Vietnam is a country undergoing transformation from a centrally planned socialis
ID: 1136055 • Letter: V
Question
Vietnam is a country undergoing transformation from a centrally planned socialist economy to a system that is more market orientated. The transformation dates back to 1986, a decade after the end of the Vietnam War that reunited the north and south of the country under communist rule. At that time, Vietnam was one of the poorest countries in the world. Per capita income stood at just $100 per person, poverty was endemic, price infla- tion exceeded 700 percent, and the Communist Party ex- ercised tight control over most forms of economic and political life. To compound matters, Vietnam struggled under a trade embargo imposed by the United States after the end of the Vietnam War.
Recognizing that central planning and government ownership of the means of production were not raising the living standards of the population, in 1986 the Com- munist Party embarked upon the first of a series of re- forms that, over the next two decades, transformed much of the economy. Agricultural land was privatized and state farm collectives were dismantled. As a result, farm productivity surged. Following this, rules restricting the establishment of private enterprises were relaxed. Many price controls were removed. State-owned enterprises were privatized. Barriers to foreign direct investment were lowered, and Vietnam entered into trade agreements with its neighbors and its old enemy the United States, culminating in the country joining the World Trade Orga- nization in 2007.
The impact of these reforms has been dramatic. Vietnam achieved annual economic growth rates of around 7 percent for the first 20 years of its reform pro- gram. Although growth rates fell to 5 percent in the after- math of the 2008–2009 global financial crisis, by 2015 Vietnam was once again achieving growth rates of around 6–7 percent. Living standards have surged, with GDP per capita on a purchasing parity basis reaching $6,400 in 2016. The country is now a major exporter of textiles and agricultural products, with an expanding electronics sector. State-owned enterprises now only account for 40 percent of total output, down from a near monopoly in 1985. Moreover, with a population approaching 100 mil- lion and an average age of just 30, Vietnam is emerging as a potentially significant market for consumer goods.
For all of this progress, significant problems still re-main. The country is too dependent upon exports of com- modities, the prices of which can be very volatile. Vietnam’s remaining state-owned enterprises are ineffi- cient and burdened with high levels of debt. Rather than let prices be set by market forces, the government has re- cently reintroduced some price controls. On the political front, the Communist Party has maintained a tight grip on power, even as the economy has transitioned to a mar- ket-based system. Vietnam bans all independent political parties, labor unions, and human rights organizations. Government critics are routinely harassed and can be arrested and detained for long periods without trial. The courts lack independence and are used as a political tool by the Communist Party to punish critics. There is no freedom of assembly or freedom of the press.
To compound matters, corruption is rampant in Vietnam. Transparency International, a nongovernmental organization that evaluates countries based on percep- tions of how corrupt they are, ranks Vietnam 113th out of the 176 countries it ranks. Corruption is not a new prob- lem in Vietnam. There is a well-established tradition of public officials selling their influence and favoring their families. However, critics say that the problem was exac- erbated by privatization processes that provided opportu- nities for government officials to appoint themselves and family members as executives of formerly state-owned companies. Although the ruling Communist Party has launched anticorruption initiatives, these seem to be largely symbolic efforts. Many observers believe that widespread corruption has a negative impact on new busi- ness formation and is hamstringing economic growth.
Why did Vietnam experience a low economic growth rate in the decade after the end of the Vietnam War in 1976?
Explanation / Answer
There are different reasons causing poor economic growth in the country of Vietnam after the war in 1976. The first reason is the poor demand conditions due to low per capita income, high unemployment rate and very high inflationary pressure in the economy. It created a scenario of stagflation in the economy. As a result, economic growth could not take place. The second reason is the state ownership of the assets and discouragement to the private property rights. It did not let the firms to operate and invisible hand concept could not take place. It brought responsibilities only upon the communist government and it could do much on its own and economy suffered. The third reason is the wracked infrastructure, poor or absent regulatory framework and prevalence of economic rent along with the corruption, also discouraged the economic activities. The fourth reason is the sanctions and trade embargo applied by the USA upon Vietnam that never let the economy to offtake unless the economic reforms took place later on.
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