Many of us are celebrating 2011 with hope as economic signs in the US such as unemployment growth, GDP growth, and investor confidence levels are all improving. After all, most of the developed world just went through the toughest recession of the 2000’s decade. During the worst conditions, the US GDP went negative at -2.5% and Japan’s GDP dipped to the -5.2% level. If you lived in the US from 2007-2009, you probably feared losing your job if you had one. Or, if you were a recent graduate, you must’ve had the toughest time finding employment. If you lived in Japan at that same period, companies that promised employment probably had forsaken you. Or, it would have taken a lot longer than that normal 6 months to find a job.
(source: Google Public Data)
However, if you lived in Vietnam then, life was normal for the average Vietnamese. Vietnam’s GDP growth only dropped from 8.1% to 5.5%, but it was still expanding above the normal rates that Japan could’ve only wished for. Vietnam is currently in the rapid growth phase – a miracle that happened to Japan from the late 1950s to the early 1970s. From mid 1970s to the early 1980s, Japan was in the “stabilized growth” period, but then it proceeded to a slump rate of 0%-1% until 2007 when the Japanese economy was shrinking until now. Japan has been going down since the 1970s:
(source: Google Public Data)
The questions that I’m trying to raise here are: What will happen to Vietnam? Will Vietnam fall into the same slump at Japan and stay there for 20 years?
To answer the question, let us survey the development of Japan from a shattered nation in 1945 until it became the world’s 2nd largest economy (recently overtaken by China in 2010). Then, I will point out of the key differences and why I think Vietnam’s growth will last much longer than Japan.
After WWII, Japan was occupied by the US and was heavily influenced by US policy up until mid 1950s. During this period, the US broke up the great Japanese holding companies. This was significant on many levels. First of all, since the holdings companies were large pre-war monopolies and its executives had very strong connections with the Japanese political world, they were able to influence the government to wage war to increase their own demands and productions. Breaking them up ensured a peaceful Japan. The US occupation leaders went so far as to prohibit the formers executives to cooperate with any former mangers to establish new companies. The new companies were also not allowed to hire more than 100 employees and the new executives were not allowed to participate in politics. Although this lasted only for a decade, it gave birth to a new generation of managers and greatly increased the competition among firms within an industry.
Labor reforms were also drastic. Women were free to enter many occupations. Labor unions were heavily promoted. The number of labor union jumped from 500 in 1945 to 35,700 in 1950. This is almost 7100% increase in 5 years! A significant difference between US labor unions and Japanese labor unions lies in the fact that US labor unions are industry-wide while Japanese labor unions are only firm-wide. I really believe that the Japanese version of labor unions are much more effective because:
1) The point of a labor union is to give worker a bargaining power against many monopolistic enterprises. However, if the labor union becomes industry-wide, it has became too large and turned into a monopoly itself. This could lead to oppression of smaller and family-oriented business and hinder their growth. This is what the US labor unions are becoming. Also, since the US labor unions are separated by professions, it further increases the gap and discrimination between blue and white collar workers.
2) If the labor unions are firm-specific, the workers can have better information about the available resources and targets that a firm has in order to make a more efficient bargain. In this way, it is much easier for workers and the firm to work out incentive details to improve the benefit of both parties. This is one of the reasons why Japanese workers are willing to stick to one company for the rest of their career. This could save a significant amount of training & transitioning cost for firms.
The new and freer competition environment combined with small-sized labor unions were definitely new fuels for the Japanese miracle. The Japanese government were also heavily involved as they “prioritized” coal and steel production by heavy price subsidies and raw material rationing. In the 1960s, the Japanese government also “targeted” many other heavy industries to play catch-up games with developed Westerners. Many Japanese economists believe that this was the right approach.
I, however, believe that this heavy involvement of the government in the industries is the cause of the death of Japanese growth. The government simply targeted the wrong sectors for too long. Every industry has an infant period and needs a large amount of capital to grow. They can obtain such capital through private stock or government subsidies or the combination of both. In the case of Japan, the government continues to subsidize selected industries even though they are no longer infant and keep on sucking the capital resources of other industries. For further protection of such industries, the government also raised import taxes and hurt many Japanese consumers while shielding many industries from foreign competitions that could improve them.
Why did the Japanese government keep on choosing the wrong targeted industries? Well, during the 1970s, the holding companies started to re-group and again had greater influence on Japanese politics. Via many means, they “convinced” the government that they are the targeted industries that needed protection. Of course, there are many more reasons, but I believe this is a significant one.
So how is Vietnam different? And what can Vietnam learn from the Japanese Miracle?
My lack of knowledge about Vietnam does not allow me to say much, but Vietnam has at least two fundamental differences from Japan. Fortunately, these two differences are very positive:
1) Most of the private executives in Vietnam are not public figures. They have much less influence on the Vietnamese trade and competition laws. Thus, they have to rely heavily on their own performances to out-compete others. In this sense, Vietnamese industries are in great training for international competition. There are many cases of briberies and corruptions. These are bad. But at least the companies are giving money to the state officials in secret instead of the state outrightly extort tax money to give to these incompetent companies. The Vietnamese government and the industries are skeptical of each other, and this incident is for the greater benefit of Vietnam.
