Same, Same – But Different

Downtown Ho Chi Minh City

Downtown Ho Chi Minh City

At ACM, we have an affinity for emerging market economies that exhibit growing populations, good savings rates, and good capital investment rates. However, reinforcement of another crucial factor must be present to cement general prosperity and to capture our rapt attention – a low and appropriate level of emerging bureaucracy.

Vietnam is smack in the middle of one of the most interesting regions on the planet. In addition to the above mentioned positive attributes, this region also generally exhibits a stable financial system and thus much of the world’s cash is increasingly lapping up on regional shores. As we are fond of saying, “400 years ago the center of finance was Amsterdam, 200 years ago it was London, 100 years ago it was New York, and today it is Singapore.”  It is this movement of money that allows the great methods of investing, especially ‘value investing’, to work. Without plentiful cash providing liquidity for overlooked opportunities to be bid up, it tends to take longer for investments to play out than in areas that experience a rising tide of cash

So the popular Vietnamese saying of ‘same, same – but different’ in this country of some 90,000,000 is echoing throughout its economy. In nearly all ways Vietnam has the sameness of what makes economies work, but with one excruciatingly obvious difference. It has a bureaucracy that is obese and inflexible. One that is literally strangling economic growth.

A Night Market

A Night Market

‘Coffee Money’ is the local term to describe costs that are outside of normal business. To wit: Vietnam is the only country where I have formally been asked for a bribe. The culture seems accepting of this sad yet prevalent practice. One way to estimate the extent of a sprawling bureaucracy and commensurate symptoms such as bribery is by checking in with black market money exchangers that are often found at local markets and bazaars. As it stands now, one USA Dollar can be traded for roughly 22,000 Vietnamese Dong. The official government set limit is 19,500 Dong per USA Dollar. Put another way, someone* with large amounts of USA Dollars can obtain roughly 13% more Dong via the black market. This is not encouraging.

In a companion photo essay that will follow this piece, I provide an example of a typical base industry manufacturing operation. I suspect that the size of this and thousands of other businesses that I motored past while boating up the vast and heavily populated Mekong Delta over a four day period are limited by the threat of becoming noticed by governmental employees in a position to extract tribute. This is no trivial matter. As a result, businesses have no reason to move up the automation ladder – so the country is not likely to become more efficient or to push its population into better uses of their brains. I conclude that the primary goals of most businesses here are to provide for immediate family employment and remain below the radar. Thus both the country’s productivity suffers from wasted potential and the tax system loses from hidden or partially reported profits, bribery, retarded growth by those that should be expanding and lower overall revenues than if productivity were maximized in its young workforce (about 27 years in median age).

Brick Business

Brick Business

To bring this point further home, confidence in the Vietnamese economy and thus its currency is at crisis levels. The Dong has been devalued 3 times in just the past year. In short no one wants a currency where instability, no matter how it is brought about, reigns. The government has even recently enacted regulations limiting the circulation of gold in the economy. Rather than its ‘official’ intended effect of contributing to stabilizing their currency market, it has caused the opposite effect. People have plowed available money into most anything tangible that should retain its value – Dong denominated bank deposits are not on that list. Thus inflation in most goods is taking off. Higher inflation contributes to a further weakened currency.

Maoist Influenced Ho Chi Minh Statue

Maoist Influenced Ho Chi Minh Statue

Where might this end? Twenty-five years ago China faced a similar crossroads. What I call their ‘bloodless miracle’ resulted in an unshackling of Maoist policy and acceptance of sweeping economic restructuring. This was the foil to the normal insurrection that follows the path that Vietnam is presently on. With such a tearful and bloodstained recent history, I pine for decisions that will reduce Vietnam’s obese and inflexible bureaucracy to a size befitting an emerging market. I am not optimistic.

*It is important to note that I did not engage in this illegal practice.