Nguyen Quang Dy: The Paradoxes of Special Economic Zones

Hanoi — Recently, there has been intense interest and discussion concerning a new Bill on “Special Administrative and Economic Units” (referred to as “special economic zones”) expected to be passed by the National Assembly soon. The first three special economic zones (SEZ) of Vân Đồn (Quảng Ninh), North Vân Phong (Khánh Hòa), and Phú Quốc (Kiên Giang) would be invested (until 2030) VNĐ 1,570,000 billion (nearly $70 billion). While I’m not against the SEZ concept per se, and not sure how they have come up with this huge figure, I do not support these three special economic zones for the following reasons.


For transitional economies (like Vietnam), the SEZ concept remains attractive, though a bit outdated with more lessons of failures. This concept requires certain conditions as it is not really about what to do but how to do it. While everything is possible, “a miss is as good as a mile”.

Given the right conditions for the project to move on track at the right time, it could become an economic leverage and growth engine (like Shenzhen). Du Bai was a success story that many countries wanted to repeat. Some Vietnamese have dreamt of turning Chu Lai into Vietnam’s Du Bai, or turning Phú Quốc into its Singapore. But Singapore’s success was due to “the Lee Kuan Yew factor” (which Vietnam does not have), and Du Bai’s success was due to the absence of “the China factor” (which Vietnam has too much).

Though the SEZ idea is nothing new, some people might have forgotten the bad lessons of “Vũng Áng Special Economic Zone & Formosa Steel Complex” (in Ha Tinh) and Tân Rai & Nhân Cơ bauxite mining projects (in Central Highland), as well as bad experiences of Chu Lai (Quảng Nam, 2003), Dung Quất (Quảng Ngãi, 2005), Nhơn Hội (Bình Định, 2005), Chân Mây (Thừa Thiên,  2006), Vân Phong (Khánh Hòa, 2006), Phú Yên (Phú Yên, 2008).

Why failures? What would make the new projects successful? Without institutional change to curb power and corruption, similar development models would repeat the failures.

Once natural resources are drained and the land scarce, interest groups would naturally   scramble to seek rents by levying higher taxes (for VAT, income and property), increasing utility prices (for gas, power, water) and toll fees. SEZ becomes a new piece of cake that they would lobby for parts of the game.

While Beijing is militarizing and controlling the South China Sea (as its own lake) banning Vietnamese from fishing and developing oil resources in their own waters, it would try to control critical positions on land. SEZ becomes an attractive piece of cake for them to take. Vietnamese interest groups may collaborate with Chinese firms (for shared interests) to manipulate policy and projects.

While government officials’ management capacity is limited (especially at local level), their greed is unlimited, and thus they are likely to be manipulated by interest groups. While the painful lessons of Formosa and bauxite mining projects are not forgotten, the new scandals of public investment projects in Ninh Bình are shocking.

Though Ninh Bình is not a special economic zone, it is a “kingdom” by itself. Those local interest groups are not only “grabbing everything” but also “ruining everything” by greed, leaving serious consequences, not only in an economic and social sense, but also in terms of national security.

Economic picture   

According to Vũ Quang Việt (an UN statistics expert), the SEZs of Vân Đồn, North Vân Phong, and Phú Quốc have put “group interests first”. The new Bill has focused on property and casino market, without attracting high-tech investment.

What Vietnam really needs is high-tech and educational investment to increase productivity, industrial development and knowledge-based economy, not property and casino projects. Viet said in 2011-2016 period, the productivity in Vietnam’s industrial sector registered a very low average growth of only 2.9% annually, while the average GDP growth rate would not go beyond 5.0% annually if the productivity could not grow beyond 4.0% annually. That is a strange economic phenomenon, and a paradox of economic development in a country where the productivity ranks among the lowest in the world (15 times lower than that of Singapore).

Without a national debate to assess and quantify the pros and cons of the SEZ projects in terms of economic, social, and geo-political consideration, there may be misconceptions (from wishful thinking) or risky decisions (by interest groups’ manipulation) leading to mistakes (like before).

These are likely scenarios:

  1. First, there may be a new “land rush” in a property market already too hot with price hikes driven by brokers (even when the SEZ idea was speculated).
  2. Second, there may be “a property bubble” leading to a crisis of over supply, making the economic picture twisted and chaotic.
  3. Third, as a result of such developments,  these SEZs are no longer attractive for high-tech investors who would need a cleaner business environment and a decent eco-system for business operation.

While the government keeps talking about “technological revolution 4.0”, what is going on at these SEZs is really “economic mindset 1.0”. But, it is a big mistake to use a policy of land-lease (for 99 years) to attract high-tech investors who do not really need long-term land-lease.

