A Massive Scandal in a Tightly-Controlled State

Have you heard about the biggest corruption scandal in Southeast Asia this year? To be precise, last month in Vietnam, Truong My Lan was sentenced to death for being involved in a corruption scandal. Lan herself is one of the majority shareholders of a bank called Saigon Commercial Bank (SCB) and the boss of a property development company, the Van Thinh Phat Holdings Group (Dinh, 2024) ¹Dinh, T. (2024, April 11). Downfall of a Vietnam’s Real Estate Tycoon: Truong My Lan Sentenced to Death for Massive Banking Fraud. VnEconomy. https://vneconomy.vn/downfall-of-a-vietnams-real-estate-tycoon-truong-my-lan-sentenced-to-death-for-massive-banking-fraud.htm.

Her death sentence is seen as a way for the courts to persuade her to return a portion of the money lost to her corruption case (Head & Bui, 2024) ²Head, J., & Bui, T. (2024, April 11). Truong My Lan: Vietnamese billionaire sentenced to death for $44bn fraud. BBC News. https://www.bbc.com/news/world-asia-68778636. While Lan has appealed against a lower court verdict, the scale of corruption and its impacts are far from trivial. The amount of money embezzled was estimated to be around 304 trillion or 192 trillion rupiah (CNN Indonesia, 2023) ³CNN Indonesia. (2023, December 6). Profil Truong My Lan, Konglomerat Properti Gelapkan Rp194 T di Vietnam. CNN Indonesia. https://www.cnnindonesia.com/ekonomi/20231206120620-92-1033572/profil-truong-my-lan-konglomerat-properti-gelapkan-rp194-t-di-vietnam. This amount of money is equivalent to 3.2 percent of Vietnam’s gross domestic product (GDP). Having many connections with Vietnam’s top government elites, it was not difficult for Lan to execute such actions. The head banking inspector, Do Thi Nhan, was even bribed by Lan’s subordinates. 

Her action violates banking regulations in Vietnam regarding the provision of unauthorized borrowers as well as regulations regarding supermajority shareholders. Lan claims that with only controlling about 15% of the SCB’s shares, and without having an official position in it, she could not be suspected of committing the embezzlement that she was accused of (CNBC Indonesia, 2024) ⁴CNBC Indonesia. (2024, April). Crazy Rich Vietnam Truong My Lan Dihukum Mati, Ini Profilnya. CNBC Indonesia. https://www.cnbcindonesia.com/news/20240413072538-4-530063/crazy-rich-vietnam-truong-my-lan-dihukum-mati-ini-profilnya. However, there was much debate regarding this matter at the trial. Witnesses who owned large shares argued that they were ordered to act on behalf of Lan. This could indicate that large shareholders considered Lan to have legitimate authority to instruct her subordinates in decision-making.

Why is This Case Important to be Analyzed?

Cronyism is a common practice in Vietnam’s everyday business operations. Cronyism, like a double-edged sword, can have negative impacts such as corruption. Yet, contrary to popular belief, cronyism has an important role in the state’s economy. While Lan’s case kickstarted the process of writing this article, it is just the tip of the iceberg. From our perspective as students, there is an urgency to critically analyze how politically motivated involvements in the financial regulatory process can significantly influence the decisions made by regulators. Politicians and public officials financially supported by a particular company or corporation may try to influence regulators to take actions that benefit certain businesses, even if it goes against the public’s interest. 

State and Business Relations: Cronyism in Vietnam

Vietnam is a socialist country, and its government has a substantial role in controlling most of the state’s affairs. As an example, all land in Vietnam is state-controlled and the state controls the prices of many goods and services, such as petrol, gas, and electricity (Diez, 2016) ⁵Revilla Diez, J. (2016). Vietnam 30 years after Doi Moi: achievements and challenges. Zeitschrift für Wirtschaftsgeographie, 60(3), 121-133. https://doi.org/10.1515/zfw-2016-0035. The banking sector is also heavily regulated. This can be linked to the beginnings of Vietnam’s history. After the war ended in 1975, North and South Vietnam unified. The government began adopting central planning and self-isolation mechanisms (Tuan, 2012) ⁶Tuan, H. (2012). Doi Moi and the remaking of Vietnam. Global Asia, 4(3). https://ssrn.com/abstract=2305761. As a result of sanctions imposed by the United States, Vietnam was prevented from having new relations with other countries. Because of that, Vietnam became more dependent on the Soviet Union for political, economic, and military support. 

