Vietnam's New Money

An influx of wealth and privilege is shaking up this socialist country. But, as pro-democracy activists are jailed and the network of power tightens, the Communist Party's strong hand may be turning economic progress into a social disaster.

On Nov. 16, 2008, two of Vietnam's new entrepreneurs were married in the Caravelle, Ho Chi Minh City's first luxury hotel, once home to journalists covering the "American War." The groom was 36-year-old Nguyen Bao Hoang, managing general partner of an investment firm, IDG Ventures Vietnam, and his bride was 27-year-old Nguyen Thanh Phuong, chairperson of another investment firm, VietCapital. Between them, their two companies controlled around $150 million of investments in Vietnam.

But the wedding wasn't just another story about new money in Vietnam. Nguyen Thanh Phuong isn't just an investment banker -- she's the daughter of the prime minister, Nguyen Tan Dung. The man she was marrying is an American citizen, the child of parents who fled Vietnam in 1975 to escape the communists -- now returned to wed the daughter of one of them.

Their union encapsulates many elements of the new Vietnam where, despite an influx of new wealth, the Communist Party still dominates both the public and private sectors. Many "private" businesses are either former state-owned enterprises (SOEs) or still have some state ownership, and most are still run by party members. Most of the controllers of the commanding heights of the private sector are party appointees, their family, or their friends. The Communist Party elite are turning Vietnamese capitalism into a family business. And if this week's conviction of four pro-democracy activists on subversion charges is any sign, the consolidation of party power is a very frightening development for Vietnam's future.

There are many examples of the family relationship between money and power in today's Vietnam: One of Vietnam's richest men, Truong Gia Binh, is chairman of the country's biggest indigenous IT firm, FPT. He's also the only man in Vietnam routinely referred to with the prefix "former son-in-law" because he was once married to the daughter of Vo Nguyen Giap -- war hero, retired army commander, and former deputy prime minister. During the 1990s, if a business needed contacts in the army's extensive array of companies, or in construction or communications, Giap was the man to see.

Another example is Dinh Thi Hoa, Vietnam's first Harvard University MBA graduate. In the early 1990s, when the World Bank wanted to stimulate private-sector development in Vietnam, it awarded many scholarships to young people, including Hoa. On her return, Hoa used her newfound knowledge to found a company called Galaxy that now owns a PR agency, most of the good Western-style restaurant chains in the country, a big cinema in Ho Chi Minh City, and a film production company. In many ways it's a model of private-sector success. But Galaxy didn't just spring up out of nowhere. It's one of the many firms created by the children of the party elite. When the World Bank chose Hoa for the scholarship, her father was deputy foreign minister.

The story of Vietnam's economic liberalization has been, to quote Ho Chi Minh on national unity, "success, success, great success." In 1993, according to government figures, almost 60 percent of the population lived below the poverty line. By 2004 that figure was down to 20 percent. The country has met most of its Millennium Development Goals, development targets set by the United Nations, escaping the ranks of the poorest countries to join the group of "middle-income states." People's living standards are soaring, their horizons are widening, and their ambitions are growing.

But the state's control over Vietnam's expansion is troublesome. The marriage between party and private interest is distorting the economy toward the wants of the few rather than the needs of the many. And networks of crony socialism are becoming a threat to Vietnam's future stability. Vietnam risks the fate of many of the World Bank's previous poster children -- boom followed by bust.

The biggest state corporations are setting up unaccountable funding channels to finance projects with minimal economic logic. By June 2008, 28 SOEs had spent around $1.5 billion establishing or buying controlling stakes in fund management companies, stock brokerages, commercial banks, and insurance firms. Three-quarters of Vietnam's finance companies are now owned by the biggest SOEs (those known as general corporations). Many also have bought securities companies dealing in shares. Add all this together, and several of Vietnam's biggest general corporations have the potential to become self-financing black boxes with opaque funding arrangements.

Although the days of the soft loan from a state bank are largely past, there are plenty of other ways to channel money to SOEs. The state's Vietnam Development Bank (subsidized by aid from foreign governments) and its Social Insurance Fund (expected to become the biggest investor in the country by 2015) seem to act as unaccountable slush funds for the benefit of the state sector. Clearly SOEs have a significant, if not necessarily bright, future ahead.

The Vietnamese Communist leadership wants to run the country along the lines of Gaullism in France -- where the commanding heights of the public and private sectors are coordinated by an elite trained in such institutions as the École Nationale d'Administration. Under "Vietnamese Gaullism," a behind-the-scenes elite (the party) is supposed to set the overall direction of policy and then delegate its implementation to the state (which is controlled by the party). The government then draws up the laws and uses whatever resources are available to it -- the state bureaucracy, SOEs, the private sector, foreign investors, international donors, etc. -- to see the policy executed. Behind the scenes, the party monitors, corrals, and presses the various actors to make sure that its policy is followed. That, at least, is what the party would like to have happen. The reality is usually something quite different.

With easy money around, it's not hard to bribe patrons, officials, and regulators to turn a blind eye to breaches of the law. The party members in charge of the SOE tail end up wagging the party policy dog. But this isn't the whole story. What is remarkable about Vietnam is the way, at moments of crisis, the Communist Party can discipline its errant members and bring the economy back under central control. But how much longer can it do so?

Until recently, Vietnam had shared the benefits of growth more equitably than any of its neighbors. The party's socialist orientation still meant something. But in the future, redistribution will mean taking wealth away from the party's biggest supporters. Does the party leadership have the ability to stand up to its newly rich citizens and demand they hand over part of their wealth through taxation to benefit poorer people in faraway provinces? Do the convictions this week signal that the corrupt networks of party, power, and privilege have already gotten out of control? If so, Vietnam's new money could collapse under its own weight.



