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Cablegate: How Economic Decisions Get Made in Vietnam

VZCZCXRO5457
RR RUEHCHI RUEHDT RUEHHM
DE RUEHHI #0816/01 1241010
ZNR UUUUU ZZH
R 041010Z MAY 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 5264
INFO RUEHHM/AMCONSUL HO CHI MINH 2968
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS COLLECTIVE
RUEAIIA/CIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHZS/ASEAN REGIONAL FORUM COLLECTIVE

UNCLAS SECTION 01 OF 04 HANOI 000816

SIPDIS

STATE FOR EAP/MLS; EB; EB/ESC/IEC
STATE PASS TO USTR DBISBEE
USDOC FOR 4430/MAC/ASIA/OPB/VLC/HPPHO
USDOE FOR INTERNATIONAL AFFAIRS
STATE PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN

SIPDIS
SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: ECON ETRD WTRO PREL PGOV VM
SUBJECT: HOW ECONOMIC DECISIONS GET MADE IN VIETNAM


HANOI 00000816 001.2 OF 004


(U) THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET.

REF: A) HANOI 221 B) HCMC 384

1. (SBU) Summary: In place since June of 2006, Vietnam's Prime
Minister and his deputy have taken greater control of economic
policy and its implementation, increasingly dominating the
traditional consensus decision-making process of the Politburo.
While Hanoi-based economists state that the Communist Party of
Vietnam (CPV) still plays a key role in setting economic strategy
and important policy matters, they emphasize that these men have won
greater leeway within the CPV in the wake of economic policy
successes exemplified by Vietnam's WTO entry and the country's
strong economic performance. In their opinion, the efforts of the
Prime Minister will be positive for economic reforms and government
efficiency. In the south, however, contacts aligned with former PM
Vo Van Kiet hold a different point of view and see PM Dzung as less
of a reformer, dominating the Politburo and using his authority to
strengthen centralized Party control.

2. (SBU) The CPV is supposed to set overarching economic strategy
and direction for the Government of Vietnam (GVN) while relevant
government agencies draft specific measures, the public discusses
the proposals, and the National Assembly passes laws. Vietnam's
vaunted consensus-driven process ensured a balance of interests but
was both slow and cumbersome. The concentration of power in Prime
Minister Dzung has already led to faster and clearer decision
making, but contacts differ widely on whether Dzung is fundamentally
a reformer or a hardliner. End Summary.

3. (SBU) According to foreign and domestic economic analysts,
economic decision making in Vietnam has undergone an important shift
under the new leadership of Prime Minister Nguyen Tan Dzung and
Deputy Prime Minister Nguyen Sinh Hung, with the government cabinet
under the two men obtaining greater, though by no means complete,
control over economic decisions. Il Houng Lee, Senior IMF
Representative to Vietnam, told Econoff that while the CPV used to
focus more on day-to-day economic management in the past, it now
appears to be focusing more on strategy, giving the cabinet, under
PM Dzung's leadership, responsibility to set policy. "The party is
starting to focus more on stability issues and leaving policy issues
alone," Lee said, noting that Dzung and Hung's successes with
Vietnam's WTO accession and Vietnam's impressive economic
performance had helped the men gain credibility among other leaders
in the CPV. While Lee and others caution that this expanded power
is still highly circumscribed, Lee added that "the current
arrangement is to allow Dzung to have the power to run the economy,
with the old guard stepping back more and observing him. He seems
to have carved out his own economic powers." Dzung's rapport with
foreign donors is giving him "extra mileage" with the CPV in the
policy-making process, he added, an arrangement he does not expect
to change as long as Vietnam's economic success continues and the
country's "political stability" -- and the dominance of the CPV --
is not threatened. The previous World Bank Country Director and
Resident Representative Klaus Rohland put the shift a different way:
while the consensus decision making process meant that in the past
80 percent of relevant stakeholders had to be on board before a
decision was made, Dzung's stature meant he only needed 60 percent
in favor.