Business investors focusing on supply chains and global value chains would need linkages with infrastructural and business eco-systems, partnership networks and financial institutions, professional service providers and skilled human resource, all of which are not offered by these SEZs.

The only thing they offer is free space in an un-free environment. In this sense, special privileges offered are not really special at all. What are the real reasons for the SEZs then (except for property development)? The obvious answer is “casino and red-light district”, as these SEZs are the only places in Vietnam where these people can do business freely. But, another reason that many people are aware of but still reluctant to spell out (for “sensitivity”) is “the China factor”. Otherwise, there is nothing else there.

Social-political picture  

While the Party and Government have a headache trying to figure out how to control power and corruption, the legal system for the SEZs gives too much power to the “SEZ chairman” as a lord (or a prince) having the rights to grant foreign investors land-lease up to 70 years or even 99 years (if approved by the Prime Minister), to appoint contractors, sign labor contracts and employ public servants…Investors are also allowed to enjoy a tax break for 30 years, to transfer property rights by sales or inheritance.

Some experts said a policy of land-lease for 99 years would only serve big property developers (and China), while 85% investors confirm a tax break is unnecessary (according to World Bank). Foreign nationals are allowed to work up to 180 days per years (without work permits), and they can get residence permits for 5 years if they invest VNĐ 110 tỷ ($5 million). Vietnamese are allowed to gamble at the casino, and enjoy a personal income tax break for 5 years (and 50% in the following years).

These special favors would lead to a new wave of migration from China and other neighboring countries, especially the unskilled labor market, upsetting the demographic structure of these zones, thus increasing social problems and crime rates (like the “Wild West” time). The SEZs are also “special incubators” for crony capitalism (or “red capitalists”).

According to Minxin Pei, the entrenchment of crony capitalism (in China) would make the transition to democracy more difficult and disorderly. It is difficult for the democratization process (led by the middle class) to happen under crony capitalism. It would be a mistake to assume that private entrepreneurs, once they have gained economic wealth and political power, would prefer liberal capitalism to crony capitalism.

The legacy of crony capitalism (greater inequality of wealth, local mafia states, and the collusion of privileged tycoons) would enable those who have acquired enormous wealth to wield political influence to crack down on new elements of democracy.

The dynamics of regime decay would destroy the institutional integrity of the party-state through three possible mechanisms.

First, these collusive networks would colonize all corners of the party-state, trying to subvert its political authority, transforming it into their private instruments of power. Instead of advancing the regime’s interests, they would primarily seek private benefits.

Second, corruption networks would compete with each other for power and rents, thus weakening the party’s internal unity and increasing the risk of purges that endanger the personal security of its top elites.

Third, when collusive corruption pervades the security apparatus of the party-state, it is almost certain to undermine the effectiveness and loyalty of the pillar institutions upon which the party-state’s survival rests. (China’s Crony Capitalism, Minxin Pei, Harvard University Press, 2016).

While some people thought Phu Quoc should be developed as Singapore (talk about positive thinking!), others would fear Vân Đồn might become something like Cremea (a negative thought). But the “Singapore Story” has been based on completely different premises.

Lee Kuan Yew once said, “The number one position in Asia should have been for Vietnam”.  According to him, the geo-political position and abundant natural resources should be the top factors which could have turned Vietnam into “the Big One of Asia”. Whereas today Vietnam’s economic output is only 1/15 of Singapore (or 1/5 of Malaysia, and 2/5 of Thailand).

Lee confirmed that the success of a nation would depend on three key factors. First, natural conditions (as strategic location and natural resources); Second, the people; Third, the opportunity.

But the human factor is always the most critical one. That is why Lee Kuan Yew was so regrettable that Vietnam has failed to appreciate talents, as he believed most Vietnamese talents have migrated overseas. (Việt Nam in Lee Kuan Yew’s eyes, Cao Huy Huân, VOA, September 14, 2014).

National security picture    

Even if these SEZs would become (short-term) successes in tourism, property or casino, Vietnam stands to pay huge prices for geo-political and national security follies (as “more harmful than good”) Article 62 of the Land Law is a policy loophole to be manipulated by interest groups, while Article 69 opens the door for China to infiltrate Vietnam.

At the Formosa steel complex (Hà Tĩnh) and Lee & Man pulp mill (Hậu Giang) thousands of Chinese work there. Recently, there have been public protests in Quảng Ngãi province for removing the Bình Hải border station to clear the land for FLC’s “Resort & Tourism Complex” at Bình Châu-Lý Sơn newtown.