A New Kind of War

One year after Operation Cast Lead in Gaza, Israel has discovered that it is easy to win military battles against its 21st century-antagonists -- but infuriatingly difficult to win the war of public opinion.

The end result of Operation Cast Lead, last year's conflict between Israel and Hamas in the Gaza Strip, was quite clear. During three weeks of fighting over December 2008 and January 2009, more than 1,300 Palestinians and 13 Israelis were killed and at least 2,500 houses in the strip were demolished. There is an ongoing debate about the number of armed Palestinians killed, but even Hamas does not contest that hundreds of its men died, among them three of the Islamist organization's senior leaders. The Israel Defense Forces (IDF) penetrated to the heart of the strip -- the center of Gaza City, where most of Hamas's major compounds are located. The organization's defensive infrastructure, which had been painstakingly built over three years and included hundreds of booby-trapped houses, tunnels, landmines, and smuggled anti-tank rockets, was destroyed.

Hamas fighters had no answer for the IDF's technological and military edge. Their attempts to kidnap Israeli soldiers failed and, though Hamas fired hundreds of rockets into Israeli territory, only a few civilians were killed. More than a year after the fighting, the strip is still under siege by both Israel and Egypt. Most Gazans are forbidden from traveling abroad, while their supply of goods depends primarily on smuggling through tunnels from Egypt.

So how, you might ask, did Hamas mark the first anniversary of this colossal failure? By celebrating, of course. In a number of rallies, Hamas leaders proudly reminded their supporters of the organization's achievements during the conflict. For them, the fact that Hamas had stood its ground against the strongest army in the region and continued shooting rockets until the last day of the war was more than enough to declare victory. Survival was the goal, and it had been achieved.

Such bizarre and dissonant remarks are widely accepted in the Middle East as a part of the regional game. Hezbollah, which had suffered heavy losses in the second Lebanon war against Israel in the summer of 2006, still describes that conflict's outcome as a "Victory from God" (Nassr Min Allah). The Arab media, led by Al Jazeera, repeated this message enthusiastically, despite Hezbollah leader Hassan Nasrallah's admission, a few days after the war's conclusion, that he would not have gambled on an attack against Israel had he known that the Israeli reaction would be so severe.

It's not that the leaders of these organizations don't actually know what happened in Lebanon and Gaza. Hezbollah and Hamas fired senior commanders after the wars. But both groups understand that asymmetric conflicts are very different from conventional warfare. In these battles, perception -- even marketing -- is far more important than results. The images that organizations such as Hezbollah and Hamas manage to sell to their publics, to their enemy, and to the international community have a far greater effect than actual events on the battlefield.

In fact, Israel's military victory in Gaza was far from complete, and the battle of perceptions is still a draw. A certain level of deterrence was achieved, but Hamas still remains in full control of the strip. And Israel's overwhelming force, applied against an enemy fighting from within the civilian population, resulted in hundreds of innocent victims. This in turn led to the extremely harsh (and biased) Goldstone Report, along with the fear that senior IDF officers would be brought to trial in some European countries for alleged war crimes. Israel is now considered by many in the international community as the regional "disturbed child," requiring immediate restraint if a new war breaks out.

Nevertheless, despite their victories on the battlefield of opinion, Hamas and Hezbollah might be celebrating a bit prematurely. The military stakes have risen recently, due to Iran's involvement and some technological evolutions on Israel's side. After Israel's impressive military success against Palestinian terrorism in the second Intifada, from 2000 to 2005, Hezbollah, with Hamas following closely behind, developed a new tactic to circumvent Israel's increased security precautions. During the 2006 war, Hezbollah bombarded Israel with 4,200 rockets, fired from South Lebanon. These rockets were aimed at Israel's underbelly, its civilian population. Israel was caught unprepared, because plans for developing an interception system to defend against medium-range rockets and missiles (those with a range of under 160 miles) had been aborted for cost reasons in 2000.

Recently, however, Israel has come up with a partial solution: the "Iron Dome" system. A sufficient number of such systems will only be deployed in two or three years, a fact that has led some Israeli leaders to conclude that no further withdrawals from Palestinian territories are possible in the near future because it would expose Israel's major population centers, such as Tel Aviv, to rocket fire on a daily basis.

Meanwhile, Iran has absorbed Syria, Hezbollah, and Hamas into a coordinated system fighting Israel, disregarding ideological and ethnic differences. Hamas, worried about its independence, hesitated before giving in to Iran's advances five years ago. But the Iranians were willing to offer huge financial support to the Gazans at a time when help from the Gulf states was dwindling.

Syria, which has historically nurtured aspirations of becoming a regional power, also accepts Iranian supremacy. Western intelligence sources claim that terrorist training camps in Iran and Syria now host students from Lebanon and Gaza for months at a time, exchanging lessons learned while fighting Israel and on the battlefields of Iraq and Afghanistan. Iran uses Hezbollah and Hamas for a campaign "by proxy" against Israel, hoping to gradually erode the Jewish state's resistance while steadily stockpiling thousands of rockets in Gaza and in Lebanon. These weapons are also intended to deter Israel from any attempt at striking Iran's nuclear sites.

Israel is fighting a long and difficult battle against Iran-controlled terrorism. Having frustrated most suicide-bombing attacks, Israel now faces the complicated challenge of rocket warfare, for which no comprehensive strategic solution has yet been achieved. Therefore, military counterattacks will remain part of Israel's strategy, meaning that another round of fighting in the near future, in either Gaza or Lebanon, seems almost inevitable. As they listen to the leaders of Hamas and Hezbollah glorify their accomplishments in the recent wars against Israel, the Gazans and Lebanese should think long and hard about whether these propaganda victories have been worth the human cost.