By Gregg Huff (University of Oxford)
This blog is based upon a grant awarded by the Economic History Society through its Carnevali Small Research Grants Scheme.
After the Second World War, south-east Asia saw many attempts to build socialist economies. These ranged from Ground Zero in Cambodia, to classic, centrally-planned socialism in Vietnam, to U Nu’s goal for Myanmar as a democratic, socialist, non-aligned state, which led to brutal military rule beginning in 1962. No south-east Asian socialist regime delivered significant, if any, economic growth or higher living standards. All were marked by dictatorship, violence against ethnic minorities, and corruption. With the partial exception of Myanmar, by the late 1980s a socialist economic development model had been abandoned everywhere in south-east Asia. A disregard for the importance of the price system and incentives was the fatal flaw undermining south-east Asia’s socialist economic experiments and the countries’ desire to industrialise, typically with heavy industry, develop, and modernise. By ignoring prices, these economies created shortages, bred black markets, and generated uncompetitiveness, inefficiency, and waste. Failure to recognise the need for incentives to elicit work effort stymied agricultural output and, thus, the means to finance industrialization.
The main aims of this blog are to analyse the workings of North Vietnam’s economic development model, to explore how prices and incentives were central to it, and to show why failure to take account of them helps to explain the model’s comprehensive failure. After the 1954 partition of Vietnam, the aim of the new North Vietnamese government was to build a socialism which was closely modelled on the Soviet Union, and which could be realised only through the development of heavy industry. A near identical strategy was implemented in re-unified Vietnam after 1975.
Development strategy in North Vietnam echoed the Soviet Union’s strategy from the 1920s and 1930s. In this Marxian-Soviet two-sector development model, industry would grow faster than agriculture, and heavy industry more quickly than light. Agriculture was seen as fundamental to the development of industry, because agricultural output was to yield a surplus to finance industrialization and allow the transfer of labour to the industrial sector. The surplus would come through land reform and the establishment of agricultural collectives, because the latter would generate production gains. Although the appropriation of this surplus by the state would temporarily depress peasant living standards, in the longer term living standards would rise as the economy grew and more consumer goods became available. The command economy and planning would create efficiency.
This blog shows that agricultural collectivization did not result in the output surpluses needed for industry. Lacking these surpluses, or agricultural exports as an adequate source of foreign exchange, Vietnamese industrialization relied heavily on foreign aid. Moreover, industrialization soon became cripplingly skewed towards heavy industry and was massively inefficient.
Given the validity of some key conditions, North Vietnam’s highly centralized command economy (and later Vietnam’s) might have more successfully moved towards rapid, industrial-based economic development. For this to happen, four crucial conditions would have had to be satisfied: a start from a relatively developed economy with a significant industrial sector and capacity to absorb technology; the availability of an agricultural surplus to finance industrialization; short industrial gestation periods, ideally of around a year as assumed by Marx in his ‘reproduction schema’; and the establishment of relatively efficient industry to supply goods to rest of the economy, even if investment in heavy industry outran light (Erlich 1967, pp. 238-46; Marx 1974).
Without question, the First and Second Indochina Wars created major barriers to Vietnam’s development. But, since none of the four outlined conditions were met, it seems unlikely that the Soviet development model which Vietnam adopted could ever have succeeded. In 1955, North Vietnam began from an economy of overwhelmingly peasant cultivators, had almost no industry, and was technologically backwards—the near opposites to meeting the first of the four conditions required for the model’s successful implementation.
The second condition, that agricultural collectivization would result in surpluses to finance industrialization, was not realised. Land reform was implemented and collectives established, but peasants resisted collectivization, both passively and actively. Mandated deliveries to the state, at far-below market prices, and the scarcity of consumer goods to exchange for agricultural products, offered no incentives to farm collectivized land or increase output. Instead, peasants withdrew work effort on collectives, concentrated on their private plots, and ate any surplus. Even so, food shortages remained a constant fact.
Between 1960 and 1975 in the north, collectivization failed even to add enough to the output of staple foods to keep pace with population increase. Although, per capita output of staple foods in Vietnam increased after 1975 with the addition to agriculture of the south’s Mekong Delta, output still fell far short of the surpluses needed to finance industry; see figures 1 and 2. Rather than the intended accumulation, the state had to rely on food aid and pay peasants high prices to obtain enough grain to sell to urban workers at highly subsidised prices. These subsidies in turn drained the state budget.
Figure 1. All staples and rice production in North Vietnam, 1955-75
Figure 2. All staples and rice production in Vietnam, 1976-86
The lack of consumer goods—the inducement goods historically fundamental to an expansion of peasant production—constrained agriculture. Simultaneously, agriculture constrained industry (Vickerman 1985). That constraint was overcome only through foreign aid, almost all from the Soviet Union and China. Aid largely financed North Vietnam’s industrialization, and most of aid went towards producer goods and heavy industry—electricity generation, coal, chemicals, iron, steel, and machine tools. Non-military aid was mainly in the form of loans and consisted chiefly of capital and intermediate goods.
