Will U.S.-Cuba Deal Match Vietnam's Economic Path?

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By Lien Hoang

July 15 – Communist solidarity has kept Cuba and Vietnam close friends for decades. Now, however, it could be the jump to capitalism that truly highlights what they share in common.

Cuba and the U.S. will open embassies this month, at the exact time that Vietnam is celebrating 20 years of normalized relations with the U.S. The transition that has transformed Vietnam—including the influx of foreign investment, the end of an embargo and a diminished role for the state—could inform Cuba's further integration into the world economy.

Foreign investment 

More than half of Vietnam's exports from 2003–2013 came from foreign direct investment (FDI), data from the General Statistics Office shows. That's a far cry from the Cold War days when Vietnam traded mostly with other communist nations and withered under a U.S. trade embargo. In recent years, it has discarded the cap on foreign stakes in listed companies, opened up most industries to foreign investment and offered massive land and tax deals to lure corporations like Samsung and Intel Corp.

“Frankly speaking, one of our major success stories is how we recruit and attract FDI into Vietnam,” said Nguyen Thanh Binh, director of the Vietnam Chamber of Commerce and Industry's business information center.

No doubt Cuba, too, will be seeking more investment from abroad as its relationship with the U.S. improves. Havana is discussing a deepwater port project with Brazil and a golf tourism venture with Britain, for example, in addition to the trade already happening with Venezuela, Argentina, Mexico, Canada, China and Europe.

Mario González-Corzo, associate professor of economics at Lehman College of the City University of New York, predicts that Cuba will ease foreign restrictions in the areas of transportation, construction, tourism, retail, sugar and natural resources like oil and nickel.

“Cuba is definitely undergoing a market socialist process,” said González-Corzo, who was born in Cuba.

Socialism with Cuban Characteristics

As González-Corzo describes it, market socialism “mixes the efficiency and discipline of the market and the social justice component of socialism.”

Just like Vietnam and China before it, Cuba faces a future of doublethink as it phases in capitalist measures while maintaining one-party rule under communism in name only. Beijing has famously called this “socialism with Chinese characteristics.”

But Cuba, with an economy of $78 billion and a population of 11 million, evokes parallels less with China and more with Vietnam, whose $186 billion economy covers 91 million people. Both countries have endured an anachronistic U.S. trade embargo left over from the Cold War.

As executive director of the Fund for Reconciliation and Development, John McAuliff is helping the U.S. normalize ties with Cuba, as he did with Vietnam in the 1990s. Back then, he was shuttling between Hanoi and Washington, advising officials on both sides that the embargo “wasn't doing anyone any good.” McAuliff said some U.S. allies allowed their companies to do business with Vietnam early on, which smoothed the path until the U.S. scrapped the embargo.

“The business community was in favor of it—which seems to be the situation now with Cuba,” McAuliff said by Skype from New York.

State Economic Role 

The absence of an embargo won't matter as much if Cuba fails to lift its own economic barriers, analysts say. Currently, most firms must go through the government to import or export goods. The state itself runs enterprises that make up 80–85 percent of the economy, which González-Corzo expects will decline sharply in the near term.

If it privatizes these state-owned enterprises, Cuba could avoid a mistake made by Vietnam, which calls this process “equitization.” When their companies privatized, Vietnamese bosses of state firms became rich overnight because of dodgy valuations. Former legislator Ton Nu Thi Ninh said that's why the government needs to have the auditing done by agencies that aren't prone to manipulation.

“I think Cuba should be careful, when privatizing or equitizing, to rely on independent, objective, and transparent agencies that are paid well,” said Ninh, who also had a long career in the foreign service that included a state visit to Cuba.

The island nation is likely to invite more private enterprise by curtailing the preferential treatment granted state firms, setting up joint ventures between public and private companies and letting businesses hire workers outside the family.

Vietnam did the same, starting in the 1980s, when communist leaders eschewed central planning to make way for the capitalist overhaul called Doi Moi. Vietnam began to open up to private enterprise, abandon fixed prices and quotas and let farmers decide how to use land and sell crops.

After bouts of mass starvation, agricultural reforms were key to turning Vietnam into a major food exporter that could feed itself. Today, insecurity in the food supply also plagues Cuba, which imports 70–80 percent of its food, according to the U.N. World Food Program. McAuliff said the country could increase efficiency if it followed in Vietnam's footsteps and granted land leases for 50 years, rather than 10 years currently.

It is also hurt by production targets. González-Corzo said rice farmers, for example, had to sell 80 percent of their harvest to the government at set prices until 2008, when that number dropped to 60 percent. If Cuba relaxed more of these rules, farmers could reach their full potential, he said.

“When you really study the Cuban economy, at its core Cuba is by definition and by practice an agricultural country,” González-Corzo said.

Lessons from Vietnam 

As Cuba restructures its economy, Binh, from the Vietnamese chamber, said it could take three main lessons from Vietnam. First, let the market decide prices. Second, revamp the legal and tax systems. After Vietnam opened up, the government introduced a raft of legislation it had never needed before, with new laws on private property, investment, enterprise and competition. It also had to rethink taxes by adopting generally accepted accounting principles and introducing consumer and value-added taxes.

The third lesson is to beware of hyperinflation, he said. During different spurts of liberalization, Vietnam's economy overheated after a spike in investment, such as when it joined the World Trade Organization in 2007. Prices jumped most severely, by 300 percent or more, in the Doi Moi era of the mid-1980s. Besides investment growth, other explanations given for Vietnam's unwanted inflation include money-printing to cover deficits, currency revaluation and shortages in supply.

“We, the socialist country, are very concerned with stability,” Binh said, suggesting that stable macroeconomics is needed to deter social unrest.

Ninh agreed that Cuba should ensure that any transition is gradual. The veteran diplomat said if she could change one thing about Vietnam's reforms of the last three decades, it would be to balance “private greed” with social welfare. While Cuba is known for its quality health care and education, Vietnam in the post–Doi Moi era hasn't done as much to curb inequality.

“That's my worry about Cuba,” Ninh said. “They could open the door to the production of goods and trade of services. But they should be careful to preserve what they've achieved in terms of public services.”

To contact the reporter on this story: Lien Hoang in Ho Chi Minh City at lhoang@bnaglobal.com

To contact the editor responsible for this story: Jerome Ashton at jashton@bna.com