Crony capitalism went on trial in Vietnam last week. However, the proceedings did little to quell public skepticism or address the underlying causes of a spectacular economic and political failure.
Assigning responsibility for the near collapse of Vietnam Shipbuilding Industry Group Vinashin), the state-owned entity that effectively went bankrupt in 2010 with over US$4.4 billion in debts, a Vietnamese court on March 30 sentenced former chief executive officer Pham Thanh Binh and eight other senior company officials to upwards of 20 years in prison.
As Vietnamese bloggers were quick to point out, Binh and his co-defendants were charged with misappropriating $43 million in funds - which represented less than 1% of the total debt racked up by Vinashin. While the court ruled that the defendants caused "serious economic consequences" and "reduced the people's trust in the government"' throwing away $43 million as detailed in the indictment was hardly the main explanation for Vinashin's meltdown.
The root problem can be traced back to 2006 when Prime Minister Nguyen Tan Dung reorganized many of the country's state-owned enterprises and placed the largest corporate groups under the direct control of the prime minister's office. Dung's ambitious plan was to pursue a corporatist development strategy along the lines of South Korea's chaebols while building a personal power base.
Dung appointed close allies to run Vinashin and the other business groups. According to critics, the prime minister's office succeeded in consolidating control but did not exercise real oversight.
Thanks to preferential credit policies, Vinashin got cheap domestic loans from state-owned banks and lots of dollars from international lenders which it used to expand into unrelated businesses such as real estate, motorcycle manufacturing and tourism. Benefiting from a government guarantee, even the proceeds from Vietnam's inaugural dollar bond of $750 million and a high-profile syndicated loan arranged by Credit Suisse worth $600 million were funneled to Vinashin.
Vinashin's shoddy management and unsustainable expansion eventually led to a debt crisis with wider economic implications for the country. Vietnam's sovereign credit rating, for example, was downgraded to four notches below investment grade by international credit agencies partly because of the failing shipbuilding company's potential impact on government finances.
Lenders naturally want to know whether a sovereign borrower can service its debts. But in the case of Vietnam, how much debt the Hanoi government is on the hook for is a big question mark. According to official statistics, the outstanding amount of government debt has been expanding quickly and is currently at 60% of gross domestic product (GDP).
However, this figure does not account for borrowings by state-owned enterprises. If the debt of these entities are included on the central government's balance sheet, Vietnam's debt position is markedly worse. Just how much worse is anyone's guess.
Besides Vinashin, Electricity of Vietnam (EVN), Vietnam National Coal and Mineral Industries Group (Vinacomin) and Vietnam Oil and Gas Group (PetroVietnam) are among several big state-owned companies carrying high debt loads and seen as potential trouble spots, especially in a market downturn.
The circumstances that catalyzed the Vinashin collapse - government-directed lending, corruption and a distorted playing field - are still rampant in Vietnam. Unfortunately, the trial last week only focused on individual criminality instead of systemic malfeasance.
One seemingly logical solution would be to privatize state-owned firms in Vietnam to bring an end to government-run chaebols. In a press interview on the sidelines of the Association of Southeast Asian Nations (ASEAN) summit this week Dung conveyed this very point to reassure foreign investors. Specifically, he pledged to "accelerate equitization to diversify the ownership of state-owned businesses".
However, privatization without transparency and accountability is no panacea, according to the candid assessment of a World Bank senior economist with experience on Vietnam. Instead, "equitization" (communist Vietnam's euphemism for privatization) could open the door to the looting of public assets.
This economist, speaking off the record, compared the possible outcome in Vietnam to that of Russia in the 1990s when much of the state sector passed into the hands of a coterie of politically-connected individuals.
Indeed, the bosses of many of Vietnam's largest investment firms today are the friends and family of the prime minister. His daughter, Nguyen Thanh Phuong, is the founder and chairwoman of VietCapital Asset Management. The prime minister's son-in-law, Henry Nguyen, is the head of IDG Ventures Vietnam, another large private equity fund.
Given the level of corruption in Vietnam, it is not unreasonable to believe that politically favored investors would have significant advantages in any equitization deal. As demonstrated by the Vinashin saga, there are currently no checks and balances. (Legal scholar Cu Huy Ha Vu, a vocal critic of the prime minister who even lodged a lawsuit against Dung, is currently in jail for so-called anti-state propaganda.)
A developing country surely requires talented and successful businesspeople, including those who are related to political leaders. What Vietnam can do without are Russian-style oligarchs or the crony capitalism that contributed to the 1997-98 Asian financial crisis.
Ultimately, what Vietnam sorely needs is equal doses of fundamental economic and political reforms. Only by leveling the economic playing field, ensuring transparency through a free media, and generating democratic reforms and accountability, can there be no more Vinashins....