperity. Pompeo said, “In light of the once-unimaginable prosperity and partnership we have with Vietnam today, I have a message for Chairman Kim Jong Un: President Trump believes your country can replicate this path.” Particularly, he reminded Chairman Kim of the U.S. pledge of economic assistance, “The miracle can be yours. That can be your miracle and North Korea as well.”

 

For President Trump, Vietnam is a historic setting to undoubtedly convey ‘the message of the past and the future’ to Chairman Kim. For the young North Korean leader, Vietnam could be recognized as ‘one alternative that sustains economic development while maintaining the socialist system.’

 

Adoption of Đổi Mới Policy: Background

After unifying with South Vietnam by force on April 30, 1975, North Vietnam’s repressive rule instigated the exodus of 1.5 million people, known as ‘boat people’. Post-war devastation and the limitations in integrating South Vietnam’s economy to a socialist economy aggravated the Vietnamese economy to economic hardships at a record level.

Eventually, Hanoi opted for Đổi Mới policy of pursuing reform and opening-up with the slogan of economic renovation at the 6th National Congress of the Communist Party of Vietnam (CPV) in 1986. This happened after the economic havoc caused by the failure of the ‘new economic policy’ adopted at the sixth plenum of the 4th National Party Congress in 1979 and the political turmoil in which the party leadership was replaced four times. After holding thoroughly the previous leaders accountable for mistakes and incompetence at the end of the power struggle between conservative and reform-minded factions, the Vietnamese government adopted the orientation of reform and opening-up policy. It audaciously laid bare the reality of the people’s livelihood.

 

Five Basic Principles of Đổi Mới Policy

The Vietnamese government set out five basic principles of the Đổi Mới policy and ‘socialist-oriented market economy’ as the objective. The five principles are ‘improving productivity, establishing long-term, strategic, and consistent economic policies, harmonizing planned economy and the market economy, pursuing an opening-up policy to enhance external cooperation, and laying the foundation to be integrated into the global economy.

To achieve these basic principles, the Vietnamese government relaxed its grip on industrial facilities and collective farms, which were under the firm hands of the CPV, by limitedly permitting private businesses. Faced with the demand of price liberalization and market opening like Eastern Europe and China, Vietnam focused on reforming the state-owned enterprises along with inviting foreign capital through financial reforms and market opening. Domestically, the government set the development of agriculture and light industry that are directly linked with people’s livelihood as the primary objective in the transition phase and actively harnessed the potential of the non-socialist sector. It pursued the rise in agricultural productivity by expanding the contract-based agricultural production and extended the period of land use. It extricated from the pre-existing heavy industry-driven policy and underscored strategically the market expansion to export consumer goods of labor-intensive light industry such as textile. Outwardly, Vietnam aimed at making use of official development assistance, paying interest in the international division of labor and international economic cooperation and bolstering market opening. It introduced special economic zones such as export processing zones and industrial complexes and drew foreign direct investment (FDI) in the form of build-operate-transfer (BOT) for infrastructure projects.

 

