Southeast Asia's Economic Poster Child Is Stalling - By Ben Bland

"Long live the glorious Communist Party of Vietnam," proclaims one of the many red-and-yellow official banners that loom over central Hanoi.

Like citizens of other one-party states, most Vietnamese have developed a handy ability to block out propaganda as they buzz through the streets on their ubiquitous scooters in search of subsistence, stability, or greater riches. "Is the Party really attempting to send a message to the people, or merely trying to reassure itself?" quips one Vietnamese academic, unwilling, like most in this police state, to speak openly about the future of the country's self-appointed rulers.

Vietnam's leaders have good reason to be nervous these days. After an extended period of rapid economic growth (above 7 percent per year) that ended in 2008, the economy has been floundering, beset by inflationary bubbles, large outflows of capital, the collapse of two major state-owned companies, and a crippling build-up of bad debt in the banking sector.

In the headlong rush to invest in Vietnam as it prepared to join the World Trade Organization in 2007, foreigners overlooked structural weaknesses such as widespread corruption, the clunky but politically powerful state-owned sector, and a dearth of investment in infrastructure, health, and education. With most economists forecasting that Vietnam will struggle to grow much more than five percent in the near future -- hardly fast enough to absorb the young people entering the labor force -- no one is ignoring these difficulties now. Indeed, the timing of the slowdown could hardly be worse: Other Southeast Asian emerging-market economies, including Indonesia and the Philippines, appear to have sharpened their acts, while Burma has peeked from the shadows in search of connection to the global economy after decades of isolation and stagnation.

Everyone, from government advisers to foreign investors, knows what it would take to get the economy back on the fast track. Hanoi must stop providing, monopoly licenses, cheap credit, and other privileges to state-owned companies and their private-sector cronies. The banking sector must be recapitalized and given sufficient incentives to channel capital to enterprises with the best prospects. And the government must get serious about preventing corruption, which has a synergistic relationship with all the other ills. The catch is that this would require more than technocratic tuning of policies, and an atavistic, secretive Communist Party is hardly a promising vehicle for such reform.