February 28, 2019 | 01:09 am PT

North Korea can learn from Vietnam’s achievements and its mistakes

North Korea can learn from Vietnam’s achievements and its mistakes
Top view aerial of Long Thanh - Dau Giay expressway at Vo Chi Cong intersection area, District 2, Ho Chi Minh City. Photo by Shutterstock/Hien Phung Thu

Equitable growth, competition and incentives, on the one hand; early environmental protection and corruption containment, on the other.

Raymond Mallon, economist 

Raymond Mallon, economist 

When I first visited Viet Nam as an ADB economist in 1988, the country was facing a serious economic crisis. Weaknesses in the central planning development model and the ongoing U.S.-led economic embargo were compounded by a drastic reduction in external support from the former East European bloc.

Poverty was widespread, there were food shortages, annual inflation was over 500 percent, and there was limited economic links with the rapidly developing neighboring countries.

Vietnamese people and businesses had limited access to ideas, technology and capital from rapidly developing regional economies. Productivity, incomes and living standards were far behind most other countries.

Recognising that the old development model was not achieving national social development objectives, Vietnamese leaders began looking at other options to national social and economic development goals. In particular, leaders studied the experiences of regional economies to identify lessons that could be applied to Vietnamese economic systems.

Key lessons that emerged were that incentives, equitable allocation of factors of production, competition, market-based pricing, and international economic integration could help Vietnam "catch-up" economically with other neighboring countries.

Following earlier pilot reforms, the 1986 National Party Congress adopted a program of Doi moi economic reforms. Over the following few years, the State gave back long-term land use rights to farmers, began removing barriers to internal and international trade, reduced price controls, and opened the economy up to foreign investment.

Post Doi moi changes

Vietnam transformed from a closed country with little movement of goods, capital and people in the mid-1980s, to an open economy that now has one of the higher ratios of trade and FDI to GDP in the world.

Vietnamese people and businesses now have the opportunity to access technology, markets, capital and ideas from all over the world, and Vietnamese businesses are increasingly integrating into global production networks. This has stimulated competition, creativity, innovation, and productivity growth.

The Vietnamese economy is becoming increasingly diversified with higher value-added agriculture and manufacturing accounting for an increasing share of national output. Tourism and other services are now a major part of the economy. Employment and income generating opportunities have expanded. Vietnam’s poverty rate has fallen faster than in any other country since the late 1980s. Vietnamese students are performing at the highest levels in the best universities in the world.

However, there have also been costs.

Trade related industrialisation and modernisation has exacerbated social and environmental challenges. Urban congestion and pollution negatively impact on living standards. Not all groups have benefited equally from economic growth. There are continuing income disparities. Worker’s rights in factories are not always adequately protected. Administrative complexity and corruption continue to constrain national development.

Notable development model features

Pragmatism and a willingness to experiment have been key features of the Vietnamese development model. Vietnam did not slavishly follow any single development model. Instead policy makers worked with business and social organisations to identify bottlenecks and actions to address these bottlenecks.

Policy reforms were often initially implemented on a pilot basis and only rolled out at a national level when the positive impacts of the reforms had been proven.

Vietnam studied international experiences, but did not always follow the advice of international development institutions. For example, Vietnam moved more slowly on transferring State-owned commercial assets to the private sector than international agencies advised, and slower than in Eastern Europe.

In retrospect, this meant that State monopolies have not simply been transferred to private monopolies to the benefit of a politically connected elite. On the other hand, the preferential treatment provided to some SOEs over several decades has slowed the emergence of a strong domestic corporate sector.

Vietnam’s experience demonstrates the importance of pragmatism and of ongoing engagement between the government and social and business groups. There has been a focus on consultation to monitor and evaluate the impacts of reforms and to identify the winners and losers from reform initiatives. This has allowed Viet Nam to adapt reform measures to Vietnamese situation and has helped ensure that the benefits of economic growth have been relatively equitably shared.

Another key feature of reform has been the critical need to build national ownership of, and commitment to, reform. Without such ownership, laws or policies may change but reform implementation remains limited. This was clearly demonstrated when international agencies pushed for quick approval of the first Bankruptcy Law and SOE Law in the early 1990s. While approved as agreed with international agencies, these laws were poorly enforced.

Lessons for North Korea

There are significant differences between the pre-Doi moi economic institutions and structure in Vietnam and the current situation in North Korea.

Vietnam’s decades of conflict and external economic embargoes meant that centrally controlled economic resources were limited, and there was already some considerable decentralization of economic decision making prior to Doi moi.

A relatively high dependence on agriculture also meant that Vietnam achieved relatively quick, and equally distributed, economic gains from the initial land and price reforms. This helped build broad-based support for the reform process.

Despite some obvious differences, there are important lessons that North Korea could learn from Vietnam’s experience.

First, equitable human development is crucial for both social and economic reasons. All children need equal access to educational and heath foundations to provide them equitable opportunities to succeed, regardless of location or family connections.

Second, competition is important. Monopolies (State or private) stifle innovation and creativity and provide incentives for corruption. Free and open trade is an important source of competition.

Third, strong and competitive factor markets are critically important for ensuring the allocation of resources to their most productive uses.

Forth, incentives matter. Facilitate equitable access of households and businesses to resources (especially land use rights) that they can invest more efficiently.

Fifth, economic integration can help in accessing the capital, technology, know-how and access to markets that underpin productivity growth and improved living standards.

Sixth, the free movement of people and ideas helps to transfer skills and know-how needed to boost productivity growth. 

Seventh, inclusive economic development is important for not only equity reasons, but also because it can ensure higher level of sustained development over the medium to long term. It will also help ensure social stability and sustained support for reform at a time of what can be quite dramatic change.

Finally, be pragmatic and learn by doing during the reform process.

Effective implementation of economic reforms requires major and broad-based changes in social attitudes towards the role and accountability of the State and public officials to individuals, household and businesses.

Official and social attitudes towards private investment, property rights, and competitive markets need to change. Strong and sustained engagement between the government and the people can help change attitudes. The media (including social media) has an important role to play in changing attitudes.

Of course, there are also lessons about what North Korea should try to avoid.

Early action to protect the environment and to contain corruption can be more effective than addressing these issues at a later stage of the reform process.

The North Korean government should attempt to attract reputable foreign investors, while ensuring mechanisms are in place to ensure that all investors comply with national laws and policies.

In addition to learning from Vietnam, North Korea should directly draw on the lessons and experiences from South Korea. North Korea’s geographic proximity to, and past culture and language ties with, South Korea provides a great opportunity to tap into South Korea’s strengths (e.g. in education, R&D, and regulatory institutions). 

*Raymond Mallon is an economist who lives in Hanoi. The opinions expressed are his own.