Seeing the failures and inefficiencies of the current economic system, which led to widespread poverty and famine, the government decided to rebuild the country (Diez, 2016) ⁷Revilla Diez, J. (2016). Vietnam 30 years after Doi Moi: achievements and challenges. Zeitschrift für Wirtschaftsgeographie, 60(3), 121-133. https://doi.org/10.1515/zfw-2016-0035. This period in Vietnam’s history is called Doi Moi or “restoration”. The series of reforms included the political and economic sectors. In 1986, the CPV started to loosen its grip on industrial production and introduced market-oriented policies. The Company and the Private Enterprise Law, for example, acknowledged the non-state sector (Diez, 2016) ⁸Revilla Diez, J. (2016). Vietnam 30 years after Doi Moi: achievements and challenges. Zeitschrift für Wirtschaftsgeographie, 60(3), 121-133. https://doi.org/10.1515/zfw-2016-0035. This made it easier for private companies to register with the government and operate their businesses. Other policies also guaranteed the right to private property, freedom of contract and enforcement of contractual claims, bankruptcy laws, and supply-demand mechanisms for almost all products. 

These reforms brought favorable outcomes. With an annual per capita income of $1,000 in 2008, Vietnam was removed from the list of the world’s least developed countries (Tuan, 2012) ⁹Tuan, H. (2012). Doi Moi and the remaking of Vietnam. Global Asia, 4(3). https://ssrn.com/abstract=2305761. Vietnam has also been able to maintain its rate of economic growth since Doi Moi. This significant economic growth also led to a remarkable reduction in Vietnam’s poverty rate, from 70% in the mid-1980s to 37 percent in 1998, and further down to 19% in 2007 (Tuan, 2012) ¹⁰Tuan, H. (2012). Doi Moi and the remaking of Vietnam. Global Asia, 4(3). https://ssrn.com/abstract=2305761.

As a result of Doi Moi, new conglomerate companies also began to spring up. To note, all land in Vietnam is controlled by the state (Hien & Spitzer, 2023) ¹¹Hien, P. T., & Spitzer, H. D. (2023). Vietnam’s” Entire People Ownership” of Land: Theory and Practice. Asian Law Review, 19 (1). https://doi.org/10.58112/alr.19-1.1. Because of that, conglomerates including Lan’s family, maintain a close relationship with government officials to get access to state-owned land and develop property (Head & Bui, 2024) ¹²Head, J., & Bui, T. (2024, April 11). Truong My Lan: Vietnamese billionaire sentenced to death for $44bn fraud. BBC News. https://www.bbc.com/news/world-asia-68778636. This partnership implicates a large and continuing pattern of crony capitalism. 

Crony capitalism builds itself on personal connections between business and government elites (Sang, 2024 ¹³Sang, H. T. (2024, May 1). With latest resignations, Vietnam’s ‘Game of Thrones’ intensifies. The Diplomat. https://thediplomat.com/2024/05/with-latest-resignations-vietnams-game-of-thrones-intensifies/. Through crony capitalism, government officials can discriminately allocate business permits, government subsidies, as well as tax incentives towards their cronies. With this system, businesses benefit from a close relationship with state power through anti-competitive regulations, government favors, and/or corruption. On the other hand, politicians are incentivized to collude with conglomerates for campaign money. 

Generally, crony capitalism has negative connotations. However, it has been proven that in many post-colonial countries, such as Vietnam, crony capitalism correlates to economic growth (Lê, 2023) ¹⁴Lê, K. (2023). Neoliberalism in a socialist state: Political economy of higher education in Vietnam. Ephemera: Theory & Politics in Organization, 23(2). https://ephemerajournal.org/index.php/contribution/neoliberalism-socialist-state-political-economy-higher-education-vietnam-0. In countries where contracts and property rights are poorly protected, this system offers an alternative solution. Insufficient protection of property rights prevents investment and capital accumulation, thereby stalling development (Ngo & Tarko, 2018)¹⁵Ngo, C., & Tarko, V. (2018). Economic development in a rent-seeking society: socialism, state capitalism and crony capitalism in Vietnam. Canadian Journal of Development Studies, 39(4), 481–499. https://doi.org/10.1080/02255189.2018.1467831. This selective approach allows investment and development to occur, but it also leads to widespread inequality and corruption.