An absence of domestic output of many intermediate inputs meant that they had to come from abroad as Vietnamese heavy industry expanded, a familiar pattern in import-substituting regimes. From 1960-4, the means of production, including intermediate goods, comprised more than 90 per cent of aid. Nearly all the rest of aid consisted of services rather than consumer goods. Little attention was paid to agriculture before 1965. After the start of that year, there was intense U.S. bombing until near the end of the war in 1975. During this time, ‘rural areas were left basically to fend for themselves’. Rural dwellers apparently lived at a near minimum subsistence level of consumption, while urbanites relied largely on imported rice and consumer goods from China (Beresford 1985, pp. 134, 163-4).
In regard to the third and fourth conditions for socialist industrial-based economic development, heavy industry both in North Vietnam and in unified Vietnam had long gestation periods, rather than developing as planners anticipated. It was notoriously inefficient, became a drain on resources, and turned into an enclave. Industry was hampered by shortages of raw materials and spare parts. By the early 1970s, many industries operated at half capacity or less. Underutilization contributed to high-cost structures. These led to a dependence on state subsidies funded through budget deficits, which added to inflation. Shoddy products were the general rule, as was corruption everywhere, including within the Party. The theft of state property for sale on the black market was widespread, as was state-enterprise reliance on the black market for inputs. Worker indifference, absenteeism, and moonlighting due to low wages, below subsistence for urban workers, were major problems.
Vietnam developed as a shortage economy in which administered prices bore little, if any, relation to supply and demand. Furthermore, the standard of consumption items and inputs for agriculture was often so low that these were hardly worth having or did not work at all. Domestically produced items, even if available, were shunned in favour of imported Chinese goods.
By the late 1970s, it was apparent to most that North Vietnam’s economy had stagnated and that the promised improvement in living standards had not materialized. Reform began in 1979, with decisions which opened the way for a series of piecemeal adaptations that moved the economy towards the market and use of the price system. These changes did not, however, achieve the hoped-for results. A decisive shift finally occurred after the Politburo meeting at the end of August 1986. By then, all senior Party leaders agreed with the slogan ‘renewal or death’ (doi moi hay la chef), although they disagreed about the speed of reform.
The development strategy followed by Vietnam might have seemed to accord with the concept of a ‘big push’. But, as formulated by Rosenstein-Rodan (1943), this depended on supply creating its own demand through the simultaneous establishment of a number of light, labour-intensive, consumer-oriented industries like shoe and textile manufacture. Workers in one industry would demand the output of their own and of other industries. Industrial development would provide most wage goods and, through expanding the domestic market, allow the realization of scale economies. The argument excluded producer goods such as steel, chemicals, and petrochemicals on the grounds of comparative disadvantage. Unlike Rosenstein-Rodan’s idea of a ‘big push’, Vietnamese heavy industry did not realise scale economies and had few linkages to other sectors of the economy. Most consumer goods and raw materials still had to be imported from China.
Vietnam’s development strategy after independence in 1955 was poorly suited to a hardly developed, labour-abundant, agricultural economy. By the late 1970s, arable land per farm worker was just 0.46 of a hectare (compared to 1.0 in India and 48 in the United States). Unemployment in the mid-1980s was estimated to be at least 15 per cent, and possibly 20 per cent, and there was high underemployment. These considerations pointed to the appropriateness of a labour-intensive, export-oriented economic strategy, and although the advantages of this began to be recognised prior to the late 1980s, it was not fully embraced. However, examples of rapid growth elsewhere in Southeast Asia, especially Singapore, could not be ignored and soon led to Vietnam’s full participation in the global economy and its current system of a developmental state capitalism combined with Communist Party authoritarian rule.
The author thanks Mike Montesano for a number of insightful comments.
To contact the author:
Beresford, M., National unification and economic development (New York, 1989).
Erlich, A., ‘Development strategy and planning: the Soviet experience’ and ‘Comment’ (by A. Bergson) in M. F. Millikan, ed., National economic planning: a conference of the universities-national bureau committee for economic research (New York, 1967), pp. 233-78.
Marx, K., Capital: a critique of political economy, vol. 2, The process of circulation of capital (London, 1974).
Rosenstein-Rodan, P. N., ‘Some problems of industrialization in eastern and south-eastern Europe’, Economic Journal, 53 (1943), pp. 202–11.
Vickerman, A., ‘A note on the role of industry in Vietnam’s development strategy’, Journal of Contemporary Asia, 15 (1985), pp. 224–34.