
By M. Rizwan Muzzammil –

M. Rizwan Muzzammil
Introduction
The recent presidential election revealed substantial public support for a pro-socialist/communist political party. Sri Lankan governments over seven decades have been, in general, centrally planning the economy and society. This central planning overrides the choices made by individuals. The author Dr. Rainer Zitelmann, in his books The Power of Capitalism and In Defence of Capitalism, provides many examples of the damaging effects of central planning.
Instead of relying on theory, Dr. Zitelmann uses history to show why central planning fails. Not only does he compare society before and after central planning (e.g. China), he also compares societies that are of the same race, culture, religion, and language, yet divided by governance method—for example, East and West Germany, North and South Korea, and Venezuela and Chile. In every case, centrally planned societies struggled, while those with less government interference grew wealthier and more peaceful.
In Dr. Zitelmann’s latest book, How Nations Escape Poverty, the example of Vietnam is described. Here is a country similar to Sri Lanka in terms of natural resources and having an Asian culture. Both countries were also under colonial rule, suffered through bitter wars, and have been subject to government mismanagement, corruption and bankruptcy.
The Economic Struggles of Vietnam Before Doi Moi
After the war with the US, Vietnam adopted a socialist centrally planned economy between 1976 and 1986. The government controlled nearly every aspect of life, leading to inefficiency and corruption. Citizens were often left dependent on ration cards for basic necessities, waiting in long lines (often in the wee hours of the night) for meagre amounts of food.
This period, known as the “Subsidy Period,” was marked by systemic failures. The government’s control over economic activities not only stifled productivity but also led to severe food shortages. By 1980, Vietnam produced 14 million tonnes of rice annually, much below the 16 million tonnes required to feed its growing population. As a result, chronic malnutrition and poverty prevailed, creating a backdrop of desperation. One Vietnamese recalls that his family of five shared just three bowls of only rice for meals, with meat being a rare luxury reserved for special occasions.
During this period, state officials frequently abused their power in food distribution. Another Vietnamese noted: “The officials were not friendly. They were bossy and had power. We felt like we had to beg for the food that was rightfully ours.” Citizens were forced to accept whatever food the officials gave them, often receiving less than their due, as corrupt officials would sometimes add rocks to the rice sacks to reduce the amount given to families. In some cases, the better quality rice was sold on the black market or kept by the officials for themselves.
In 1986, annual inflation was 582%. Since monthly salaries were not sufficient to meet expenses, households had to find extra income to compensate. Many families turned one room of a three-room apartment over to pig-farming, tolerating the noise, odor, and poor hygienic conditions.
In 1990, Vietnam’s per capita GDP stood at just $98, making it the poorest country in the world, behind Somalia ($130). Between 1976 and 1980, GDP growth was a meagre 0.4% per year. Comparisons with other socialist nations highlighted its backwardness; for example, Vietnam’s electricity production per capita in 1985 was 87 kWh, while in East Germany and Hungary it was 6,839 kWh and 4659kWh respectively.
The government’s policies had created an environment where food scarcity and economic despair were the norm.
The Doi Moi Reforms: A Radical Shift
In 1986, the Vietnamese communist government initiated the market-oriented Doi Moi reforms, recognising that fundamental changes were essential to prevent the country from descending further into crisis.
Vietnam’s leaders did not try to implement a new system from the top down in one fell swoop, but started with experiments at the local level, and where these were successful, they were transferred to the state level.
The reforms initially focused on the agricultural sector, which accounted for 70% of the workforce and 41% of the GDP at the time. Farmers were granted the right to lease land from collectives and sell their produce at market prices. This shift represented a significant departure from the collectivist model that had previously stifled agricultural productivity.
By the late 1980s, these reforms bore fruit: Vietnam achieved self-sufficiency in rice production. The new policies incentivised farmers, leading to a substantial rise in agricultural output. In the years that followed, Vietnam became one of the largest rice exporters in the world
Important changes included granting permission for private manufacturers to employ up to ten workers (later increased), 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, and return of businesses that had been nationalized to their former owners/relatives.
From 1990 to 1996, Vietnam’s GDP grew at an impressive average annual rate of 7.9%, making it one of the fastest-growing economies in Asia, second only to China. Per capita GDP increased from the aforementioned $98 to $329 in 1996 and to $4160 in 2022.
The reforms also had a significant impact on poverty reduction. In 1993, 79.7% of the population lived below the poverty line. By 2006, this figure had dropped to 50.6%, and by 2020, only 5%. Extreme poverty, measured at $1.90 per day, plummeted from 52.3% in 1993 to just 1% by 2020. This substantial decline in poverty was accompanied by improvements in life expectancy, which rose from 62 years in 1980 to 73.6 years by 2020.
Legal Reforms and Their Impact During Doi Moi
The Doi Moi reforms were accompanied by a series of pivotal legal changes that facilitated Vietnam’s transition from a centrally planned economy to a market-oriented one. One of the most important steps was the 1987 Foreign Investment Law, which allowed for 100% foreign ownership of businesses and provided protections and tax incentives to investors. This law attracted billions of dollars in foreign direct investment (FDI), modernising Vietnam’s infrastructure and boosting industries like manufacturing.
