How Capitalism Beat Communism in Vietnam

It only took a generation to go from ration cards to exporting electronics.

By Rainer Zitelmann of Reason. Excerpts:

"The amount of food you got depended on your family's status. State employees received more, factory workers less. If there was not enough rice, people received wheat instead, though hardly anyone knew what to do with it: Even if they knew how to bake bread, they couldn't normally get hold of the other ingredients. In any case, they needed electricity to heat an oven, but electricity was available only a few hours a day.

Today the Vietnamese call this era Thoi Bao Cap—"the subsidy period." It was the time of a socialist planned economy, before the free market reforms of the late 1980s.

In 1990, with a per capita gross domestic product (GDP) of $98, Vietnam was the poorest country in the world, behind Somalia and Sierra Leone. Every bad harvest led to hunger, and Vietnam relied on food aid from the United Nations and financial assistance from the Soviet Union and other Eastern Bloc countries. As late as 1993, 79.7 percent of the Vietnamese population was living in poverty.

By 2020, the poverty rate had fallen to 5 percent. Vietnam is now one of the most dynamic countries in the world, with a vibrant economy that creates great opportunities for hardworking people and entrepreneurs. Once a country unable to produce enough rice to feed its own population, it has become one of the world's largest rice exporters, and a major electronics exporter too."

In 1977, the government started collectivizing agriculture and nationalizing nearly 30,000 privately owned small businesses. Many peasants in the South regarded collectivization as particularly unjust because the communists had given them land during the war to secure their support and now wanted to take it away from them again. Many of them resisted collectivization, and some left their land or sold their animals rather than work in collectives. By 1980, only 24.5 percent of the rural population in the South worked in collectives, compared to 97 percent in the North.

"The peasants in South Vietnam reacted by restricting production, which was primarily oriented towards their own needs," Claudia Pfeifer explained in her book Konfuzius und Marx am Roten Fluss (in English, Confucius and Marx on the Red River). "Within a few months, the agricultural sector almost completely collapsed."

"Less than 10 percent of the cultivated area for annual crops could be artificially irrigated and drained, even though pumps were available for about 40 percent of the area—power shortages and blackouts often made their use impossible. Only 30 percent of the agriculture sector's electricity demands were satisfied.

State-owned cooperatives received 40 percent of the government's funds, though they contributed only 5 percent of total agricultural production. The state collectives did not reward members for the amount of rice they produced, but instead counted how many days they had worked. If you worked 30 days, you got 30 points, which gave you the right to a defined share of the harvest. If you worked 20 days, you got 20 points and correspondingly less.

In 1980, Vietnam produced only 14 million tons of rice, though the country required 16 million tons to meet its population's basic needs. Every failed harvest led to immediate food shortages, and to rationing. The second Five-Year Plan envisaged an increase in GDP of 13 percent to 14 percent per year for 1976 to 1980. In fact, it went up only 0.4 percent—and this with a rapidly growing population. Agricultural production was to increase by 8 percent to 10 percent per year; it went up by 1.9 percent. The plan envisaged annual increases in industrial production of 16 percent to 18 percent; the actual annual average was just 0.6 percent. In the entire northern half of the country, the per capita supply of paddy rice declined by about a third in the second half of the 1970s.

Most of the yield was produced on the fraction of the land that was privately farmed. From 1976 to 1988, more than 60 percent of cooperative members' income came from the 5 percent of land they were allowed to keep after 95 percent of the land had been collectivized.

At first, South Vietnam's new rulers declared that they wanted to nationalize only foreign-owned enterprises. Vietnamese-owned enterprises were transformed into so-called parastatals (enterprises with state participation). But this was meant to be a temporary measure: The plan was that all enterprises would gradually become fully state-owned. The same problems arose in industry as in agriculture. Production stagnated, and state-owned industrial production actually declined by 10 percent from 1976 to 1980."

"The Vietnamese reformers' initial focus was on agriculture, at the time the most important economic sector by far. In 1981, for example, the state introduced Directive 100, which allowed individual families to use cooperative land. In the words of Vu Le Thao Chi, this "placed the unwritten custom of family-based production into an officially sanctioned framework."

In the early 1980s, a number of other reforms were introduced in Vietnam. Firms would now be responsible for their own profits and losses. Enterprises could decide for themselves what to do with any excess profits. Planners maintained strong controls, but if nothing else this legalized what had already been taking place illicitly. "For instance," the political scientist David Wurfel found, "when materials were short, goods could be sold in the open market to raise cash to buy supplies, or perhaps to pay bonuses to workers and thus raise productivity. Though largely illegal, these initiatives became more and more widespread. Thus, the first key reform decree for state industry in January 1981 required factories to register all activities they conducted outside the plan at the same time that it allowed them to acquire and dispose of resources as needed to increase their supply of inputs."

