Learning to be Capitalists: Entrepreneurs in Vietnam's Transition Economy

Annette Miae Kim has written an important book on a previously neglected topic that has increasingly gained popularity amongst academics. It shows that institutional change and development cannot be decoupled from social change. It is this focus on change, the Achilles heel of neoclassical economics, and the book's focus on cultural narratives driven by entrepreneurs, that makes it a valuable contribution to entrepreneurship research, transitional studies, and development studies in general. In this review, I am suggesting a marginal, yet important correction of her theoretical lens that is more consistent both with the previous empirical evidence as well as with the fascinating data gathered in Kim's research.

As described in the book's Appendix, the author conducted in‐depth interviews with land developers in Ho Chi Minh City in the year 2000 and 2001. She thereby created 14 case studies of firms operating in the local market. Firms were not randomly chosen. Rather, she selected firms that fell into one of four typical categories of firms currently operating: investor groups, professional companies, equitized companies, and foreign joint ventures. The typology was confirmed by local bankers, academics, and the firms itself. Investor groups are an agglomeration of small‐scale land developers that cooperate for specific projects. Professional companies, in contrast, are unified organizations with office building and professional staff. Equitized companies are privatized, formerly state‐owned organizations. All firms were larger scale, private, residential developers. Kim located the entrepreneurial decision makers within the firms and asked questions about a standardized list of topics concerning personal background, firm history and organizational structure, and detailed accounts of project development; after which she would let the conversation move on toward other issues she might not have foreseen. The author also spent a few weeks in Poland in order to talk to land developers there to create a comparison group.

In Chapters 1 and 2, Kim outlines the theoretical lens through which she interprets the gathered data. The stage is set by outlining a puzzle: why do some transition economies experience growth in spite of their low ratings of institutional quality? The author's answer to this problem resurfaces throughout the book and represents its theoretical backbone. Kim states that there are multiple paths to development, independent of the neoclassical consensus of sound legal systems, secure property rights, and liberalization.

There are several key findings. First, original political endowment, as measured by the degree of privatization and number of political actors within firms, was not sufficient for project success. All surviving firms actively and continuously developed new ties with political authorities and other firms in a changing institutional landscape (Chapter 3). Second, Kim highlights the process of cultural change and the socially constructed nature of cognition (Chapter 5). She states that “people need to learn new economic behaviors” (p. 117). At the same time, this learning process cannot be directed in a top down fashion. Swedish development aid, in the form of standardized classes on real estate development, is portrayed as disconnected from the local conditions, while “outside the class room, real estate markets grew rapidly without the benefit of lectures” (p. 116). According to her, nobody planned the changing social cognition but it was the result of decentralized process of social change. She states “The role of the developer recently became institutionalized where it did not exist ten years earlier” (p. 118). Finally, and most importantly, she consistently outlines an alternative model which she calls “Fiscal Socialism” that allows the state back into the transition process cognition (p. 8). Even before 1993, when the country's institutions were classified as being non‐conducive to growth, Fiscal Socialism enabled entrepreneurship in land development against all academic predictions.

The core of the book, Chapters 3 and 4, explores the model of Fiscal Socialism in more detail: according to Kim, decentralized local authorities planned land usage, but were unable to finance it. The entrepreneurs had to develop political ties and entered the market‐politics‐nexus in order to fulfill that function. In the absence of a strong financial sector, they secured necessary funds from future land users who then bore a significant portion of the risk. The entrepreneurs rely on their social networks in order to illicit information about the authorities’ master plan for land parcels and to get licenses and permits. Firms without such networks are shown to be significantly less successful. Entrepreneurs did receive support in land price negotiations with farmers by local authorities who exerted pressure in order to induce farmers to sell at a low price. In return for enjoying profits, entrepreneurs develop the infrastructure as planned by the authorities and the unintentional partnership of private and public forces concludes. Kim states that it is, thus, possible that countries develop in the presence of strong states. In her view, the free market ideology, as represented by the Washington Consensus, is flawed but oddly enough, still enjoys high popularity amongst academics.

The fiscal socialist lens leaves open two questions. First, why then? If Vietnam's reform program doi moi did not increase institutional quality, what changed in the 1980s that triggered the development process? Local authorities do the planning and entrepreneurs provide the necessary finances that would not be available otherwise. According to Kim, changing social cognition, a changing cultural atmosphere, an increased tolerance toward entrepreneurs to take over certain tasks was the ignition spark. In her view, it is not because of good institutions, it is an acceptance of entrepreneurs within a strong, but decentralized state‐market‐nexus that can create development. As an interdisciplinary contribution one must applaud such an explanation, but it does not explain the question of how the changes emerged. It is a somewhat obscure and external shock. As one of the main arguments in the book it stands loose and under‐explained, despite her promising theoretical framework concerning socially constructed cognition influenced by the work of Douglass North, Lev Vygotsgy, Leon Festinger, and Albert Bandura.

Second, despite her achievement of pointing to the two anomalies of China and Vietnam, both countries with low institutional quality and high growth rates, she under‐reports the wealth of evidence to the contrary. Before pointing to an anomaly it is worth stressing that there exists a robust empirical relationship between institutional quality and growth that is missing from the book. Hallmark studies such as Fry and Shleifer (1997), Bengoa and Sanchez‐Robles (2003), Acemoglu and Johnson (2005), or even literature reviews such as Shirely (2008) are nowhere to be found.