Not only Quảng Ngãi but also Đà Nẵng has moved a border station to clear the land for a private property project. Gen Võ Tiến Trung (former Director of the Defense Academy) confirmed “The positioning of border stations had been considered carefully in the perspectives of local defense planning” (Zing, April 22).

Article 62 is also good news for interest groups as it allows local governments to take the land away from farmers and give them to companies for project development, and Vietnamese companies can transfer the land to foreign companies (like Chinese ones). In a seminar in Japan (September 7, 2017), Trịnh Văn Quyết (FLC president) said that apart from selling shares, “FLC can transfer projects to foreign investors”.

According to news reports, Quảng Trị province is prepared to allocate 1000 ha along Cửa Việt seaboard to FLC for resort, golf course and an airfield development. Now that Vũng Áng is in Chinese hands, Vân Phong and Cửa Việt may be the next ones in line that China is really interested. Along the Northern to Southern seaboards of Central Vietnam, many strategic positions have been granted to Chinese companies for resort projects without taking national security into consideration. In Da Nang and Nha Trang, many strategic defense positions along the coastline have been taken over by Chinese companies (sometimes through local proxy).

While Vietnam’s economic interests and sovereignty in the South China Sea are seriously threatened by China, the decision to set up new SEZs at these critical positions would be inexcusable for either economic or national security reasons.

Given poor management yet  exceptional corruption skills, these SEZs may become “special corruption zones” by interest groups (or “red capitalists”), and “special incubators” for “crony capitalism”. If most of big projects in Vietnam have fallen into the hands of Chinese firms, there is no reason why they would not take over these new SEZs as “special concessions”.

Chinese crony firms supported by their government with powerful motivations and financial resources would take over the SEZs as a “soft invasion”, to “win without fighting” (as Sun Tzu’s art of war or Weiqi board game). For those critical positions on land that China could not take by force (as they had taken Paracel and Spratly islands) they would try to take over by investment and “sharp power”. Therefore, the “great policy” for the new SEZs with special favors (for 99 year lease) looks like “sending the fox to mind the geese” or “giving a hand to the enemy”.

Geo-strategic picture

In history, Vân Đồn was a frontline outpost having a strategic position guarding the North-Eastern gateway to the sea, from where Chinese naval forces would invade. Ngô Quyền had fought the Southern Han Dynasty’s army, and defeated it at Bạch Đằng naval battle (in 938), Lý Thương Kiệt had fought the Song Dynasty’s army (1075-1077), and Trần Hưng Đạo had fought the Mongol armies (1257-1288).

When Lý Thường Kiệt launched preemptive attacks on Khâm Châu, Liêm Châu, and Ung Châu (Chinese citadels across the border), his army had used Vân Đồn and Móng Cái as staging bases before the attacks. And later, when Lý Thường Kiệt fought against the Song army along Sông Cầu river defense line, Vân Đồn was used as a naval base to prevent the Song naval force from moving up the river to regroup with the Song army at Sông Cầu. That is why the Song army was defeated …

If Vân Đồn enjoys a strategic position guarding the North-Eastern gateway, looking over the Tonkin Gulf, Phú  Quốc enjoys an equally strategic position guarding the South-Western gateway looking over the Indian Ocean, while Vân Phong (near Cam Ranh) enjoys a strategic position guarding the gateway of Central Vietnam looking over the South China Sea. In Central Vietnam, while Sơn Dương (in Vũng Áng) is a deep-water port now controlled by the Taiwanese and Chinese, Vân Phong and Cửa Việt are the only major deep-water entrepots having strategic values that China has not been able to control.

Phú Quốc commands a special strategic position in the new Indo-Pacific vision. It is so close to Sihanoukville and Bokor (in Poipet, Cambodia), as two strategic positions which China has leased for 50 years. Now, China is very interested in Phú Quốc as the next target to form a strategic triangle in this area. Once China could strike a deal with Thailand to develop the Kra canal, Phu Quoc might be even more important than Singapore in geo-strategic terms.

According to James Holmes (a leading American expert in naval strategy) “a clash of arms (in the South China Sea) is possible”, and “China could win even if it remains weaker than America in the aggregate”. In the words of gen Chang Wanquan (Chinese defense minister) China can win a war in the South China Sea by “people’s war at sea”. Holmes commented: “statesmen and commanders in places like Manila, Hanoi and Washington must not discount Chang’s words as mere bluster”. The Chinese can win by “over-empowering the US in a war by contingent at the place and time that truly matters…”.

