Vietnam Communists' new challenge: managing capitalism

Vietnam’s Communist rulers gathered Tuesday ahead of a party congress that will select the country’s top leaders and set its priorities for the next five years.

The weeklong meeting in Hanoi comes amid uncertainty over the party’s ability to manage one of Asia’s fastest growing economies after a state-owned shipbuilder defaulted last month on $600 million in debt.

Prime Minister Nguyen Tan Dung, a hard-charging former banker, is expected to retain his post despite criticism over his handling of the debt default and rising food prices that have pushed official inflation to 12 percent. Two other senior jobs will become vacant with the mandatory retirement of the country’s president and the party’s secretary general, a key position in the hierarchy.

Since it began opening up in the 1980s, Vietnam has been transformed by rapid economic growth. It has become a darling of aid donors and foreign investors, who continue to pour money into low-cost manufacturing and resource-based industries. But its reliance on deficit spending and inability to control inflation has exposed the shortcomings of its consensus-driven political system.

Vietnam's runaway inflation

While many Asian countries currently fret over rising currencies, Vietnam faces the opposite problem. It struggles to defend its currency, the dong, which is shunned by Vietnamese who prefer to hoard dollars or gold. This has fueled runaway inflation, as the price of imported goods rises, and raised fears of a hard landing after several years of breakneck growth.

“The perception among domestic investors is that when push comes to shove, the government is more interested in growth than curbing inflation,” says a local economist.

In the run-up to the congress, which is the equivalent of an election in Vietnam’s one-party state, policymakers have shied away from taking tough decisions on the economy for fear of being blamed for any negative publicity. This includes measures to support the wobbly currency and to cut a budget deficit that stood at an estimated 6 percent of gross domestic product (GDP) in 2010, according to the International Monetary Fund.

“People are too frightened to take decisive action. Individuals don’t want to tighten interest rates and cut spending,” says Jonathan Pincus, an economist with the Harvard Kennedy School who resides in Ho Chi Minh City.

What's to come

1 | 2

Next