In recent decades, businesses have dominated the economic sector even more. After the Law on Enterprises was enacted in 2000 to boost private sector development, over 100.000 new private enterprises were registered with the government. Consequently, the private sector has had a major impact on Vietnam’s economy. In 2018, the private sector’s share of GDP rose to 42,1%, up from 41,74% in 2017 (Vinh & Manh, 2020) ¹⁶Vinh, V. X., & Manh, C. D. (2020, June 4). The paradoxes of private sector development in Vietnam. East Asia Forum. https://eastasiaforum.org/2020/06/04/the-paradoxes-of-private-sector-development-in-vietnam/. Even so, high–level corruption has remained high in the 21st century (Gan Integrity, 2020)¹⁷Gan Integrity. (2020, November 4). Vietnam risk report. https://www.ganintegrity.com/country-profiles/vietnam/. In 2018, Vietnam recorded one of the highest bribery rates at 65%, surpassed only by India’s 69% (Thu, 2018) ¹⁸Thu, H. L. (2018, January 25). The Vietnamese Communist Party’s corruption hunt. The Interpreter. https://www.lowyinstitute.org/the-interpreter/vietnamese-communist-party-s-corruption-hunt.

While Truong My Lan’s case relates to the banking sector specifically, its implications can be looked at from a broader perspective. This perspective shows how state and business interaction outside of the law is being normalized. Lan’s case is just the tip of the iceberg. The SCB scandal is only one of many others that involve big conglomerates trying to gain benefits by bribing or colluding with state officials. Other scandals relating to big conglomerates have frequently shown on front-page news. 

For example, in 2022, Trinh van Quyet was arrested because of stock manipulation and illicit stock transactions in his company, FLC (Onishi, 2022) ¹⁹Onishi, T. (2022, April 13). Vietnam’s new conglomerates in crosshairs of corruption crackdown. Nikkei Asia. https://asia.nikkei.com/Business/Companies/Vietnam-s-new-conglomerates-in-crosshairs-of-corruption-crackdown. His acts negatively affected Vietnam’s stock market and caused financial losses for investors. In the same year, Do Anh Dung, chairman of the Tan Hoang Minh Group, was arrested on charges of fraudulent appropriation of property.

From these cases, it can be concluded that there are many interests attached between the parties who violate the law and the financial authorities or financial regulators in Vietnam. For example, there is often a relaxation of capital requirements and limits on ownership of risky assets as well as the suspension of regulations that should be supervised by regulators. By relaxing regulations and delaying regulations, businesses hope to hide financial problems. In addition, regulators are also influenced by politicians who want to maintain financial support from industries that make large donations to their campaigns, so they are more likely to give in to pressure to reduce strict regulations on financial institutions.

Lan’s prosecution and eventual sentence are a part of the Communist Party of Vietnam’s Blazing Furnace anti-corruption campaign (Head & Bui, 2024) ²⁰Head, J., & Bui, T. (2024, April 11). Truong My Lan: Vietnamese billionaire sentenced to death for $44bn fraud. BBC News. https://www.bbc.com/news/world-asia-68778636. The secretary general of the CPV, Nguyen Phu Trong, has intensely pushed for this campaign to restore the public’s dwindling trust in the government. The government itself has an active role in publicizing this case. Yet, will recent political turbulence affect investors’ confidence in Vietnam’s economy, and also, its GDP? 

Understanding the Negative Economic Impact of Cronyism: Its Influence on Growth

It is important to note that a country’s economy is very dependent on people’s expectations. People’s perspectives on the future are significantly shaped by their current level of trust in present social and economic conditions (Moore & Blanchard, 2000) ²¹Moore, M. P., & Blanchard, O. (2000). Macroeconomics. Prentice-Hall.. This trust, in turn, influences their economic decisions, which can lead to substantial effects on overall economic growth.