2) There are not many holding companies in Vietnam. This is a great environment for competition. Of course, if the companies can achieve better productivity through merging and increasing their size, they should do so. However, if they rely on their size and wealth to influence the laws for their own benefit and protection, Vietnam will head to the downward path that Japan traveled.
Actually, I think it’s just a matter of time until someone will become large enough to influence the law unless Vietnam has a stricter constitution. Well, the Vietnamese constitution is almost hidden. I’ve never seen it for the 14 years that I lived in Vietnam. I still haven’t seen it now after 10 years.
At this rate, I think Vietnam Miracle will last for the next 20 years for the total of 40 years (Japan only had 30 years). My deepest fear is that the many Vietnamese international students will pick up the Western thought that “the government will solve everything” and forget to strive for their own businesses. My fellow Vietnamese youth, if you are abroad, please pick up the technologies and the entrepreneurial spirit of the foreign countries and be wary of the lazy attitudes that many foreign citizens have.
Dear Neil,
I read your article but I disagree with what you said about the westerner’s spirit only think that the government will solve everything. I think the westerner’s spirits are the opposite since they favor no government intervention. Just like the United States, we favor no government to intervention because without government intervention company will have more freedom and innovation to grow more which in turn reduce the unemployment rate and stimulate spending. With no government intervention, we have powerful companies that can influence the government through lobbying so they are depended on each other because without money running the campaign then the candidate will not get elected. However, during the recession we witnessed the government intervened to help out our economy. I think that the reason for this is that the government needs to have a short term solution to increase confidence in the consumers. Another reason was that those companies are so big that by letting those companies shutting down will have a tremendous effect on our economy. Therefore, I think that during good time there will be no goverment intervention and during bad time the government will have to help out those companies. So the westerner’s spirit don’t favor the government will solve everything.
Hi Tien,
Thank you for the comment!
I’m glad you really think so. It’s just that in my area (SF-Berkeley, CA), many people think that the gov’t is ought to regulate everything. Also, during my meetings with European friends, many of them also believe the same idea. My thought is a bit biased in that sense. I do believe that many folks in the innovative areas like Silicon Valley, Manhattan, etc. would prefer a “hands off” government.
Regarding the “too big to fail” companies. I agree that their failure will send large shock waves to the economy. But I think that people need to experience a little pain for their reckless-ness. Or else, they would just think that the gov’t will come to rescue and use that as an excuse to take higher risks.
I don’t think you can talk about competition in Vietnam without mentioning SOE’s. Efficiency and value-added per sector by private enterprises in Vietnam far out gain those of SOE’s. However, due to their size and government affiliation, SOE’s crowd out private companies in the loanable funds market and make it extremely hard for private sectors to seek out capital.
SOE’s are essentially the equivalent to the holding companies you mentioned in the article–inefficient behemoths whose boards are typically appointed by government officials. It doesn’t matter if private companies don’t have public officials sitting on their boards; SOE’s do and they’re the ones controlling and moving their respective markets. The government’s backing of SOE’s means they are able to take larger risks (e.g. Vinashin) than private companies, inhibiting growth by more efficient players.
Just an interesting note, it’s been debated that SOE’s do not follow the incentives model of typical Western companies. In the US, companies seek to maximize profit margins. However, SOE’s instead want to maximize revenue, with profits being of secondary importance. In order to maximize revenue, SOE’s need to maximize output and hence, employment. High employment is extremely important because politically appointed managements are incentivized to build up the reputation of their SOE by offering as many jobs as possible to the local community. The visibility that follows will allow them to better compete and network with larger firms and more important people within the Party, who could potentially spur on further growth of the SOE with government subsidies. Another reason why major companies in Vietnam are not striving for economic optimality (profits v.s. revenue).
http://www.nber.org/papers/w12780
Comparing Vietnam and Japan probably isn’t a very good example. You should look at Thailand and Indonesia–similar countries that experienced major growth spurts in the mid 20th century and are now stuck in middle-income trap. How can Vietnam avoid doing what they did?
Excellent Analysis!!
I’ve read a bit about SOE’s in Vietnam. To answer your last question “How can Vietnam avoid doing what [Thailand and Indonesia] did” would take me a couple months of readings. haha. I’ll work on it though. Or would you want to offer your thoughts on those?
I’m glad Tin brought up SOE, as well as parallels w/ Thailand and Indonesia. If I might add, I think another key difference is that as large as the kereitsu/zaibatsu of Japan and the chaebols of Korean grew, they were at least founded by entrepreneurs rather than the state. Also, the East Asian model of development (Japan, Korea, Taiwan, some parts of China) favoring export-driven growth favors industrialization and technological innovation. The Southeast Asian growth model, driven largely by Chinese economic elites, is extractive (see book called ‘Asian Godfathers’)—natural resource extraction, labor intensive/low skilled mfg, real estate speculation. Vietnam wants the former in the LT, but in reality is pursuing the latter in the ST. A key indicator is whether or not a country can produce a globally recognized, quality brand. Also, I’m not a political economist, but I think anyone who studies Vietnam must address the ‘elephant in the room’: what role does a democratic, multi-party system play in fostering or impeding economic development?
Excellent article. I believe you have done good research before writing this.
I like the sentence:
My deepest fear is that the many Vietnamese international students will pick up the Western thought that “the government will solve everything” and forget to strive for their own businesses
Yes, there is deficiency in the government. But if we don’t strive for our own business, we will never make our country grow, no matter how good the government is.