Learning to be capitalists

  • Spring 2009
Annette Kim

Annette Kim is Ford International Career Development Professor of Urban Studies and Planning at MIT’s Department of Urban Studies and Planning, and author of Learning to Be Capitalists (Oxford University Press, 2008).

By Annette Kim
May 1, 2009

This book has considered a puzzle: why have some countries transitioned to capitalism so rapidly? How did they change their economies so fundamentally when so many reform efforts in developing countries have been ineffective? The conundrum has grown the last two decades as transition countries in Europe and Asia attempted to overhaul their entire economic systems with varying results. We must concede that a particular set of reforms does not correlate with economic growth, investment, and domestic firm formation. Vietnam is one of the most curious cases of transition, because while experts have ranked it as having the most inappropriate reforms, it is currently one of the fastest growing economies in the world.

I have focused on solving one part of Vietnam's transition puzzle. Its fastest growing city, Ho Chi Minh City, has a real estate industry that ranks as the worst place in the world for private capital to invest. Nevertheless, Vietnam's domestic housing market has flourished. And most intriguingly, hundreds of entrepreneurs and private firms emerged within the first decade of transition to develop large investment projects. Where did these people come from? How could they conduct business in such an inhospitable economic environment? The aim of my research was to help fill the gap in our understanding of economic transition by directly engaging this first generation of entrepreneurs. I lived in Vietnam and developed extended case studies to find answers. 

My research eventually led me to the concept of social cognition. Social cognition's framework provides insights into the process of institutional change that better explain the diversity of transition outcomes than either the historical materialist or the neoclassical frameworks. It illuminates how market capitalism developed so rapidly in Vietnam despite conventional wisdom, why political connections and financial resources were not enough to determine the success of firms, why private firms did not emerge as readily in Hanoi as they did in HCMC, and why developers in Warsaw, Poland, emerged under the conventional set of reforms.



I realized that my case firms, despite being an eclectic group in terms of size and productivity, ownership, domestic and foreign participation, political power, and social position, all shared a common understanding of the way private land development works in HCMC. This fiscal socialism system, outlined in chapter 4, was not recorded in any government economic development plan or in any urban economics textbook. Still, my fieldwork enabled me to diagram the system, and the entrepreneurs confirmed their roles in it and the terms of their new economic relationships. Their understanding of the terms of fiscal socialism distinguished these entrepreneurs from lay dabblers in real estate (who might, for example, build an extension to their house in order to rent rooms). This motley group of entrepreneurs possessed a new and shared cognitive paradigm.

The fiscal socialism model of land development was not only a significant change for Vietnam, but also completely unlike the conventional model of the way land development is supposed to work in a market economy—the model that development projects, overseas technical assistance, and capacity building projects presuppose. Rather than having secure property rights and enforcement of contracts through courts to encourage private investment, property titles were distributed after the land rights were sold, the project was financed by customers, and the construction was completed. Because it seems untenably risky to invest in property one does not own, policy experts have consistently viewed Vietnam's institutional framework as severely backward for a market economy.

The obvious question arises as to why the fiscal socialism system emerged, rather than the conventional one. My fieldwork showed that it was the result of a social and political process. The state played a large role in the construction of fiscal socialism because it controls all land development through ownership, urban planning, and permits and approvals. Its bureaus decide which land parcels may be developed by private parties and thus which current land occupants must eventually relocate.

But HCMC's private market and entrepreneurialism did not form in response to a grand master plan designed by the state. For one thing, the government does not have the public finance to develop most of its plans. Nor can it command private entities to perform, as it could with state-owned enterprises during the era of central planning. Rather, the way the new system was structured requires a definition of power broader than state coercion and the manipulation of political elites. Some theorists have defined power as the strategic alignment of interests. The state needed public finance to fund the infrastructure development of its rapidly sprawling city and to bolster its legitimacy. Meanwhile, large segments of the exploding urban population, whose household incomes had tripled through trading, were seeking better housing options after decades of public neglect, as well as investment opportunities for their surplus. In the beginning of transition, with the city's need for heavy capital investments for economic development without effective means for the state to access private savings, the firms filled a role in mediating the interests of these parties. They were the dealmakers who could take household savings and build the city's infrastructure. But the rural population contested the share they received for being dispossessed and relocated for new urban development projects, to the point that they also shaped the terms of the land transfer and the firms' project location, size, and profitability. In other words, the less powerful members of society still had an important role in shaping the social construction of fiscal socialism through their resistance.