In the context of Vietnam, cronyism that leads to corrupt behavior has a negative impact on the country’s economy. This can be empirically demonstrated using econometric models by creating two models that explain how the effects of corruption have both direct and indirect impacts on GDP growth in Vietnam which was measured during 2000 – 2012 (Cingoz & Akilli, 2015) ²²Cingoz, A., & Akilli, H. S. (2015, April). A Study on Examining The Relationship Among Cronyism, Self Reported Job Performance and Organizational Trust. In WEI International Academic Conference Proceedings. Vienna, Austria, April (pp. 7-11). https://www.researchgate.net/profile/H-Akilli/publication/275947373_A_STUDY_ON_EXAMINING_THE_RELATIONSHIP_AMONG_CRONYISM_SELF-REPORTED_JOB_PERFORMANCE_AND_ORGANIZATIONAL_TRUST/links/5549efd80cf26eacd6921b12/A-STUDY-ON-EXAMINING-THE-RELATIONSHIP-AMONG-CRONYISM-SELF-REPORTED-JOB-PERFORMANCE-AND-ORGANIZATIONAL-TRUST.pdf. 

From the first model, we can see the regression results by examining the relationship between GDP growth influenced by human capital (HC), investment (INV), and institutional quality measured through ‘voice and accountability’ (V&A), and corruption (the direct effect of corruption on GDP growth represented by β5) : 

    Additionally, corruption also has an indirect effect on growth through the channels of several intervening variables, namely in the investment equation (a), human capital (b), and institutional quality measured by voice and accountability (c).

Table 1 

Table 2 

Source: (Cingoz & Akilli, 2015) ²³Cingoz, A., & Akilli, H. S. (2015, April). A Study on Examining The Relationship Among Cronyism, Self Reported Job Performance and Organizational Trust. In WEI International Academic Conference Proceedings. Vienna, Austria, April (pp. 7-11). https://www.researchgate.net/profile/H-Akilli/publication/275947373_A_STUDY_ON_EXAMINING_THE_RELATIONSHIP_AMONG_CRONYISM_SELF-REPORTED_JOB_PERFORMANCE_AND_ORGANIZATIONAL_TRUST/links/5549efd80cf26eacd6921b12/A-STUDY-ON-EXAMINING-THE-RELATIONSHIP-AMONG-CRONYISM-SELF-REPORTED-JOB-PERFORMANCE-AND-ORGANIZATIONAL-TRUST.pdf

From the results of Tables 1 and 2, we can conclude that corruption significantly affects economic growth in Vietnam, both directly and indirectly. Through simulations that incorporate Vietnam’s data into various models, we found that reducing the corruption level has a positive impact on GDP growth. If the corruption level in Vietnam decreases by one unit on the Corruption Perception Index (CPI) scale, economic growth could increase from 6.732% to 6.941%. A one-standard-deviation decrease in corruption could increase growth to 7.227%, and further reductions could result in even higher growth. Therefore, these results support the hypothesis that corruption has a negative impact on economic growth and that reducing corruption can provide significant economic benefits to Vietnam.

If we look back at the situation in Vietnam, in recent years, there have been numerous large-scale campaigns to combat corruption in the country. According to Transparency International itself, Vietnam’s ranking on the Corruption Perceptions Index in 2023 dropped from 42 to 41 (Transparency International, 2024). This has drawn significant attention from private companies that are interested in investing in Vietnam. Widespread corruption can create legal and business uncertainties, thereby reducing the interest of investors. Political instability can create an environment that is not conducive to long-term investment. Apart from that, with fear of being accused of wrongdoings, government officials will be hesitant to make risky decisions related to infrastructure projects. To summarize, uncontrolled corruption, including actions such as cronyism, will have a significant impact on Vietnam’s economic growth and its development as a country.

Conclusion

Truong My Lan’s corruption scandal highlights the prevalence of cronyism in Vietnam’s everyday economic activities. It exemplifies how deeply embedded corruption is in the relationship between state and business. Historically, Vietnam’s government has reformed the economy. Even though it led to significant economic growth, it also fostered crony capitalism, where government and business elites benefit through corruption and favoritism. Although crony capitalism has driven investment in the short run, it negatively impacts economic growth by eroding trust and deterring investment. Thus, addressing corruption is vital for ensuring Vietnam’s long-term economic development.