4. (SBU) Dzung's background is well known. He spent his teenage
years as a Vietcong medic fighting in the Mekong Delta and moved
into district and provincial government in 1975. Brought to Hanoi
to serve in the Ministry of Public Security, he later served as the
Director of the CPV Central Committee's Economic Commission, in
charge of the Communist Party of Vietnam's financial affairs and as
Governor of the State Bank while simultaneously serving as Deputy
Prime Minister, in 1998 and 1999. He also served as Chairman of the
National Financial and Monetary Council and as head of the Party
Central Committee Steering Board for Reorganization of State-Owned
Enterprises. While some observers assert that Dzung, lacking a
formal economic education (his degree is in law), does not have a
solid grasp of economics, Lee and other economists note that his
background provides him with a comfort level with economics that has
served him well to date. They say his extensive experience with
modern economic decision making makes him far different than his
war-generation predecessors, including Phan Van Khai, the previous
Prime Minister from 1997 to 2006. While it should be remembered
that Dzung remains a product of and core insider within the CPV, he
also represents a new breed of more technocratic leaders within it,

HANOI 00000816 002.2 OF 004


international economists note.

5. (SBU) An alternative view comes from journalists and
businesspeople in southern Vietnam. In their view, PM Dzung is the
consummate politician, not a technocrat. Since becoming Prime
Minister, they say he has orchestrated cult of personality style
media coverage to emphasize his leadership. Vietnamese newspapers
run daily front-page photos of the PM engaged in a range of duties -
meeting the people, meeting with government workers, meeting with
foreign visitors. His views on a broad range of subjects are daily
headlines: "PM Dzung orders swift action against bird flu", "PM
encourages Thais to do business in Vietnam", "PM urges all
localities to battle El Nino". Vietnam's other leaders, President
Nguyen Minh Triet and CPV General Secretary Nong Duc Manh, have a
much lower media profile. PM Dzung is also using the Internet in
ways not previously attempted by Vietnamese leaders; he is the first
Prime Minister to engage in an online chat with Vietnamese
citizens.

6. (SBU) HCMC contacts say PM Dzung's military and law enforcement
background is much stronger than his economic experience. They
attribute the Prime Minister's rise to power through his work in
Vietnam's security apparatus. His economic work came fairly late in
his career and was undertaken simultaneously with other positions.
One journalist told the Consul General that PM Dzung took advantage
of an unexpected vacancy when he took over the governorship of the
State Bank of Vietnam for a year, while he also was serving as
Deputy Prime Minister; the journalist characterized PM Dzung's SBV
service as a political move calculated to polish his economic
credentials.

7. (SBU) Below the PM are two Deputy Prime Ministers, one of whom
traditionally takes the lead for economic matters. This DPM is
currently Deputy Prime Minister Nguyen Sinh Hung, a reformer who was
elevated to the position last June from his previous role as
Minister of Finance, a job he had held since 1996. Hung holds a
Ph.D. in economics earned in Bulgaria and is the government's
strongest and steadiest economic hand. Hung currently chairs the
government's National Monetary and Financial Advisory Council and
even makes some decisions on behalf of the Prime Minister, said
Vivek Suri, an Economist at the World Bank in Hanoi.
"The DPM position is key because he, not the PM, will often sign
important economic legislation," he said. For example, a recent law
related to banking reform was signed by DPM Hung, Suri said. "Hung
is quite dynamic," said Suri. "And he is in charge of economic
policy, so you have a champion of reform holding the key economic
position." DPM Hung also pronounces frequently on issues regarding
Vietnam's stock market.

Role of Party and Government in Policy Changing
--------------------------------------------- --

8. (SBU) Though the formal decision-making process is highly
regimented, economists note that decisions are highly reliant on
informal power networks. These informal networks are critical in
influencing government and Party bureaucracy, which has the power to
block or delay new measures because of the Vietnamese traditional
system of consensus-based decision making.

