Borrowing market economics

Kim Dong-ho
The author is an editorial writer of the JoongAng Ilbo.

The contest between market economies and planned economies ended a long time ago. The evolution of China and Vietnam is living proof. The socialist roots of the two countries remain intact — only in formality. They still disallow free competition, free-market mechanisms and private possessions. As they uphold justice and fairness explicitly defined under Marxism, their governments — in other words, the state — control production means to ensure equality of the people.

But that is in theory. The reality is entirely the opposite. The Chinese and Vietnamese economies run primarily on market economy models. China in 1978 declared opening and reform, and Vietnam promoted market through its Doi Moi initiative in 1986.

As a result, socialism has become extinct. Nearly 30 years has passed since the collapse of the Soviet Union in 1991, and Chinese and Vietnamese socialism also failed. It has been rapidly replaced by market economics. Now, private enterprises have towered over state corporations. Private companies from China and Vietnam have emerged as major threats to American, Japanese and Korean companies. The Financial Times projects that Vietnamese companies will soon compete with multinationals.

Some of them have already become as big as U.S. multinationals and Korean chaebol. Huawei, Tencent and ByteDance have all become formidable challenges to U.S. players. Vingroup of Vietnam, which is called “Samsung of Vietnam,” expanded its business from services to manufacturing motor vehicles and smartphones while tapping overseas markets.

The ban on private ownership, a typical feature of socialism, has become meaningless today. Land ownership in China and Vietnam has become almost liberalized. Since China began opening and reform, land ownership became permissible. Individuals can lease land up to 70 years. They won’t likely lose their wealth even after 70 years. In China and Vietnam, children of wealthy families study overseas and land good jobs when they return. They are not only paid well, but they inherit money from their parents.

Although the market economy builds wealth of individuals — and nations — China and Vietnam emphasize that they are rooted in socialism. They refuse to accept that capitalism overrules socialism. Beijing even touts “modernization of socialism” and toughens its control grip. China seeks to justify the legitimacy of its socialist system through the so-called Chinese Dream to overtake the United States by 2049 to celebrate the centennial of the founding of the Communist Party of China (CPC). Although its facade is entirely capitalist, Vietnam also joined the “crusade” by stipulating in its Constitution that a nationalized economy plays a leading role in the economy.

Still, capitalism — and market economy — feed their newfound confidence. Capitalism has seeped deeply into China, with domestic demand accounting for a whopping 70 percent of its gross domestic product (GDP). In Vietnam also the share of state companies in the GDP has shriveled below 30 percent due to the dramatic growth of its private sector.

Its development also has followed the typical market economy model. Foreign capital is the primary driver. China has created free economic zones to draw foreign investments, and Vietnam also followed in China’s footsteps to suck in capital and technology from advanced countries. Once workers have become skilled through technology transfers, home-grown manufacturing and innovation become possible.

Samsung Electronics accounts for a quarter of Vietnam’s exports. Thanks to technology transfers from developed countries, Vietnam has become confident enough to manufacture automobiles and smartphones on its own. Vietnam’s state-owned telecommunication company Viettel is expected to become the world’s sixth to commercialize 5G wireless service in October. It excluded equipment from China’s Huawei amid an ongoing trade and technology war between the United States and China. Hanoi’s siding with the United States — despite a deadly war between them — would have been unthinkable 10 years ago. Nobody would have imagined America’s pitiful state of trying to muster support from allies to put the brakes on China’s high-tech rise. Soon, companies from socialist nations will be competing with one another.

How long the strange hybrid system will fuel growth in the two socialist nations remains uncertain. What kind of synergy — and limits of a market economy under state control and dictatorship — can be produced could define the future of China and Vietnam. The common belief is that a single-party rule system would inevitably cause some fissures. The Financial Times observed that many Chinese have come to discover a huge difference between individual rights and state power from the coronavirus crisis. China takes pride in having contained the virus spread through a lockdown of the city of Wuhan, home to 11 million people. But the FT noted that the Chinese have become critical of their government for worsening the crisis by blocking information. The New York Times pointed out that Beijing was undermining Hong Kong’s freedom by toughening its control under the pretext of virus containment.

Beijing’s censorship led the virus build-up to a global pandemic. The FT noted that many Chinese felt humiliated when authorities stopped people randomly to check on their temperature. The highhandedness is also prevalent in economic activities. The invisible hand is often behind private enterprises. The government has stakes in many private enterprises. Seating political figures in chief executive posts or meddling in management affairs is commonplace in China.

China’s severe wealth discrepancy is also a weakness in state-controlled capitalism. The wealth gap between the southeastern coastal region and western mainland in China has not narrowed despite the country’s staggering progress. Over 400 million in rural areas are restricted in moving to urban regions. The wealth gap is also –widening in Vietnam. Venezuela fell into poverty due to the spendthrift leftist government. China and Vietnam have grown more than 6 percent annually before the Covid-19 crisis in 2020. Whether they admit it or not, capitalism drove their economies.

Stuck in regulation

The fast expansion of China and Vietnam can be attributed to business liberalization. Although they initially condoned it to fight poverty, the governments now do not hesitate in allowing new businesses if they can raise competition to the levels of the United States, Japan and Korea.

But Korea is now the laggard, and the economy has choked under a myriad of old and new regulations. The Moon Jae-in administration dramatically raised the minimum wage and shortened work hours to undermine corporate sovereignty. It has also proposed bills on commerce, fair trade and financial group supervision to add more regulations.

Korean companies must fend off their fast-rising Chinese and Vietnamese rivals while they are chained to regulations. The government has been providing incentives for reshoring to stimulate the economy amid the Covid-19 crisis, but regulations are scaring away companies.

Moreover, foreign companies are insecure in the state-controlled economies of China and Vietnam. In the early stages of Covid-19 outbreaks, Vietnam stopped issuing visas and only permitted exceptional entries for engineers from Samsung and LG.

The move suggests the virus scare cannot stop Vietnam’s determination to draw technology. However, once homebred companies have become self-sufficient, the country could kick out foreign companies. Korea Inc. is arguably the most vulnerable to the risk.

In the early stages of reform and opening, China and Vietnam attracted foreign capital through near-zero taxes and special regulations. But after their own companies grew, they scaled back benefits for foreign enterprises. Vietnam has begun imposing heavy taxes on multinationals like Unilever and Coca Cola. FT projected “Vietnamization” just as China did after Chinese companies become competitive enough.