March 30, 2021

From developmental state to entrepreneurial state: Choices for Vietnam?

March 30, 2021

The role of the state in economic development and the relationship between the state and the market, as well as the state and the business sector, are the focus of discussions in the seminar entitled “From the developmental state to the entrepreneurial state: The role of the State in Industry 4.0” organized by Fulbright School of Public Policy and Management (FSPPM) on March 16. The seminar offered extended discussions from the theme of the book The Entrepreneurial State: Debunking Public vs. Private Sector Myths written by Professor Mariana Mazzucato (University College London).

Embedded autonomy

Dr. Nguyen Si Dung, former Deputy Chairman of the Office of Vietnam National Assembly and a former member of the economic advisory team of former Prime Minister Nguyen Tan Dung, said the developmental state model could be a suitable choice for Vietnam. A developmental state is characterized by having an ambitious industrialization plan and strong state intervention to achieve the goal, he noted, adding that the developmental state model is something between the centrally planned economies of socialist states and the regulatory state, in which the state only fixes market failures.

According to Dr. Dung, northeast Asian economies including Japan, South Korea, Taiwan and China and a Southeast Asian economy influenced by the northeast Asian culture – Singapore – have successfully pursued the developmental state model and become the “Asian dragons.”

Vietnam has not firmly chosen to follow this developmental state model; however, certain initial steps influenced by this model were taken following the Doi Moi economic reforms, Dr. Dung remarked. One of the reasons that Vietnamese policy makers chose developmental state-inspired policies is the similarity in the culture between Vietnam and other “Asian tigers” and “Asian dragons.”

 Dr. Nguyen Si Dung

One of the main drivers for the success of northeast Asian developmental states is the elite bureaucracy. The bureaucratic elites were chosen from imperial examinations in the feudal system; nowadays, they are chosen from civil service examinations. Only by ensuring the bureaucratic elites having the highest integrity, the public administration systems of developmental states can operate successfully,” he said.

Dr. Vu Thanh Tu Anh, Dean of Fulbright School of Public Policy and Management, emphasized an important characteristic of the developmental state – embedded autonomy – which means the state must be deeply involved in the market and the business sector to really understand the market and the business sector in order to have the right policies; on the other hand, the state has to maintain its independence. Otherwise, the state would be manipulated and become corrupt. There is a thin line between embeddedness and autonomy.

East Asian countries following the developmental state model are successful because these states understand the market but still maintain their independence, integrity and meritocracy. Thus, they create good policies to develop their countries. Meanwhile, in Vietnam, the state and the political system only keep the close connection with state-owned corporations and groups; they do not really understand the market and the way the private sector operates,” Dr. Tu Anh said.

Although he agreed that the developmental state model would be suitable for Vietnam, he noted that Japan, South Korea, Taiwan and Singapore were able to publicly protect their domestic industries in the 1960s to 1980s. Today, Vietnam cannot do the same given the fact that the country joined WTO, CP-TPP, EVFTA, RCEP and other bilateral free trade agreements.

Dr. Vu Thanh Tu Anh

In the context of the fourth Industrial Revolution, things change very quickly. If the state fails to foresee these changes, it will lag behind. The state must have vision and flexibility in the use of its resources and strength for industrial strategies,” he warned.

Iphone and the entrepreneurial spirit of the U.S. government

In the world of technological innovations, Vietnam can refer to the “entrepreneurial state” model, as called by Mariana Mazzucato in her book. According to Mazzucato, the entrepreneurial state proactively takes the lead not only in the areas of research and creating new technologies but also creating new markets, thereby leading the private sector. She takes the example of the United States, which is considered a typical capitalist country in which the private sector plays the leading role in the market economy, and the state only fixes market failures. She argues that the US government acted as a risk-taking, pioneering investor responsible for much of the large-scale innovation which drove the country to economic success.

Over the last decades, the US government has been implementing major public investment projects in technology and innovation, which are the prerequisites for the country’s past and present economic success. From the Internet, biotechnology and shale gas, the US government has been playing a key role in driving innovation-led growth – they often invested in the early stages of innovation so that industy businesses would continue to develop, according to Mazzucato.

