Trade, Development, and Immigration

Book review: “How Nations Escape Poverty: Vietnam, Poland, and the Origins of Prosperity” by Rainer Zitelmann

In economics, we often pick out countries or regions that consistently outperform their neighbours, or some other plausible comparison group, in some important respect, and we then ask what it is that they do differently.

If you chose that conventional approach, it is unlikely that you would develop a strong interest in either Poland or Vietnam. In terms of current economic indicators, neither economy is particularly outstanding.

Yet if we look at relative changes over time, we get a very different picture. Over the past three decades or so, Poland and Vietnam have been among the world’s growth champions, albeit from a low base. Not coincidentally, they have also been among the world’s most ambitious liberalisers, again, albeit from a low base. This is the subject of Dr Rainer Zitelmann’s forthcoming new book How Nations Escape Poverty: Vietnam, Poland, and the Origins of Prosperity.


In the mid-1970s, the Vietnam War finally came to an end. North Vietnam and South Vietnam were reunified under the leadership of the North, as the Socialist Republic of Vietnam. Ho Chi Minh, one of the heroes of the Western student protest movements of the period, did not live to see it, but his comrades from the Communist Party of Vietnam (CPV) were now in charge of the country.

Having just emerged from a devastating and drawn-out war, it is not surprising that Vietnam was a desperately poor country at the time. What is more remarkable is that things barely improved in the following years. Vietnam remained one of the very poorest countries in the world, about on a par with Somalia and Sierra Leone. On some measures, living standards got actively worse. As the socialist planned economy of North Vietnam was now extended to the South, it delivered the results that socialist planned economies usually deliver. The forced collectivisation of agriculture led to a decline in harvests, and had it not been for assistance from the more developed socialist sister states in Eastern Europe, it may well have resulted in yet another socialist famine.

Hardliners within the CPV did what socialists usually do in such a situation: they blamed imaginary “saboteurs” and “imperialists” trying to “undermine” the glorious workers’ state. Remarkably, though, in this case, the hardliners did not win out. At a party conference in December 1986, the CPV effectively decided to move away from the planned economy, and allow more room for market mechanisms and private enterprise.

Step by step, this became a reality over the course of the subsequent years. Initially, this merely meant accepting and formalising what was already happening anyway. On the ground, a lot of peasants were already quietly opting out of the collectivised system, farmed their own small plots de facto privately, and sold their harvest on grey markets.

The next big steps were the phasing out of state-set prices, and allowing the reemergence of market prices. Small-scale private sector manufacturing, employing up to ten people, was legalised, a limit which was later raised. State-owned enterprises were not privatised at this stage, but they were given greater autonomy over their operations, and they were allowed to retain some of their surpluses. They were, for example, allowed to buy and sell input factors and capital goods to and from other state-owned enterprises, leading to the formation of a quasi-market. Those familiar with the Socialist Calculation Debate will notice that this goes some way towards solving the socialist calculation problem first noted by Ludwig von Mises in the 1920s. Von Mises had pointed out that in the absence of a market for the factors of production, those factors cannot have market prices, and without market prices, there can be no meaningful economic calculation. Socialist planners and managers of state-owned enterprises would have no way to tell the difference between efficient and inefficient methods of production. They would be stumbling in the dark, and the supposedly “rationally planned” economy would, in reality, be chaotic and unplannable.

Then in the 1990s, Vietnam opened its doors to the outside world, allowed foreign investment, dropped the state monopoly over foreign trade, and began to integrate itself into the global economy. This was taken further in the 2000s, when Vietnam concluded free trade agreements, and joined the World Trade Organization.

The combined results were remarkable. If we use a poverty line of £3.20 a day (PPP), then in the early 1990s, close to four out of five Vietnamese households still lived in extreme poverty. By the mid-2000s, that share had fallen to about half of the population, and today, it stands at about one in twenty households. Average life expectancy at birth has gone up to over 73 years, from 62 years in 1980.

Vietnam is, of course, still far away from being a free-market economy. State-owned enterprises still account for about a fifth of GDP, state planning still exists, and, state-vs-market arguments aside, Vietnam still suffers from widespread corruption.

The economic halfway house which they have built since the late 1980s has enabled them to escape extreme poverty, and attain a modest level of prosperity. That is no small achievement, but whether it will get them much further than that remains to be seen. According to Dr Zitelmann’s survey data, public opinion in Vietnam is unusually pro-capitalist, so travelling further along the road to a capitalist market economy would probably not be unpopular. But of course, public opinion is of limited importance in a one-party state, and in the Vietnamese case, economic liberalisation has not gone hand in hand with political democratisation.


In the late 1980s, Poland was not just poor when compared to its Western neighbours, but also lagging behind the German Democratic Republic, the Czechoslovak Socialist Republic, and some of the bordering Soviet Socialist Republics of the USSR. In addition to the usual problems of an unproductive shortage economy, Poland was also suffering from high levels of external debt, and high inflation.

But from 1989 on, under the economic leadership of Finance Minister and Deputy Prime Minister Leszek Balcerowicz (whom Zitelmann describes as the Polish Ludwig Erhard), Poland became a trailblazer in the post-socialist transition. A series of company laws created the legal underpinnings of an emergent private sector, while prices were liberalised, and the economy was opened up.

It is a commonly held view that the transition worked best in places that went for a gradualist approach, whereas those places that inflicted a brutal neoliberal ‘shock therapy’ fared worst. I used to believe this too, but the experience of Poland suggests otherwise. The Polish economy contracted for two years, but from 1992 on, it started to recover, and it soon picked up pace. Today, Poland is about two and a half times richer, in per capita terms, than in the late 1980s.

Poland is modern market economy, but it is very far from being a free-market role model. State-owned enterprises still account for an unusually high (by OECD standards) share of GDP, and in recent years, the rule of law has been undermined in several ways. Taxes and public spending are higher than they probably should be, in an economy at that income level. So we should be weary of overly optimistic projections, which simply extrapolate present growth trends. But what bodes well for Poland’s economic future is that, not unlike in Vietnam, the public mood appears to be unusually pro-capitalist, according to Dr Zitelmann’s survey data.


This book strikes a good balance between macroeconomic figures, human stories from people living through those periods, references to academic literature, polling data, and simply, an explanation of what actually happened in these countries, policy-wise.

Focusing on case studies of strong relative improvement, as opposed to the more conventional focus on the “best in class”, is an interesting approach. It shows how escaping the worst forms of poverty and underdevelopment does not even take all that much. Countries do not need to get things absolutely right to attain a degree of prosperity. They just need to avoid suffocating the entrepreneurial spirit of their populations.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Editorial Director, and Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

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