Three Phases[i] of Đổi Mới Policy

The introductory phase of Đổi Mới policy, from 1986 to 1994, encompasses two periods of the five-year plan, fourth and fifth. Beginning with the reforms on state-owned enterprises, the Vietnamese government initiated mechanisms to support businesses of private and foreign firms and concentrated on opening its economy and expanding its foreign relations. In 1987, the Vietnamese government implemented measures related to the management of state-owned enterprises. Excluding some items, the government entrusted these enterprises with the full production and management plans and authorized the diversification of their business portfolio to wholly mobilize their management resources and labor force. The government abolished the institutions regarding production – the government used to provide raw materials and supplies and the companies supplied finished products to the government. The government introduced a contract-based acquisition system to curb the government’s supply of raw materials and provisions to the companies, making them procure the shortages of materials from the market. The companies were granted autonomy in the management of personnel and financial resources. The government also leveled the relationship between the companies and banks for the companies to freely choose banks related to payment and credit system. It also privatized state-owned enterprises except for those in the base industry and sought the so-called ‘small bang’ – partially radical reforms – implementing financial and budgetary reforms together with price liberalization.[ii] In 1988, the CPV Politburo declared the resolution no. 10 on management reform of the agricultural economy. It de facto abandoned the collectivization of agriculture production and altered the counterpart for the procurement contract from a collective group of farmers to individual farms. The means of distribution of arable land was changed from an equality basis to a merit basis. In March 1988, the government kicked off financial reforms. The government confined the role of the central bank, State Bank of Vietnam (SBV), to only engaging in transaction with other banks and allocated the functions of commercial banking to two newly-established state-owned banks, Industrial and Commercial Bank (now, Vietnam Joint Stock Commercial Bank for Industry and Trade) and Vietnam Bank for Agricultural Development (now, Vietnam Bank for Agriculture and Rural Development) Following the legislation of law on central bank and financial institutions in May 1990, the number of private commercial banks, joint venture banks, branches of foreign banks, small-scale credit unions, etc. rapidly increased. Regarding price control, the Vietnamese government reduced the number of commodities for price management and abolished the mechanism to compensate for the price difference in 1987. Moreover, it ended price control on most of the items, with a few as an exception, such as electricity, transportation, and fuel. It officially recognized the market price of consumer goods including rice and scrapped the food ration system.

Vietnam also stepped up to entice foreign investment and liberalize trade. In 1988, it institutionalized State Committee for Cooperation and Investment (SCCI) and laid down the protection of foreign investment capital as a rule - stipulating that the state shall not nationalize projects with foreign investment. The government commenced with high-tech, textile, machinery, and medical equipment and other industries through granting favors such as tax deduction to foreign companies doing business in ‘Tân Thuận Export Processing Zone’ – established in 1991. In 1988, the government disposed of the monopolistic rights on foreign trade, allowing the trade companies to be established and private companies were eligible for foreign trade in 1991.

In the early days of Đổi Mới policy, because the conservative- and communist-minded figures dominated the party leadership and the reform-minded group constituted a small portion within the leadership, the policy did not reap economic achievements as expected since the leaders approached the reforms passively. Despite this fact, the party leadership highlighted the improvement of foreign relations, taking into account that external aid is necessary to overcome the ramifications of war with Cambodia and China and the collapse of the socialist economic bloc. With the cost of stationing in Cambodia reaching 3 million dollars daily and the international pressure since the invasion to its neighbor in December 1978, Vietnam began withdrawing forces from Cambodia in September 1989. The Comprehensive Cambodian Peace Agreement signed in October 1991 was the turning point for Vietnam to leap forward. In 1991 and 1992, Vietnam normalized diplomatic relations with China and South Korea respectively and reached an agreement with the U.S. on the issue of U.S. MIA soldiers in the Vietnam War. After the peaceful transition in Cambodia, the U.S. gradually enhanced relations with Vietnam: opened a temporary liaison office in Vietnam in December 1992; partially removed economic sanctions to re-allow international financial institutions to provide concessional loans to Vietnam in July 1993; and lifted economic sanctions completely in February 1994. In November 1994, Citibank and Bank of America obtained approval to open a branch in Hanoi and since then, the aid from IMF and World Bank hugely rolled in.

 

The development phase of Đổi Mới overlaps with the sixth and seventh five-year plans, from 1996 to 2000 and from 2001 to 2005 respectively. This was the period when the Vietnamese economy entered the global system and paved the road to high economic growth. A decade from the launch of the Đổi Mới policy, Vietnam established diplomatic relations with the U.S. in 1995. At the end of 9 rounds of negotiations, the two countries signed ‘U.S.-Vietnam trade agreement’ in July 2000 - five years after the establishment of bilateral relations – and Vietnamese goods streamed into the U.S. market and the export industries thrived. Vietnam became a member of the global economic community after joining ASEAN in 1995 and APEC in 1998.

