By Kyle Springer

View of a construction scene in Ho Chi Minh City along the Saigon River. Source: cseward’s flickr photostream, used under a creative commons license.

Reform-minded Vietnamese and foreign investors were disappointed when Vietnam’s National Assembly passed a new constitution in late November without making any changes on the dominant role of state-owned enterprises (SOEs) in the economy. The reaffirmation of the leading role of SOEs is somewhat puzzling, considering Vietnam is a negotiating partner in the Trans-Pacific Partnership (TPP) trade agreement with the United States, Japan, and eight other countries. A chapter in the TPP is dedicated to addressing market-distorting advantages SOEs currently enjoy in some member economies.

However, reforms through constitutional amendments should not be seen as the only avenue for structural reforms in Vietnam. Neither should Hanoi’s failure to ratify a more market-friendly constitution be seen as an indicator of the  country’s readiness for reform. Vietnam has demonstrated an ability to respond to the demands in a number of trade liberalization initiatives in the past.

In 2001, the United States signed a bilateral trade agreement with Vietnam, allowing Vietnamese goods more access to the U.S. market in exchange for Hanoi adopting a package of market-liberalizing reforms. These reforms required Vietnam to improve its business environment and make it more favorable to foreign investors. One change was for Vietnam to allow U.S. companies to import and export products without having to go through local partners. Previously, foreign companies had to rely on licensed Vietnamese importers, many of which were SOEs.

When Vietnam joined the World Trade Organization (WTO) in 2007, it was also required to undertake a number of reforms that involved reducing the dominant role of SOEs. Vietnam opened its banking sector to privately-owned banks in the same year; it now has 41 private banks and 53 branches of foreign banks, compared to just five state-owned banks earlier. Vietnamese authorities also had to give foreign companies access to the supply of goods and services to its SOEs on commercial terms in accordance with WTO regulations.

Vietnam takes its trade relationship with the United States and the prospect of joining the TPP seriously, just as it did with normalizing trade relations with Washington and joining the WTO. According to U.S. officials involved in the TPP negotiations, Vietnam has been cooperative in discussions on the issue of SOEs. The United States is now Vietnam’s second largest trading partner, after China, and bilateral trade is expected to keep growing. The importance of this economic relationship will cement Vietnam’s commitment to the TPP and to some extent its willingness to compromise on key economic issues.

At some point in the future, economic reforms must go hand in hand with political reforms; but it is unclear whether Vietnam’s ruling elite understand this. Political reforms that allow for more transparency and rule of law will lead to greater investor confidence, and open the door for more economic growth. Despite having a robust manufacturing sector, Vietnam still lacks a vibrant private sector and supporting industries, due to the near-monopoly of SOEs in many sectors of the economy. By signing up for the TPP, Vietnamese economic leaders recognized they cannot continue to follow the Chinese growth model indefinitely. What remains to be seen is how far they will go in embracing reforms and how soon they will level the playing field between SOEs and the private sector.

Mr. Kyle Springer is a researcher with the Sumitro Chair for Southeast Asia Studies at CSIS.