Additionally, the 1990 Enterprise Law and its 1999 revision opened the door for private businesses, allowing entrepreneurs to register companies, hire employees, and participate in trade. These laws led to a flourishing private sector, with thousands of new enterprises contributing to employment and economic growth.
Another major reform was the 1993 Land Act, which gave farmers long-term land-use rights, enabling them to lease, inherit, and transfer land. This shift incentivised farmers to increase agricultural productivity, turning Vietnam into one of the world’s largest rice exporters.
The 1992 Constitution played a critical role in legitimising private ownership and recognising the coexistence of state, collective, and private sectors. This legal clarity encouraged both local and foreign investors to join the economy.
Finally, Vietnam’s entry into the World Trade Organization (WTO) in 2007, preceded by several laws liberalising trade, further integrated Vietnam into the global economy. The country’s exports surged, and its economy became increasingly competitive on the world stage. The signing of the Bilateral Trade Agreement (BTA) with the United States in 2001 marked a significant milestone, increasing trade volumes between the two countries by 1200% over the next decade.
These legal reforms were instrumental in transforming Vietnam’s economy. They laid the foundation for rapid GDP growth, significant poverty reduction, and the development of a vibrant private sector that continues to drive Vietnam’s modern economy.
Conclusions
Vietnam’s experience is an example to Sri Lanka as it illustrates the transformative power of market-oriented reforms. It is commendable that the Vietnamese communist party has pragmatically pursued what has proven to work. The overall success of Doi Moi demonstrates that reducing government control, encouraging private enterprise, and integrating into the global economy can lead to substantial improvements in economic growth and living standards.
From economic theory, there are many benefits to reducing government control and privatising. Three such advantages are listed below for the reader’s reflection:
1. Reduced corruption: Corruption typically breeds in enterprises that are government run, or are close to government, as the lack of competition reduces the pressure to cut costs and operate efficiently. By reducing government involvement the scope for corruption decreases, as private businesses are driven by profit motives and accountability to stakeholders.
2. More access to capital for private business: Government typically crowds out and raises the cost of capital for private business when it borrows. This borrowed capital usually does not contribute to economic growth as State Owned Enterprises (SOEs) are generally not focused on profit. By privatizing SOEs, the government provides a double-boost to the economy, by opening up markets and making capital cheaper and more accessible.
3. Lower taxes and cost of living: When government workers spend their incomes they increase the demand, and hence prices, of goods and services. The government salary competes with the salary of private citizens, who have, in fact paid the salaries of government workers with their tax money. Private citizens are thus doubly hurt when they are forced to pay taxes, and when those same taxes are used to raise the cost of living. By reducing government workers (through privatising), both these effects can be reversed and the relief to citizens can be substantial.
*The author is a civil engineer based in Singapore. He can be reached on write2rizwan.m@gmail.com)
ramona therese fernando / October 25, 2024
M. Rizwan Muzzammil,
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I agree with most of what you say about Vietnam except that it cannot be compared to Sri Lanka.
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US war with Vietnam left the whole country in absolute devastation. They had little to no US/Western help and little to no help from the Communist bloc countries. They had zero means of survival except through centralized planning.
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It would have been an impossibility to implement a market-driven system for over a decade. Only after that could they gradually initiate the market-orientated reforms. Right now, it is hardly of the Western capitalistic democratic model, but is a single party authoritarian political system. Market-system is not a free one, but one that is heavily scrutinized by the state. While they encouraged foreign ownership of businesses, placing of their country’s money in overseas accounts as another form of investment opportunity is done very cautiously. Foreign ownership of business is also not about the selling of large state-owned enterprise (except for some foreign investment thorough stocks and shares), but is mostly about multinational companies opening up subsidiaries Vietnam.
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ramona therese fernando / October 25, 2024
Sri Lanka on the other hand was hardly devastated in the same way as Vietnam was (only the North was, with many Northerners who left the land holding substantial amounts of money of their people). Country was able to get many loans from China to develop the country after the war. However, after a spate of infrastructure building with no plan in place to make the infrastructure productive, many more loans were taken out again and placed on foreign investment and offshoring schemes rather than being placed on developing the country for the people. Foreign investment was about the wholesale of our state-owned enterprises, with little to no multinational companies opening up subsidiaries in our land.
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ramona therese fernando / October 25, 2024
With the government-controlled system of free-trade in Vietnam, long-term land-use rights given to farmers ensured that they indeed worked on their farming and did not blindly transfer and sell their lands to commercial development both local and foreign.
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There was a high chance of the opposite happening in Sri Lanka with the land-ownership given to farmers. Unregulated commercial development would have allowed quick selling of land for the quick buck, as our farmers were already in much debt (the Vietnamese farmers were never in any debt).
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Lester / October 25, 2024
Communism/Marxism or any extreme form of socialism usually fails at the end. A moderate level of socialism might work in a country like Iceland, with an ethnically homogeneous population. But then look at a place like Sweden, where immigrants have abused the welfare system: https://www.gisreportsonline.com/r/sweden-immigrants-crisis/. Once you introduce factors like unmitigated immigration to the socialist state, the incentive to work (productive capacity) is no longer there. In statistical terms, there are many more millionaires in the USA than in Europe. Americans have strongly rejected socialism, time and again. They understand that the superpower status of the USA is built on a foundation of capitalism. One should also read Orwell’s “Animal Farm” to understand why extreme socialism does not work.
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