In the expansion phase of the economic opening from 2006 onwards, as the corporations underwent reforms and the economy opened its doors to foreign capital, the special economic zones have been developed in earnest, the trade relations with the U.S. have been normalized, and foreign capital surged into the country. These settled the market economy in Vietnam. Hanoi strived to attract foreign investment and the country was approved as the 150th member of the WTO at the organization’s General Assembly in November 2006. In December of the same year, the U.S. Congress also passed the legislation that grants Vietnam the status of permanent normal trade relations and Vietnam became the non-permanent member of the UN Security Council for the first time in 2008. And the free trade agreements with South Korea and Eurasian Economic Union took effect in 2015 and 2016 respectively. Vietnam also earnestly set up industrial complexes and special economic zones. Whereas China established social overhead capital in accordance with the expansion of opening from point to line to plane, Vietnam selected areas nationwide for industrial complexes and intensively developed them and expanded infrastructure from there, mindful of the fact that the infrastructure remained in a ramshackle state.

Grants and aid flow from the international community largely gushed in the development of infrastructure and laid the grounds for economic growth. The foreign capital flowed in three different paths: official development assistance of the international community; the remittance of overseas Vietnamese known as Việt Kiều; and foreign direct investment.[iii] Since the inception of the diplomatic relations with the U.S. in 1995, the international financial organizations including the IMF, World Bank, and Asian Development Bank (ADB), began investing in infrastructure projects in Vietnam.

 

Lessons for North Korea and Inter-Korean Economic Cooperation

A decade from the adoption of Đổi Mới policy in December 1986, Vietnam and the U.S. established diplomatic relations in August 1995 and five years later, the two countries ratified the bilateral trade agreement in November 2001, enabling Vietnam to access the U.S. market. Twenty years from Đổi Mới policy, Vietnam has been recognized as a member of the international economic community, entering the World Trade Organization in January 2007. As the key preconditions for establishing diplomatic relations, the U.S. called for the land privatization, transition to a multiparty system, and privatization of state-owned enterprises, and Washington and the international financial institutions, such as IMF, fastidiously demanded corresponding domestic reform measures whenever they increased assistance to Vietnam.

The reform-oriented leadership of Trường Chinh and Nguyễn Văn Linh ascertained the success of the Đổi Mới policy. Vietnam also primarily engaged in political reform receptive of reform and opening-up. It also took the legislation process, amending the constitution, party charter, and the law on foreign investment. Article 51 of Vietnam’s new constitution in 1992 stipulates, “The Vietnamese economy is a socialist-oriented market economy with multi-forms of ownership and multi-sectors of economic structure.” It simultaneously sought internal reforms and integration into world economic order and the international community’s massive support after the rapprochement with the U.S. has been the key to success.

Because the Đổi Mới policy is framed as ‘the cabinet assuming the reformative rule based on the premise of the communist party’s social control,’ it is sufficient to give lessons for North Korea. Nevertheless, in the case of Vietnam, leaders have been replaced to reform-minded figures while maintaining the collective leadership. It is interesting to watch how far the absolute power in North Korea is willing to sacrifice its power to propel reforms and opening-up policy. Pyongyang needs to institutionalize the legal and institutional settings including reshaping the economic system, statistics, etc. transparently in accordance with international standards for foreign capital investment. Vietnam also illustrates that North Korea should positively accept the reform programs from the international financial institutions such as IMF and World Bank. Given its restraints in mobilizing domestic resources, North Korea needs resources and an influx of large-scale foreign capital from the international community. Therefore, Vietnam’s example demonstrates that trade agreement with the U.S. is essential and ultimately lead to the accession to the WTO to complete the reform and opening-up procedure.

 

 

*Note: This article is based on the author’s personal opinion and does not reflect the views of the Sejong Institute. This is an unofficial translation of the original paper which was written in Korean. All references should be made to the original paper.

 

[iii] Yang Un-chul, “A Study on the Applicability of Đổi Mới Policy to North Korea from the Perspective of Economic Transition,” (in Korean) Journal of International Trade and Industry Studies, Vol. 16, No. 4, (Winter 2011), p.10.