Reaping the Potential in Australia-Vietnam Relations Means Tough Choices on Both Sides

By Donald Greenlees and Mukund Narayanamurti

Scott Morrison’s Vietnam strategy will receive a kick start with the convening of the first ministerial economic partnership meeting between Canberra and Hanoi this week. But, as Donald Greenlees and Mukund Narayanamurti write, reaping the potential requires commitment and tough choices on both sides.

Scott Morrison spoke enthusiastically of the opportunity for Australia in closer relations with Vietnam in August when he made the first bilateral visit by an Australian prime minister in 25 years.

“I see the potential. My government sees the potential.  Our challenge is to realise that potential,” Morrison told the Australian Chamber of Commerce.

There have been a few false starts in Australia-Vietnam relations since the exchange of ambassadors in 1973.  Paul Keating, who in 1994 became the first prime minister to make a post-war visit, had a pledge to raise human rights reluctantly extracted from him by the Australian Vietnamese community on the way to Hanoi.

He too saw the potential; in an economy stirred to life by an industrious and entrepreneurial population and in a strategic relationship based on a symmetry of interests between Australia, Indonesia and Vietnam in hedging against a potentially dominant China.

But the hopes of building commercial and security linkages were often ground down in the following years in the act of navigating Communist Party ideology and sclerotic state bureaucracy.

Morrison’s task is to build more momentum into relations than events permitted Keating.  There are good reasons to suspect this time there will be a better outcome.  For a start, the outreach is more reciprocal.  In Hanoi in August, an Australian prime minister on a visit to Asia for once found counterparts probably more eager than he for signs of friendship.

But it will require a lot of work on both sides.  Vietnam has opened up enormously since the tentative engagement in the 1990s that was still overshadowed by memories of the war.  Changes in the regional diplomatic, military and economic balance of power since then have coincided with Hanoi willing to look beyond the confines of ideology and history.

The Vietnam National Assembly Building in Hanoi. Image: Shutterstock.

Starting with the economic openness policy, doi moi, in 1986, and gathering momentum under Communist Party resolutions in recent years, Vietnam has signalled it wants an economy based more on private enterprise and less on state control.

Yet it remains a hard place to get things done.  The strictures Hanoi imposes on political and business life, and even on strategic engagement, limit opportunities.

Canberra and Hanoi will need to establish a strong framework for the relationship and then bring in a wider constituency in both countries than they have in the past.  This is especially true of the commercial relationship, which offers some of the greatest potential for building closer cooperation.

They now have the chance to do both with the launch of the first of several initiatives agreed between Morrison and Prime Minister Nguyen Xuan Phuc.

Today, Australia hosts the Vietnam-Australia Economic Partnership Meeting (EPM) co-chaired by the Minister for Trade, Simon Birmingham, and the Vietnamese Minister for Planning and Investment, Nguyen Chi Dung.  The one-day Adelaide meeting, followed by business-focused meetings in Sydney, will be the prelude to a business mission Birmingham plans to lead to Vietnam next year.

These initiatives are underpinned by a strategic plan of action for 2020 and 2023 that includes closer defence and security cooperation, enhanced economic ties and development of “knowledge and innovation partnerships”.  All this builds on the signing of a strategic partnership agreement in March last year.

The EPM is a good starting point to address the many impediments to closer relations. There are requirements on both sides if the relationship is to fulfil the potential Morrison sees.

First, Vietnam needs to accelerate and deepen the economic liberalisation polices that have delivered an economic performance that is envied across the region. Second, Australia needs to ensure greater domestic buy-in to relationship-building efforts, particularly from the business and Vietnamese-Australian communities.

On the first priority, Vietnam must avoid complacency and be prepared to embrace reforms that reduce the degree of Communist Party control.  Economic growth averaged 6.6 percent a year between 2014 and 2018, reaching a high of 7.1 percent last year.  Sustaining this performance requires Hanoi to recognise commercial success depends on economic and political openness.

The World Bank’s Ease of Doing Business survey ranked Vietnam 69 out of 190 in 2019, just ahead of Indonesia, but well behind Malaysia at 15.  According to the Heritage Foundation 2019 economic freedom score, Vietnam sits at 128 in the world.

Hanoi needs to undertake a raft of structural reforms. Critics cite complaints common to the region: too many inefficient state-owned enterprises, lack of respect for property rights, a politicised judiciary, corruption and nepotism in state enterprises, skill shortages, insufficient access to finance, and red tape that hinders business development.

The Saga Du Mekong garment factory in Nha Trang. Image: Valsib, Shutterstock.

Reform in these areas will benefit both domestic and foreign investors.  In some respects, the domestic private sector does it tougher than foreign-invested companies.  An Australian government-funded report last year highlighted the problem of the “missing middle” in Vietnam’s business sector.

Medium-sized companies accounted for only 1.4 percent of the total.  A whopping 97.3 percent of companies were micro and small.  Overwhelmingly, small companies fail to graduate to mid-size.  While the recent growth in technology enabled start-ups, numbering close to 3,000 (the third highest in South East Asia), presents the potential to create many more viable medium-sized companies, the implied lack of capital accumulation is one reason Vietnam is viewed as “far from an innovation-led and technology-driven economy”.

Despite an official Communist Party commitment to making private enterprise a driving force of a “socialist-oriented market economy”, Hanoi struggles to balance liberalisation with preserving Party authority and a generous social welfare system.  One corollary of the Party’s desire to retain control is a reluctance to liberalise its digital economy, holding back progress in a vital growth sector. A recent cyber security law, roundly condemned by the EU and the USA, is a case in point.

But this is an area where closer collaboration with Australia can help.  Morrison does not propose that Australia become Vietnam’s biggest economic partner, but rather its highest “quality” partner.  Becoming a high-quality partner will require pursuing opportunities that go beyond exports of non-value-added commodities.

Australia is well-positioned to invest in high-tech agri, precision food processing, health, and university and vocational education. More intense bilateral engagement also can contribute to the quality of economic decision making, capacity building and the creation of a more efficient public sector.

A rice farmer uses a combine harvester on the outskirts of Hoi An. Image: Shutterstock.  

But government is only part of the story.  The second priority in fulfilling the potential of the relationship is to ensure Australian business and the Vietnamese diaspora embrace the opportunities.

As a recent Asialink Business and CBA study demonstrated, Australian companies that develop “activating strategies” are the ones that take greatest advantage of the rapid growth, not just in Vietnam, but across the region.

Yet the understanding, commitment and capability that underpins such strategies has proved elusive.  Australian companies need Asia-capable staff, an understanding of local consumer preferences, and an in-market presence. These capabilities can drive material financial outcomes.  A better understanding of local consumer preferences has been shown to improve revenue outcomes almost eight-fold.

Footscray Victoria
A Vietnamese supermarket in the Melbourne inner-western suburb of Footscray. Image: Shuang Li, Shutterstock. 

Another vital contribution can come from the 300,000 people of Vietnamese origin living in Australia. For reasons of history, they have been reluctant to lead engagement.  In 1994, Vietnamese leaders pressed Keating to put human rights at the forefront of relations. This remains a potent issue, especially for the war generation.

It is their children that are often most likely to seek out their ethnic roots and forge commercial collaborations.  The Vietnamese diaspora should be encouraged to play a bigger role, putting to rest historical legacies and embracing contemporary opportunity, without abandoning advocacy for a more liberal and open Vietnam.

Donald Greenlees is a Senior Adviser of Asialink and Mukund Narayanamurti is CEO of Asialink Business.  The views expressed are their own.