Domestic Mobility and Elite Rent-Seeking: The Right to Migrate Among Provinces and Vietnam's Economic Success Story

Abstract:     
Vietnam represents an interesting case study for debates about international trade opening and economic federalism. Critics of globalization have long argued that competition for investment capital will lead to a race to the bottom, where in order to obtain foreign investment, a state has to reduce its tax rate, its business regulations and social welfare provision to an absolute minimum. In the process, it is forced to reduce the welfare of its population, especially the most vulnerable groups. Vietnam's economic structure reflects this globalised world domestically: with 64 provinces competing for investment vigorously and under conditions of factor mobility, the assumptions of globalization should hold in Vietnam if they are correct in the interstate system (where particularly labor flows much less freely). This research finds that the most globalized provinces (those with the highest level of foreign investment, international trade and industrialisation) are far from the bottom in terms of social welfare provision. Instead, they attract hundreds of thousands of migrant workers who brave significant obstacles to join the workforce of – preferably foreign – factories. It is here hypothesized that this competition among economic subunits under conditions of free movement of all factors of production changes incentive structures for the elites, reducing their interest in maximizing rent seeking while giving them incentives to grow the pie overall instead. With reduced rent seeking, business climate and economic performance improve. Contrary to the assumptions of globalization critics, social welfare does not decline, as evidenced by continued mass migration to the small number of highly industrialized, trading and foreign invested provinces from virtually all other parts of the country. Implications for globalization theory are discussed in the conclusion.

Keywords: Vietnam, Decentralization, Federalism, Race to the Bottom

JEL Classification: O53, P20

Accepted Paper Series