Something about the streets of Ho Chi Minh City, filled with bicycles, motorbikes, and ox carts, looked strangely familiar to Dennis Rondinelli. Drafted by Uncle Sam, he had served in the Vietnam War, helping rural people in pacified areas start businesses and rebuild war-torn communities. Rondinelli’s 1994 return was less culture shock than déjà vu.

“I was like Rip van Winkle waking up 20 years later, looking around and saying, `Okay, didn’t miss much,’” says Rondinelli, professor of management at the Kenan-Flagler Business School.

During the next two years, though, office buildings and hotels sprang up like mushrooms. Vietnam sat poised to become the next Asian Tiger, one of Southeast Asia’s booming economies. Even the infamous Hanoi Hilton was demolished and replaced by two towers, one 25 stories tall, for offices and apartments.

Vietnam’s doi moi, free-market economic reforms begun in 1986, jumpstarted the country’s stagnant, state-planned system. Inflation plummeted. Exports nearly doubled to $5 billion from 1993 to 1995. The country’s fledgling industrial base pushed the gross domestic product growth rate to a heady 9.5 percent by 1995.

In 1996, Rondinelli teamed up with the World Bank to assess the change. While the numbers looked impressive, Rondinelli wanted to know whether Vietnam’s financial boom also meant better roads and schools and healthier children, especially in rural areas where he had worked 26 years before.

“There’s an important social dimension to economic growth,” Rondinelli says. “In a country dominated by socialist principles, gaps in the distribution of wealth could bring about a tremendous social backlash.”

In Vietnam, all policy comes from the top. The new head of the Communist Party, three-star General Le Kha Phieu, defends socialism and a firm party rule. He also promises that Vietnam’s economy will maintain a 9 percent growth rate through 1998. That would rank Vietnam as one of a few bright stars in Southeast Asia since the Asian financial crisis began in fall 1997.

So where’s the rub? “You can’t have a market economy and central government planning at the same time,” Rondinelli says. “It’s a contradiction in terms.”

While central European countries throw off the yoke of communism and embrace capitalism, Vietnam’s Communist Party appears firmly entrenched. Will introducing a free market and foreign investment mean losing control? Rondinelli says that’s the dilemma the Vietnamese government faces.

Rondinelli’s interest in privatization and economic transition brought him to the Center for Global Business Research at the Frank Hawkins Kenan Institute of Private Enterprise. A series of Japanese moh opera characters hangs on his office wall, above pictures of his wife Soon-Young, who is Korean, and their two daughters. His smile is contagious as he explains meeting his wife in the U.S. thanks to a roommate he had during the Vietnam War.

“Something good did come out of the Vietnam War,” he says.

During his 1994 visit, he worked with sociology doctoral student Le Ngoc Hung to propose how rural Vietnamese can share in the wealth. In the field, they interviewed experts in and out of government to get an accurate picture of doi moi. “It would have been difficult without Hung’s help,” Rondinelli says.

Hung’s work at Vietnam’s Central Institute for Economic Management gave them access to government reports. The researchers cross-checked statistics with the London-based Economic Intelligence Unit and the World Bank, and their own interviews. Under the auspices of the World Bank, Rondinelli traveled and interviewed freely.

Right away they met doi moi entrepreneurs, many providing basic services once the domain of government. Private “people-founded” schools in urban areas offered an alternative for those who could afford to pay. Doctors and health care workers opened their own clinics after the health care system was deregulated in 1991. Now, patients and their families can buy almost any medicine at a private pharmacy, especially those not available in a public hospital.

But as they drove north of Hanoi to provinces near the Chinese border, the alternatives disappeared. Children sat on benches in dirt-floored, single-blackboard schools. Parents who could not afford informal “contributions” to fix leaky school roofs or buy library books kept their children home from school. Many people sought traditional healers if they did not have access to communal health clinics.

“We saw that the old institutions in place since 1975, or even before that in the North, are no longer really effective in terms of taking care of people’s health and education and providing jobs,” Rondinelli says. “Vietnam needs new kinds of organizations and institutions.”