Identifying the alignment of interests helps us understand why the various social groups would choose to participate in the new economic system. But for these people to see and adapt to the new order required a socialization process. In other words, the reformation of the economy involved reconstructing cognitive paradigms in society as well as in the developers. One indication of the social cognition process is to observe how power struggles were fought in public discourse. The central and local governments faced limited resistance through public demonstrations and editorials in state-run media, but these acts were just the tip of the iceberg of social dissent that the state could not ignore. Society had generated several narratives about the transition, such as stories about the greediness of ward officials and private developers. But it had also generated narratives about the greediness of farmers and the need for rapid economic development. The tension between these competing narratives did not have a primary forum, such as a supreme court; rather, interpretive narratives and knowledge about conflicts and acts of resistance spread throughout society into its cognitive collective. The new economic system and the very material transfers of land and finance were enabled and shaped by the boundaries and definitions being constructed through this society-wide negotiation process.

Furthermore, the strategic alignment of interests throughout society is still not enough to explain how the firms could turn potential opportunities into reality. By Western standards, the substantial risks in this arrangement should still have inhibited investment. I observed that within the new paradigm of fiscal socialism, the firms that emerged still had to find practical ways to manage the risks and make projects work. Specifically, in order for the case firms to complete the four critical steps in urban land development projects, they had to create institutional arrangements of their own through private contracting and relationships. In chapter 3 I outlined the considerable institutional diversity in the ways the firms found land to develop, negotiated land compensation, collected development finance, and processed the many permits and approvals needed. The creation of these practical micro-institutional arrangements allowed HCMC's unusual market to function with formal project approval and property titles distributed at the end of the project, customers supplying the bulk of development capital, and local government working closely with the developers.

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

An excerpt of Learning to Be Capitalists: Entrepreneurs in Vietnam's Transition Economy, published in October 2008, was reprinted with permission from Oxford University Press.

As expected, I found that the firms' ability to create these institutions were in part constrained by their social position. The entrepreneurs were relatively young, educated urbanites. However, fieldwork in HCMC also showed that in the unruly social construction process, developers who were in similar social positions, and who had similar access to political resources, did not interact with the changing structures in the same way. In order to survive, all firms had to learn how to develop projects. They did not necessarily copy what other firms or actors did, but they did acquire tacit knowledge vicariously. In other words, agents started to perceive the underlying framework of new possible economic actions and sometimes generated behavior going beyond what they had seen or heard. The developers exhibited agency in the particular choices they made about how to develop projects that were important in determining such things as which firms succeeded in HCMC. The most productive firms, although varying in size and ownership, shared a common factor: their leadership continually learned and adopted new information and strategies into their operations. They learned how to be entrepreneurs in this particular market.

Thus the reformation of the entrepreneurs' cognitive paradigms made fiscal socialism practicable. Social cognition, however, means that the cognitive paradigms change not just in individuals but with the other members of society with whom they interact. Very important in understanding the change in these entrepreneurs is the change in some bureaucrats, in particular local wards and districts, that made fiscal socialism a practical reality in HCMC. Their discretion in interpreting and implementing the national laws and policies and becoming entrepreneurial themselves in trying new activities and relationships were key to the successful completion of projects. That is, it was not only the firms that learned, but also the local state actors who learned how to be a capitalist-friendly state. This was not true of all bureaucrats that I met, some of whom still spoke of the immorality of the private sector's existence. But my case firms freely introduced me to local bureaucrats who thought differently and with whom they could work.