I suggest that Kim's data and evidence stands in partial conflict with her theoretical lens, and that an alternative lens exists that is more consistent with previous empirical findings. In addition, this lens maintains the element of social cognition that I regard as the fundamental contribution of her book. The alternative lens would be one where development does not take place because of the state, but despite the state. This view would therefore not ignore the fundamental empirical link between institutions and development. As Boettke (2001, p. 250) has stated “Where is the example to the contrary? Where has an economic system which can be characterized as respecting private property, maintaining sound money, free pricing, and freedom of contract collapsed into economic deprivation?”

Institutions are elusive and hard to quantify. A country can have formal, de jure institutions that are conducive to growth in theory, while in practice, they do not exist. Laws on paper often have no teeth as can be seen in Latin American countries that attempted to emulate the US constitution in the nineteenth century. On the other hand, it is possible that official rules and regulations suggest low potential for economic growth while, de facto, institutions provide sound incentives for economic and political actors. Written constitutional rules are mostly absent in Britain, yet the country displays all the de facto institutional features we expect in a developed economy. The evidence in Kim's book overwhelmingly suggests this latter scenario to be the case. The author is correct in pointing out the limits of institutional quality quantification by the IMF and others, and their policy interventions should therefore be regarded with caution. However, Kim is throwing out the baby with the bathwater when she suggests that the well‐established link between secure property rights and development should be revisited.

The author states “private participation was not forthcoming in the beginning of the transition period” (p. 37), which is what we expect in the absence of well‐defined property rights. Later “firms observed the states greater effort to limit arbitrary expropriation.” More information on zoning plans was released and higher compensation payments made. Thus, even if officially measured institutionally quality is low, de facto quality has considerably improved on an informal basis, which is why the IMF made incorrect predictions because they lack local (often tacit) knowledge.

When private land developers have to create and maintain connections to political actors in order to gain information on zoning plans and to receive permits (pp. 58, 74), when they buy land next to government business as it reduces the risk of expropriation (p. 59), we must recognize this behavior to be unproductive (Baumol, 1996). In a less‐politicized economy many of these activities are not necessary, and thereby reduce transaction costs. Yet, it is the only way in which business can be conducted in a transition economy ruled by powerful political players. Kim's critique of the focus of “best practice institutions” is therefore valid – boilerplate solutions do not work (p. 181) as every country has different institutional tradition including social norms and traditions, yet, we must not confuse the wasteful efforts to navigate a corruptible and semi‐socialist state with the ultimate goal of such a development process, which is the absence of state predation and secure property rights.

Kim's theoretical lens of fiscal socialism contrasts coordination with competition and she interprets the fact that firms would “locate projects adjacent to on another, in order to save on the development cost of infrastructure” as a lack of market competition (p. 93). This, however, is a peculiar view of markets. In the next sentence she writes “market entry is open.” If entry barriers are low, cooperation of firms does not constitute evidence of a lack of competition. To the contrary, it shows that firms are seeking new ways to reduce costs in order to serve their customers well in the face of potential new rivals (Hayek, 1948).

Another anecdote from the book suggests that the alternative theoretical lens has more explanatory power. “Firm #4 recounts that the real estate's market explosive growth started to flag in 2003 when […] a new deputy mayor of HCMC (Ho Chi Minh City) came into office and enforced the laws and regulations more carefully. The firm's leader describes him as a real communist; he has not friends, no relationships, no corruption, no knowledge about business.” As soon as the official rules are enforced business growth ceases. Thus, it is only because property rights existed informally that land development was possible. The changing social cognition, the unofficial ties, created the institutional environment of sufficiently secure property rights in which businesses can emerge.

In fact, when Kim compares thriving Ho Chi Minh City to the more stagnant city of Hanoi in Chapter 6 the importance of institutional quality becomes apparent. According to the book, only 30 percent of parcels are controlled by the public sector in Ho Chi Minh City, whereas 90 percent are controlled by government officials in Hanoi. Firm number 4 and 6 reports that one needs more powerful political connections in Hanoi in order to operate a business, and that the local bureaucracy is less pragmatic. Social norms are biased against business in Hanoi, whereas they changed to be more accepting in Ho Chi Minh City.

She also finds that the entrepreneurs in her small, Polish sample similarly rely on their network connections to local bureaucrats in order to minimize their property rights risk, although formal political institutions are much more robust and were built on a tradition of legal norms before the socialist era. This shows how formal market institutions must necessarily be complemented by informal ones in order to enable entrepreneurship.

This spontaneously developing, de facto medium quality institutional system that “was not outlined in any government economic development plan nor did it conform to any urban economic textbook model” (p. 91) facilitated the conditions to overcome one of the primary obstacles in transition. It created niches in which markets could emerge, while, at the same time, giving local authorities an incentive to go along, which, arguably, is a problem that other transition economies were not able overcome (Shleifer and Treisman, 2001). Transition has to be a win‐win situation, i.e. compensating politically powerful losers, while giving the private sector room to expand – otherwise development falls into a transitional gains trap.

Kim writes about “editorials critical of local government officials, portraying them as greedy, corrupt figures who took advantage of their position and did not follow the official regulations” (p. 104). This, arguably, is exactly what they were. They bent official market‐hostile rules in their favor. At the same time, this created the niche in which entrepreneurs could create real wealth that corrupt officials benefit from. Later in the book, Kim provides more evidence in favor of actually existing business freedom. Instead of using official courts, firms mostly (70 percent of all cases) used informal arbitration and enforcement procedures facilitated by residential bloc committees (dan pho) (pp. 138‐139), thereby, again, evading the crippling official rules and procedures. Entrepreneurial niches, protected from government predation through informal mechanisms provided the space in which individuals could “learn new economic behaviors” (p. 117). These niches are the spaces in which Vietnamese people are “Learning to be Capitalist.”