The United States would not have Silicon Valley, the iPhone, and the legend named Apple without the US government’s early investments. Apple made the best of the government’s investments into revolutionary technologies: Internet, GPS, touch screen and such. Without these government-funded technologies, Apple would not have become so famous.

Picking the winner or letting the market decide?

Learning from the US, the governments of China, Japan and Germany have fostered public investment in research and development (R&D) of basic technologies. For example, China is not the pioneer in wind power investment, but in 2010, China surpassed the United States to become the world’s largest wind energy producer, just 5 years after it deployed financing programs for R&D activities and wind power projects with subsidies or favorable loans. The Chinese government also spent billions of dollars on the installment of solar photovoltaics in the country and became the world’s largest producer of photovoltaic power.

According to Dr. Tu Anh, as Vietnam is shifting to an innovation-based growth model, it can totally learn from the governments of China and the United States. The state can actively invest in basic research that require a lot of money, take a lot of time and have high risks. As for applicable research, the business sector can be better investors than the state.

The problem with Vietnam is that when the state has a role, it often does too much. For example, the state could be a sponsor for research projects, but it should not implement the projects itself,” Dr. Tu Anh shared his view.

As a member of Prime Minister Nguyen Xuan Phuc’s economic advisory team, Dr. Tu Anh learned a lot from the country’s economic failure stories. He gave the example of Vinashin, the debt-ridden state-owned shipbuilder that received huge investments from the state but incurred huge losses. The main reason for the failure was that the state tried to produce everything by itself, even welding rods.

But in the end, the state could not make welding rods; they were imported from other countries. Not to mention other basic parts of a ship like the engine, the hull or GPS. If the state gave the job to the private sector from the beginning, things would have been different,” Dr. Tu Anh said.

According to Dr. Tu Anh, the state should let businesses, scientists and laboratories compete for fundings from the state. The grant must be approved by a team of knowledgeable experts.

It is like letting a herd of horses race in the prairie and the strongest horse will win, instead of picking the winner from the beginning. Vietnam has for a long time pursued the policy of “picking the winner”. We must combine the role of the state and the market’s competitive mechanisms to strictly select effective projects. Otherwise, a huge amount of budget funds would be wasted by incompetent policymakers and civil servants who are prone to corruption and manipulation,” he warned.

Dr. Tu Anh’s warning implied a recent decision by the Ministry of Planning and Investment to pick 7 large state-owned corporations, including VNPT, Viettel, Vietcombank and PetroVietnam, to join a large-scale project on developing state-owned enterprises. According to Dr. Tu Anh, this decision reflected the “picking the winner” mindset, while Vietnam has experienced failures in its industrialization strategy caused by state-owned corporations in the previous decade.

Policy sandboxes

Being the co-founder of some Silicon Valley technology startups such as Katango and OhmniLabs, Dr. Vu Duy Thuc (Stanford University) said at the seminar that the state’s entrepreneurial role does not necessarily mean that the state pours money into investments. Instead, the state can create “policy sandboxes”, or regulatory frameworks that allow some companies to experiment new technologies before implementing them in a larger scale.

 Dr. Vu Duy Thuc

He gave the example of Japanese government’s permission for Toyota to build a 70-hectare new city, served as a living laboratory, to test all their new technologies, including self-driving cars. Toyota paid for this experiment on the condition that the government will give incentives and allow the company to implement these technologies, if successful, in the whole country. The Singaporean government is using similar approach to self-driving cars and blockchain technology.

These regulatory sandboxes give the governments the opportunity to test, to fail fast and learn fast,” he commented.

Sharing the same view, Dr. Tu Anh said that if the government is open-minded enough, it can create experimental mechanisms for businesses or for a local government.

Even though it is experimental, these sandboxes are still placed in the national regulatory system. Therefore, it is more likely that the people responsible for these experiments have to take risks. We must create some mechanisms to protect them so that they would dare to take that chance,” he concluded.

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