Furthermore, the vicarious learning exhibited by the developers and local state actors was assisted by HCMC's informal social structures more than the formal, legal ones. The spread of entrepreneurialism in HCMC was shaped by the openness and extensiveness of its social networks and the availability of intermediaries. People were open to meeting people and sharing information. New people could enter the market without extremely strong political connections because they could develop them. Furthermore, the looser social norms about laws and regulations held by the bureaucracy in the south encouraged people to experiment and create new economic relations.

The importance of these informal, social structures and their cognitive nature became even clearer when we compared HCMC's situation to that of Hanoi. Although both cities are in the same country, with uniform laws and policies, and both have very high housing demand, private development firms did not emerge in Hanoi as they did in HCMC. Local political economy interests and social norms embedded in both state and private actors impacted the formation of markets. Several of the firms that had successful operations in HCMC tried to develop projects in Hanoi, in order to take advantage of the severe housing shortage there. But they reported that the closed power structure in Hanoi limited entry into the market, as did the more exacting regulatory enforcement by local bureaucrats. It was more than the bureaucracies that impeded the formation of firms, however. As evidenced in the statistical analysis of market prices in both cities, presented in chapter 6, households in Hanoi's new housing market possessed such deeply embedded norms about legal formalism that they would reduce the asking price of their own properties if they did not have property title papers in hand. In short, the fiscal socialism system could not have emerged in Hanoi because neither the political economy nor the cognitive structures allowed sufficient agency in state and private actors to create new relations and actions. That is, even if individual agents had had simple profit maximizing interests (instead of the social, interdependent ones we observed), they would have had difficulty performing entrepreneurial actions because the rest of society was not willing to engage with them. Which district officials would protect their projects? How many Hanoian households would pay installments for an unbuilt house for which they would not receive title until several years later? Individual Hanoians who wanted to enter the real estate business could relocate to the south and work there, but the reverse was not true. The unimaginability of new relations and actions is central to the variation we observe in transition economies.

This comparative example does not imply that Hanoi does not have the right cultural traits for capitalism, or that HCMC was somehow more naturally entrepreneurial. For example, around 2003, after the central government changed the top leadership in HCMC (something it does on a regular basis), the newly installed bureaucrats enforced a more formal and exact reading of the regulations and a closer oversight of district government activity. Concurrently, popular criticism increasingly vilified the land management practices of some local ward and district officials. The other HCMC state actors then became less amenable to suppressing the bargaining ability of rural landholders and facilitating the firms' applications for development approval through the many intergovernmental layers. HCMC's fiscal socialism system of land development slowed to a crawl, if not a halt. Because of a change in powerful agents and a shift in narratives about bureaucrats, the paradigm shifted so that the local state actors changed their dispositions. It also improved the farmers' bargaining position in relocation compensation. In other words, the market and its terms of exchange are being continuously reconstructed by agents in society.

However, the kinds of social networking and social norms present in HCMC were not necessary for private investment in other places. Another important insight of social cognition theory is that attention is not located in the same places in particular societies. In a comparative analysis with Warsaw, we saw that Polish developers did not learn how to develop projects from one another and did not collaborate or socialize with one another. Instead of networking, they paid attention to foreign firms and learned from them as unofficial apprentices. We also saw that Warsovians were sticklers about legal documents and notaries, much like Hanoians. But the firms took advantage of legal formalism and redeployed it in the post-Communist housing system. Despite being touted as an exemplar of conventional transition reforms, most of Warsaw's property contracts were not formally correct nor could they readily be enforced in courts. Their social legitimacy, however, could still be used to encourage customers to take risky full-recourse mortgages to pay for unbuilt properties and for landholders to sell development options to the new firms. As in HCMC, the key to firms being able to implement projects was the decentralization of development authority to the sub-city, gmina level of government. Some gminas would exercise discretion and help the firms gain planning approval to proceed with a project. In other words, Warsaw's housing market bore striking resemblances to HCMC's fiscal socialism.

In summary, housing markets and private firms developed rapidly in HCMC and Warsaw through a reconstruction of socially shared cognition that supported a strategic re-alignment of interests. This new paradigm, along with practical knowledge, spread through social processes of vicarious learning and the particular pathways of attention structured by their respective societies. The location of these happened to be in very different places between the transition societies.