9. (SBU) Formally, the Communist Party sets the strategic direction
of economic policy, but first consults with a range of researchers
and others before issuing guidelines for government officials to
implement, economists note. The broad outlines of strategy are
outlined at each five-year Communist Party Congress. The last
Congress, held in May 2006, for example, gave approval for the
continued integration into the international economic community via
the World Trade Organization and "equitization," the GVN term for
the transformation of State Owned Enterprises (SOEs) into joint
stock companies and their partial privatization, Suri noted. Aside
from the Congress, plenums held three or four times a year also
issue guidelines for policy makers. In cases of sensitive issues
the Politburo also provides guidance via resolutions, many of which
are not public, leading many analysts to decry the GVN's lack of
transparency. The CPV's Central Economics Commission, which Dzung
used to head, is the key party organ examining economic policy,
though six other CPV economics committees also examine economic
issues. Recent public resolutions included those on judicial
reform, banking reform, and human development, Suri said. The most
recent CPV Plenum, held in January, also issued an important
directive on the Vietnamese military divesting itself from a range

HANOI 00000816 003.2 OF 004


of economic activities, a measure economists are eager to see take
place (reftel).

10. (SBU) After the Party Congress, the National Assembly passes a
five-year Socio-Economic Development Plan (SEDP), used by the Prime
Minister and government policy makers generally. Using the SEDP and
other CPV instructions as a guide, the PM then directs relevant
ministries to draft specific new laws and/or policies. "The Prime
Minister looks at the SEDP everyday," said Le Danh Doanh, a senior
economist at for the government-owned Central Institute for Economic
Management (CIEM). The generation of policy specifics is the
responsibility of the department director, with the government often
holding inter-ministerial workshops or passing new policies,
regulations or draft laws throughout the government. These measures
are often made public for debate, and it is not unusual for
different government officials to air opposing views in the media.
Such public debate is part of Vietnam's consensus-building process,
creating buy-in from a range of society and interest groups,
observers note. After this process, measures are approved by the
Prime Minister's office, and in the case of legal changes, are then
sent on to the National Assembly. Increasingly, the National
Assembly itself has been reserving a more independent role, and in
the case of recent reforms to Vietnam's labor code (allowing
independent representatives to negotiate for workers in some
strikes), it implemented changes that the national union, the
Vietnam General Confederation of Labor, strongly resisted, and which
the Prime Minister and Communist Party allowed to be made (reftel).

11. (SBU) The IMF's Lee gave the GVN high marks for its consultative
process and for consulting with the international community on
economic policies. "They hold very frank discussions... and they
consult us on everything," he said. He noted that in many cases,
this advice is taken, and noted that in February an IMF paper urged
officials to resist the temptation to impose capital controls on
foreign investment in order to cool Vietnam's white-hot stock
market. The advice was kept, with the GVN making pains to distance
itself from rumors that the government would impose capital controls
to tamp down speculative foreign investment in Vietnam's soaring
stock market. (Note: There were also many others, such as the U.S.
Department of Treasury, private sector bankers, and even other
Vietnamese officials who were providing similar advice. End note.)
In any event, the PM later issued a notice similar to a range of
other earlier IMF proposals, including those urging the GVN to focus
more on better enforcement of market regulations and greater
transparency.

Personnel and Organization Changes Expected
-------------------------------------------

12. (SBU) The current leadership configuration has started to
implement several administrative reforms now underway and observers
expect a government personnel shake-up to follow the National
Assembly elections in late May. In line with PM Dzung's 2007
initiative to undertake administrative reform, economists within and
without the GVN expect ministries, such as the Ministry of
Fisheries, to close and the roles of several other ministries, such
as the Ministry of Finance and Ministry of Planning and Investment,
to change. "There has been a general dissatisfaction with the way
the government functions, and a generally well-recognized problem
with poor coordination," the UNDP's Pincus said. Economists widely
expect the MOF to take greater responsibility for capital spending
and the budget process at the expense of the Ministry of Planning
and Investment (MPI) and MPI to lose power as it becomes more like a
"ministry of economic reform," similar to a body that exists in
China, Pincus said.

