Vietnam, Special Economic Zones, and the “Problem” of Chinese FDI

Dr. Jean-Marc F. Blanchard's picture

To spur economic development, Vietnam has been, among other strategies, moving to establish special economic zones (SEZs). As elsewhere, these SEZs offer special privileges like long-term leases up to 99 years, tax breaks for companies and workers, and discounts on water and other service charges. In Vietnam’s case, SEZs recently have become a lightning rod for public protest rather than a cause to celebrate Hanoi’s economic acumen.

The roots of the unrest partly tie to worries long-term leases may be given to Chinese investors—for reasons including history, the South China Sea dispute, and China’s domineering presence, things associated with China evoke great sensitivities in Vietnam. Also relevant are rising displeasure over the nature of the Chinese outward foreign direct investment (FDI) in Vietnam, which largely entails real estate development and casinos rather than value-added boosting outward FDI (OFDI), as well as the corruption, environmental damage, and land displacement linked to past Chinese OFDI (COFDI) in Vietnam. China’s importance as a trade partner, notable flows of COFDI, economic weight, geographic proximity, and salience for the survival of the Vietnamese Communist Party mean Vietnam likely will not and cannot turn its back on China or oppose China vigorously except under the most extreme circumstances. To placate groups in Vietnam, the diversification of partners is one option. Another route, though, is for the government to “heal itself.” First, Hanoi needs to ensure its economic development policies generally and in regards to SEZs specifically are well thought out. Second, it needs to ensure SEZ development gives due attention to mitigating environmental, forced relocation, and other externalities. Third, it needs to clean up the situation internally because the real problem may be a problem of dirty politicians rather than dirty money, regardless of whether the money appears as COFDI or in some other forms!