Vietnam – a curious American darling!

US seeks partnership with Vietnam

As the US and China are locked in a great power struggle, the US is courting friendly nations to join forces with it. Democratic countries like Australia, India and Japan, and to a lesser extent Europe, are enthusiastic supporters. And against the background of its complex and often troubled relationship with China, Vietnam has also responded positively to US entreaties for a close partnership – despite their tragic wartime history.

A recent flurry of high-level contacts is a sign of Vietnam’s partnership with the world’s leading democracies. On the occasion of a visit to Hanoi in September 2023, US President Joe Biden and General Secretary of the Communist Party of Vietnam Central Committee Nguyen Phu Trong elevated their nations’ relationship to a “Comprehensive Strategic Partnership” for the purposes of peace, cooperation, and sustainable development.

With an eye on the South China Sea, the two leaders also “underscored their unwavering support for the peaceful resolution of disputes in accordance with international law, without the threat or use of force”. Australia’s Prime Minister Anthony Albanese also visited Hanoi in June, while Vietnam was invited to the expanded G7 Summit in Japan’s Hiroshima, where Vietnam Prime Minister Pham Minh Chinh had a bilateral meeting with Indian Prime Minister Narendra Modi.

Vietnam’s dynamic economy

What is remarkable in Vietnam is the growing national self-confidence. Vietnamese people routinely refer to their victory in the “American war”. Moreover, economic reforms since 1986 have helped propel Vietnam from being one of the world’s poorest nations to a lower middle-income economy in one generation.

Today, Vietnam’s GDP per capita stands at $13,500 in purchasing power parity terms. It is now well ahead of the neighbouring Philippines ($10,100), and is quickly catching up to Indonesia ($14,700). Vietnam’s rapid development has helped lift 40 million people out of poverty, and only 4.4 percent of the population lives below the national poverty line.

Visitors to Ho Chi Minh City (aka Saigon), with its international hotels and luxury stores, might imagine that Vietnam is a first-world country. Nothing could be further from the truth in this “dualistic” economy, where outside a few major cities, much of the population live precarious lives, and are at the risk of falling back into poverty if hit by unemployment, serious illness, or a natural disaster. All that said, Vietnam’s progress and dynamism are palpable.

Vietnam’s successful formula

There are many reasons why Vietnam has done so well. Education levels would be around the average of the OECD countries (a group of capitalist democracies). Vietnam is not only well ahead of neighbouring Cambodia, Philippines, Indonesia, Thailand, and Malaysia, but it is also in the same ballpark as the US, according to the OECD. In sum, when it comes to education, Vietnam has more in common with the countries “Confucian Asia”, like Singapore, Taiwan, Hong Kong, Japan, and Korea, than with its Southeast Asian neighbours.

Vietnam has fairly good transport and energy infrastructure, although it lags behind regional peers like China, India, Indonesia, Malaysia, and Thailand. The digitisation process in Vietnam has progressed rapidly in recent years. Vietnam is also a signatory to a number of free trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the Regional Comprehensive Economic Partnership, the EU-Vietnam Free Trade Agreement, and the US/Vietnam Bilateral Trade Agreement.

These factors have enabled Vietnam to attract foreign direct investment (FDI), especially from South Korea, Japan, Singapore, and Hong Kong, and participate in global value chains (GVCs) for manufacturing goods like electronics, furniture, clothing, and footwear. For example, over the past 15 years, Korea’s Samsung has established its undeniable position as the largest FDI investor in Vietnam. Around 50 percent of Samsung’s smartphones and tablets are now produced in Vietnam and exported to 128 countries and territories. Companies like Apple are now moving some of their value chains out of China and into Vietnam in light of China’s rising labour costs and geopolitical tensions.

Vietnam’s room for improvement

While Vietnam has attracted a large amount of FDI, business linkages between multinational enterprises and domestic firms are still relatively undeveloped. Vietnamese suppliers are mainly relegated to lower tiers of integration in the GVCs, specialising in low-value-added parts/components or assembly functions.

To capture stronger gains from GVC integration, Vietnam needs to improve human capital, enterprise technological capability and innovation systems, and resuscitate the flagging investment in infrastructure.

The prominent and entrenched state-owned enterprises, and poor enforcement of intellectual property rights also do not help. And while the Heritage Foundation ranks Vietnam’s economic freedom above world and regional averages, it insists that institutional shortcomings continue to discourage more sustained long-term economic development. Indeed, despite strong GDP growth, Vietnam’s productivity performance has been weak, and the country desperately needs more economic reform.

Demographic and Climate Issues

While Vietnam faces numerous challenges to keep climbing the development ladder, other issues are emerging on the horizon. Vietnam may be on track, like China before it, towards suffering from an aging population well before it reaches advanced economy status due to its falling fertility rate. Also, according to the World Bank, Vietnam is among the 10 countries most affected by climate change and natural disasters globally, with many of the growth engines like Ho Chi Minh City, Da Nang, and Can Tho cities being on the frontline of climate-related and extreme weather events. In sum, continued economic success for Vietnam is far from guaranteed.

Corruption, Repression, and Rule of Law

On the political side, endemic corruption and weak rule of law represent deep governance challenges. Such repressive regimes can manage to grow their economies from a very low base to a middle-income level.

However social and political repression acts as a break on innovation and creativity, essential elements for graduating high-income status.

And as countries advance, continued repression can only push brain drain. Already, many of Viet Nam’s best and brightest are departing for higher-paid jobs in other countries. In other words, instead of staying at home and fighting for democracy, young elites are taking the easy way out.

All things considered, there is little likelihood over the coming decades of Vietnam becoming an advanced, capitalist democracy like the US, Japan, Korea, and other Western countries.

A reality check on American dreams

The US’ recruitment of Vietnam as another bulwark against authoritarian China is filled with great irony. When it comes to authoritarianism, Vietnam is virtually a clone of China, with its severe restrictions on press freedom and its dire state of human rights. Moreover, the Economist Intelligence Unit ranks Vietnam an “authoritarian regime” in the same ballpark as China.

It is a fantasy to imagine that democratic countries can forge deep, open, and trusting political partnerships with authoritarian countries like Vietnam, with totally different value systems and interests. Moreover, unlike the US, Vietnam faces the unenviable and enormous challenge of living peacefully with the Chinese economic and political behemoth on its border.

So the future scenario will likely be Vietnam carefully dancing with both China and the US, trying to play one off against the other to ensure its own survival – more than Vietnam being a US strategic asset in its competition with China.