Why Vietnam Is Booming

(John Rekenthaler is currently on vacation in Vietnam but still writing; this column was inspired by his visit.)

Boom Towns The bicycles are gone, replaced by Honda scooters. Satellite dishes adorn village roofs. The fashionable youth in Saigon, the nation's wealthiest spot, cluster in Starbucks, where they sip coffee drinks that are made and priced as if in the United States. The children giggle as they wait in lines at the fast-food chains. Some of them are chubby.

Such is modern Vietnam, a place that, except for the hammer-and-sickle flags, appears for the world as if the South had won the war. This is not how Communist-run countries are supposed to be. It was not how East Germany looked, nor the Soviet Union, nor Cuba, nor North Korea. What happened?

The temptation is to wave one’s hands and say, “It’s cultural.” The Vietnamese are an industrious people, able to shrug off the yoke of an incompetent economic system. The explanation is unconvincing. Even if we accept the dubious, unprovable assertion that Russians and Cubans lack industriousness, what of the Germans and Koreans? The same peoples, separated only by political lines, built the powerhouse that was West Germany and the weakling that was East; the winner that is South Korea and the loser that is North.

No, something else has permitted Vietnam (and China) to succeed whether others have failed.

Party Poopers It's not the Party's honesty. As with any other government that is not answerable to the people, Vietnam's Communist Party takes what it can get. It exhorts the masses to sacrifice, while enjoying lavish "business" dinners with drinks until the point of collapse, followed by the pleasures of karaoke and massage girls. In Hanoi, some scooters routinely ignore traffic lights. I inquired. "They are Party members. The policeman knows that if he pulls them over, they make a phone call and then he is in trouble."

The Party is also intrusive. Those seeking an example of the wonders of deregulation, where businesses can operate freely without facing legal restrictions and paperwork, will need to find other countries. In the World Bank’s 2016 “Ease of Doing Business” rankings, Vietnam rates the 121st easiest among the 190 countries surveyed for starting a new business and a wretched 167th for paying taxes. It does have some strengths--most notably, getting credit and obtaining construction permits--but its overall score is only moderately above those of Nepal and Iran. Not the most illustrious company.

So, what is going on?

On the Bright Side Far be it for me to offer anything resembling a definitive answer, but a few things are apparent. One is that the Vietnamese are determined to make a go of it. The war was, to write the very least, wrenching. The conflict persists in more than memories; official retribution policies continue to punish the children of South Vietnam supporters, who are denied certain career paths (or, in the case of one young man whom I met, the opportunity to receive a scholarship from a top overseas university). But the people wish to look beyond the grudges. However difficult it was to get there, and however imperfect the form, it is now a single independent Vietnam--and that is a good thing.

Another potential reason is that the country is safe. Violent crime is rare, such that visitors are not warned against entering any areas, day or night. (Sexual assaults are so uncommon that the U.S. Department of State’s 2016 report on Saigon crime and safety listed but a single failed attempt from the previous year.) There are pickpockets who prey on tourists and some organized crime that targets locals, but for the most part entrepreneurs can go about their businesses without fear of being robbed.

Then there’s the taxi test--a personal favorite. Will the taxi drivers cheat outsiders? Or do they operate ethically, even though the odds are high that they can fleece this particular fare? The beauty of the test is that one needn’t actually ride in a taxi to administer it. The locals know. My conversation went like this: “How much is the fare from Da Nang?” Answer: “About $15.” Do I need to negotiate the fare ahead of time? The local looks puzzled. “Why would you? He has a meter.”

(As I write this, I Google an article comparing Vietnamese and Thai taxi habits. The author reports that the Vietnamese drivers are "uniformly honest and polite" and "never refuse" a fare. In contrast, he describes Thai drivers with a noun that this column will not print. I then check the numbers. Vietnam's annual gross domestic product growth rate over the past 20 years has been about 6%, Thailand's at 4%. True, Vietnam's growth comes off a smaller base, and the sample size is but one. So, definitive proof this is not. However, when it comes to confirming a prior opinion, how much evidence does any of us need?)

Speak Quietly Then there's free speech. It doesn't exist, for those who speak loudly. Last year, Vietnam sentenced a former high-ranking official who had formed a blog to discuss national affairs to five years in prison for publishing articles that presented a "one-sided and pessimistic view" of the country, thereby harming the people's confidence. (By that standard, every Democratic Presidential hopeful would have been jailed in 2008, and every Republican candidate during the following two elections.) Ho Chi Minh may have quoted extensively from Thomas Jefferson when declaring Vietnam's independence, but that does not mean that he fully understood his source.

However, unlike with East Germany, North Korea, or the Soviet Union, the Vietnamese government doesn’t fuss too much about its citizens’ private utterances. (Back in the day, my wife was trailed by the KGB while visiting Moscow; yes, that sort of nonsense truly did happen.) The locals are happy to talk, as long as they won’t be put on the record. Nor does the government get upset about the formalities. Officially, it’s now Ho Chi Minh City. In practice, it is fine to still call the town Saigon, and most still do.

The lesson, I think, is that a developing country’s form of government is mostly beside the point. Yes, Vietnam would be better off yet if its rulers were more honest and business-friendly. Moreover, as the country becomes wealthier and its economy more sophisticated, its minor flaws could become major. Aside from the island nations of Singapore and Hong Kong and several oil countries, the top world economies as measured by per-capita GDP all permit relatively free criticisms of their government. It remains to be seen whether developing countries can join the elite nations while maintaining their current government systems or whether they must change as their economies mature.

Outside of Politics The critical items are not to be found in constitutions. Critical are items such as the effects of national histories, the extent of crime and everyday corruption, and whether free speech is permitted in private, if not necessarily in public. These aren't the sort of things that tend to be discussed in political debates, but they are what enable businesses to generate profits--or what get in the way, if the country fails on those scores.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.