In this sense, “active defense is all about harnessing tactical offense for strategic defensive campaigns”. Now that PLA commanders could pursue a mix of small and big unit engagements against the US-led coalition, Holmes advised “US and allied commanders to study China’s art of war to gain insight into how PLA’s offshore active defense might unfold in the South China Sea”. (China Could Win a War Against America in the South China Sea, James Holmes, National Interest, May 30, 2018).

In an armed conflict in the south China Sea, the SEZs of Vân Đồn, Vân Phong, and Phú Quốc would play a critical role in the strategic game of “anti-access/area denial” (A2/AD). If these strategic positions are in China’s hands, Vietnam would be checked mate (and the game is over). That is a real danger in any war scenario, not only for Vietnam but also for ASEAN and other powers having vested interests in the South China Sea (such as the US, Japan, India, Australia, and the EU or Russia). As the South China Sea is vital not only for Vietnam but also for these powers, the story of Vân Đồn, Vân Phong, Phú Quốc SEZs should be put in  larger geo-political perspectives of the South China seas and the Indo-Pacific vision.

Let’s bear in mind the geo-strategic implications of the SEZs (like the TPP saga) are greater than (short-term) economic interests. It would be unfortunate if law makers and decision makers have no strategic thinking, or strategic think tanks are muted.



The new SEZs of Vân Đồn, North Vân Phong, and Phú Quốc would be invested 1.570.000 billion VNĐ (with 270.000 billion for Vân Đồn, 400.000 billion for North Vân Phong, and 900.000 billion for Phú Quốc). Even if the initial investment figure would not be inflated (like  the “Ninh Bình syndrome”), how can the state or the business community raise so much money (if not from the “northern neighbor”). This implies potential national security risks and long-term geo-political dangers. If the story of the SEZs is put in perspectives of conflict of strategic interests and the new Indo-Pacific vision, “the China factor” would loom large and clear in the broader geo-political picture. It is really a paradox when Vietnamese leaders keep lobbying hard for the US, Japan, India, and Australia to increase their military presence in the South China Sea to counter China while the National Assembly is prepared to pass this new Bill to allow potential investors (mostly the Chinese) to lease the land (for 99 years) at the most critical positions having strategic values in the country.

The nature of Vân Đồn, North Van Phong, and Phú Quốc SEZs is mostly about property market and casino operations. As soon as the news about the SEZs was speculated, investors started to rush in to buy land for hoarding, driving the prices up. So why do they need to set up the SEZs when the market is already moving? For Vân Phong to become an entrepot, it is not necessary either to set up a SEZ. In fact, property development is simply land hoarding for “quick bucks”. They have mistakenly assumed that the key factor to attract investments is a series of favors leading to legal manipulation, tax avoidance and money laundering. But attracting investment at all costs would entail big prices to pay later. For long-term sustainable growth, there must be institutional change to facilitate international integration along the line of the common standards already agreed upon in the WTO, BTA, FTA (and CPTPP).

While the Party would “lead everything”, the National Assembly should share responsibility for this “historical decision” which would define patriotism. This is when law makers and decision makers should think over and decide what to choose (like “choosing fish or steel”). If they make the right decision, later generations would be indebted. But if they make the wrong decision, they would be cursed by later generations (even if they run away). Many experts have advised that for the Bill to be passed it requires extensive inputs and revisions to ensure national interests over group interests, to void unfortunate mistakes. Negative consequences in social-economic, institutional, environmental and national security terms as a result of the SEZs (as “special concessions”) would be enormous and unpredictable. Once money is lost, it is difficult to recover. But once territory and sovereignty are lost, it is impossible to recover. When can Vietnam get back the Spratly and Paracel islands?  (and the next might be Vân Đồn, Vân Phong, and Phú Quốc). Now, it is time for the National Assembly to prove they would vote for national interests, not group interests (or foreign ones).


  1. Việt Nam in Lee Kuan Yew’s Eyes, Cao Huy Huân, VOA, September 14, 2014
  2. China’s Crony Capitalism, Minxin Pei, Harvard University Press, 2016
  3. Dự án luật về ba đặc khu Vân Đồn, Văn Phong và Phú Quốc (Legal Bill on Van Don, Van Phong, Phu Quoc SEZs), Vũ Quang Việt, Viet-studies, May 30, 2018
  4. Mô hình đặc khu đã lỗi thời (Outdated SEZ Model), Nguyễn Tiến Lập, MTG, May 31, 2018
  5. China Could Win a War Against America in the South China Sea, James Holmes, National Interest, May 30, 2018

NQD. June 3, 2018