More private enterprise is one solution. Giving local leaders the responsibilities for financing and administering their own services is another. He also suggests that party officials encourage nongovernment organizations to provide health care and other services, a new idea for Vietnamese leaders.

“There are no indigenous nongovernment organizations in Vietnam,” says Joe McMahon, an attorney and a volunteer for Denver-based Water For People, a nonprofit organization. In 1995, Water For People started tapping into schools in Vietnam’s central Hue Province. The group now helps nearly 100 schools obtain a clean source of water. Like Rondinelli, McMahon had seen Vietnam before, mostly from the cockpit of an F-4 Phantom fighter jet.

“There’s a desire at the national government level to provide clean water for everyone by the end of the century,” McMahon says. “At the local level, government officials are very receptive to what we do, but we have a lot of challenges working with provincial governments.”

Theodore Ning, the cofounder of Water For People, picks his words more carefully. He hesitates to reveal the personal opinions of rural residents for fear that government officials would misconstrue his comments. “I can definitely say that the rising gross national product of the cities is not reflected by the residents of the countryside,” he says.

According to UNICEF, 42 percent of rural and 47 percent of urban Vietnamese have access to safe water. Only 16 percent of rural residents, compared to 47 percent of urban residents, have access to a sewer system.

One reason for the disparity lies in Vietnam’s sticky web of government. Rondinelli says the system of provinces, districts, and communes breaks down when it comes to taking responsibility for basic services, like water, schools, and roads.

“We talked to a lot of people in local levels of administration who really didn’t know what they were responsible for,” he remembers. “When we asked, they sort of shrugged.”

Reform comes slowly. Under pressure from international lending organizations, Vietnam passed a budget law in 1996 to sort out provincial responsibilities and limit corruption. But Rondinelli questions the law’s effects, especially in light of a recent pullback by the Communist Party. National government officials complain of “cultural pollution” among younger Vietnamese more enamored with the free market than the party line. One Communist official was recently quoted as saying the government was not afraid of capitalism; rather, Vietnam was afraid of not being able to control it.

Perhaps at the heart of all the difficulties is the fact that the government, and many people, do not fully accept and understand free enterprise,” says Paul Wedel, executive director of Bangkok-based Kenan Institute Asia. “In particular, there is a tendency to see dealing with a foreign company as a zero sum game in which any profit to the foreign business somehow means a loss to Vietnam.”

Kenan Institute Asia, which is sponsored by the Kenan Institute of Private Enterprise, fosters U.S. technology, knowledge, and business expertise in Southeast Asia.

A 1995 graduate of the Kenan-Flagler Business School, Michael Frederiksen works in Vietnam for a Thai-based real estate developer. He says local business partners often demand undue influence on day-to-day business decisions.

“The lack of understanding when it comes to competition and joint-venture partnerships has stunned me,” he says. “Many issues have to be tiptoed around, and the Vietnamese government has to be nudged gently to take a capitalist view. Patronizing or confrontations get you absolutely nowhere.”

Coupled with the widespread conviction that all foreigners are rich is the expectation by police and local authorities for “tea money,” or payoffs. The temptation to overtax foreign-generated income also discourages investors. Rondinelli says some companies find that Vietnam’s luster has worn off, especially those unrealistic about Vietnam’s potential. Indeed, 14 companies have a license to assemble cars in Vietnam. But fewer than 20,000 vehicles were sold there in 1997.

Over the long run, though, Rondinelli seems positive that if politics loosen and the economy continues to grow, U.S. companies will do well to keep an eye on Vietnam. Construction firms and energy providers, as well as transportation and manufacturing companies, could do well there, he says. It’s no accident that Russia pledged earlier this year to help build a $1.5 billion oil refinery, Vietnam’s first.

“It can be a place where companies that make basic consumer products can make a lot of money,” Rondinelli says.

Still, he emphasizes that Vietnamese leaders must face the changes within as well as from abroad. The strength of the economy ultimately depends on the well-being of those furthest from the busy streets of Hanoi and Ho Chi Minh City, he says. Without creating new organizations and institutions to boost services, rural residents will be left behind. New institutions and reformed economic policies go hand in hand.

“But it’s much harder to change institutions,” Rondinelli says, “than it is to change policies.”