"at the Sixth Party Congress in December 1986, large numbers of representatives from South Vietnam supported market reforms."

"The reforms adopted in the next couple of years included permission for private manufacturers to employ up to 10 workers (later increased), abolition of internal customs checkpoints, elimination of the state foreign-trade monopoly, reduced restrictions on private enterprise, elimination of virtually all direct subsidies and price controls, separation of central banking from commercial banking, dismantling major elements of the central planning and price bureaucracies, the return of businesses in the South that had been nationalized in 1975 to their former owners or their relatives, and the return of land seized in the '70s collectivization campaign if it was "illegally or arbitrarily appropriated.""

"At the end of 1987, family farmers won the right to lease land from cooperative and state farms on a long-term basis. These farmers' rights of disposal over land were expanded in the 1992 constitution and the 1993 Land Law. Although land could not be bought and sold as private property, the transferability and inheritability of land on long-term leases (up to 75 years) was guaranteed.

The character of the agricultural cooperatives changed. The collectives were dissolved, and farmers now joined together voluntarily. The new cooperatives became providers that offered certain services to the farmers, much more cheaply than the collectives had done in socialist times. Their services became both better as well as cheaper.

In the industrial sector, too, enterprises enjoyed much more autonomy. The state headquarters' ability to intervene directly in economic activity was restricted. Economic relations between the enterprises were to be regulated by mutual contracts. The planned economy was not abolished entirely, but planning now only meant setting strategic goals over extended time frames. The setting of wages and the exploitation of profits became a matter for the individual enterprises to determine. As Pfeifer notes, "Enterprises were even granted the right to sell, lend, or rent out capacities that could not be used by the enterprise at a specific moment in time" (though the business's assets remained state property)."

"Previously, the only private enterprises allowed in Vietnam had been family businesses, which were not allowed to employ wage labor—at least officially. Now companies were allowed to hire as many workers as they wanted or needed. In 1990–1991, the legal structures of sole proprietorship, limited liability company, and public limited company were introduced. This development culminated in 1992 with Article 21 of the new constitution, guaranteeing the protection of private ownership of the means of production against expropriation.

Before 1989, the state had fixed all prices. Now such regulations applied only to electricity, petrol, cement, steel, and transport services. This liberalization of prices led to an improvement in the supply of goods. Although many prices continued to rise sharply for a while, the prices of basic foodstuffs actually remained stable, and in the case of rice they fell.

Until the reforms began, the state dominated every aspect of Vietnam's foreign trade, which was mainly with the socialist bloc, first and foremost with the Soviet Union. Opening the country meant welcoming foreign investment and integrating Vietnam into the world economy. After a Foreign Investment Law was passed in 1989, money started to flow into Vietnam from Western Europe, Singapore, South Korea, Thailand, Hong Kong, Japan, Australia, and other countries.

One of the most important reforms involved abolishing the system of centrally planned specifications and letting companies manage their own exports and imports. The private import and export of goods was allowed and, in almost no time at all, Vietnam had compensated for its lost trade with socialist countries by increasing its trade volumes with capitalist countries, especially in Asia (Taiwan, South Korea, Hong Kong, Singapore, Japan) and Australia. A series of trade agreements followed, including one with the United States.

In 1999, a new Enterprise Law removed yet more bureaucratic hurdles for private companies."

"Vietnam's gross domestic product grew by 7.9 percent a year from 1990 to 1996, faster than any other Asian country but China. Poverty fell sharply. By the World Bank's standard for extreme poverty—living on less than $1.90 a day—52.3 percent of the Vietnamese population was living in extreme poverty in 1993. By 2008, the figure had fallen to 14.1 percent. By 2020, it was only 1 percent. That indicator was developed for "low-income economies," though, and Vietnam has now moved to the "lower-middle-income" category, where poverty is defined as living on less than $3.20 a day. By that measure, the poverty rate dropped from 79.7 percent to just 5 percent.

In 1980, life expectancy in Vietnam was 62 years. Today it is 73.6 years. Vietnam has also risen in the United Nations' Human Development Index, which aims to comprehensively measure the quality of life of people in a country. The index score for Vietnam increased from 0.463 in 1980 to 0.704 in 2020, putting it only slightly below the global average of 0.723."