13. (SBU) The Office of the Government (aka the Prime Minister's
Office) has also begun to take on a stronger role, something
reflected in a variety of moves. A recent decision of the Office of
Government (OOG) to take coordination of a study on government
strategy to 2020 away from MPI reflects Dzung's efforts to boost the
power of the office and the declining stature of the ministry.
Dzung's decision to eliminate the quasi-independent Prime Minister's
Research Council is another indication of an effort to streamline
decision-making. "It seems the PM is more interested in moving more
power to the Office of Government to act as a White House, stocking
it with professionals who can give good advice, acting like a
Downing Street," said World Bank Country Director Rohland. Other
recent institutional reform measures included a decision to reduce
the number of CPV Economic Commissions from 11 to six and reducing

HANOI 00000816 004.2 OF 004


the status of the Central Institute of Economic Management, which
used to serve as an important government think-tank under the MPI.
The re-alignment will likely strengthen the MOF and help cut down on
the bureaucratic stove-piping that is harming the efficiency of
government decision making, Pincus said.

14. (SBU) Personnel changes will also occur. One important change
will likely be the management over the State Bank of Vietnam (SBV),
with the expected departure of SBV Governor Le Duc Thuy. In
contrast to the powers of the Prime Minister, SBV Governor Thuy
currently exercises little relative power over key decisions such as
setting interest rates. Nguyen Dinh Cung, Director General of the
Macroeconomic Policy Dept of the Central Institute for Economic
Management (CIEM), told Econoff that recent corruption scandals --
one involving Thuy's attempt to take personal ownership over a
valuable home in central Hanoi and another involved his son's being
given a lucrative contract to print Vietnam's official currency --
have damaged Thuy's credibility. "The State Bank governor is quite
weak," Cung said. Others attribute Thuy's weak position to his
resistance to follow maneuvering by some influential CPV members to
get him to leave his position as Governor earlier last year, and see
the corruption charges as orchestrated to counter his intransigence.


15. (SBU) Of all the changes, economists note the character of
Thuy's replacement will provide an important indicator of the tone
and direction of future economic policy. Vietnam policy makers have
already stated their intention to move the SBV toward a more
independent role, in line with the received wisdom on promoting more
economic stability in a developed economy. Such independence is
lacking now, partly because of Thuy's weakness, both politically and
as a policy maker, and the GVN needs a stronger, more competent hand
to implement those changes. Some would like to see someone similar
to the current Le Thi Bang Tam, Chairwoman of the State Capital
Investment Corporation.

16. (SBU) The appointment of a reformer is not a foregone
conclusion, however, Pincus noted, primarily because anti-reform
elements within the CPV and within State Owned Enterprises (SOEs)
are far more powerful than many wish to admit and will resist it.
Pincus blasted The World Bank and investment banks such as Merrill
Lynch and UBS issuing glowing reports on the state of the economy
and touting the country's investment opportunities in the face of
this challenge from anti-reformers. They could easily scuttle any
attempt to advance reform through personnel changes, he said. "If
the next governor is some old party guy then it will be
clear--someone has paid them off," Pincus said.

17. (SBU) Among the most difficult challenges is equitization.
While the Party Congress indicated that equitization should
continue, it also laid out a process of equitization ensuring State
control over many state-owned firms and allowing an
insider-influenced process of equitization that has to date resulted
in the issuing of SOE shares to a combination of managers, other
SOEs and even GVN officials. This process has in turn created a
complex web of cross-ownership and interlinked interests, often with
the objective of protecting enterprises from privilege-reducing or
monopoly-busting reforms, critics including Pincus assert. It may
be, therefore, naive to believe that Dzung, Hung and others will be
able to have a radical impact on reforms. In fact, southern
contacts say that these leaders are the establishment and seek first
and foremost to make the Party and the state more effective in
controlling the economy. UNDP's Pincus is more sanguine. "The good
news is that the government is committed to reform," Pincus said.
"The bad news is that the politics and the money may overrun their
intentions."

MARINE

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