The wary balance of the market-based economy

12:00 | 31/07/2017

Although Vietnam’s business community has been the backbone of the country’s market-based economy over the past decades, it has experienced its share of ups and downs.

Professor Nguyen Mai

Professor Nguyen Mai, chairman of the Vietnam Association of Foreign Invested Enterprises, provides a look back over the years, with an eye towards the future.

Vietnam’s 30-year transition from a concentrated and subsidised economy to a market-based one has resulted in remarkable changes in the development of the country’s enterprises.

The economy used to rely on state-owned enterprises (SOEs) and agricultural and small-scale co-operatives.

However, over the past three decades it has become characterised by the increasing development of private enterprises, whose numbers now come to over 620,000, including over 20,000 foreign-invested enterprises (FIEs). Many SOEs have been equitised, and the wholly-owned SOEs are almost all major ones.

The resolution of the 12th Communist Party of Vietnam Central Committee’s (CPVCC) fifth plenary meeting stated, “Market factors and types of markets have been formed in a more synchronous manner, and they have become increasingly linked with the regional and global markets. Almost all goods and services have been traded under the market mechanism. The investment and business climate has improved more significantly; the right to freedom in doing business and equally competing among enterprises in economic sectors has been better ensured.”

However, the resolution also underscored limitations: “The operational effectiveness of economic entities and types of enterprises in the economy remain limited. There remains inequality among economic entities in approaching some social resources. Administrative reform remains slow. The investment and business climate has yet to become completely stable and transparent. The right to freedom in conducting business has yet to be fully respected. The right to ownership of assets has yet to be guaranteed.”

Overcoming these abovementioned weaknesses will create new momentum for the development of enterprises in Vietnam.

30 years after the Doi moi reforms, Vietnam’s economy is still taking shape, Photo: Le Toan

Role of policies

In the past, most people underestimated the private economic sector and overvalued the state-owned economic sector. Currently, however, many doubt the efficiency of the latter, saying that it operates inefficiently and that the former is serving as the engine of the country’s development.

But these inefficiencies stem mostly from unsound policies which have impeded the sector’s operation.

SOEs such as Vinashin and Vinalines have become examples of wastefulness, corruption, and inefficiency. Other SOEs like Viettel and Vinamilk have grown into national brand names.

At the same time, private firms as Vingroup and Sungroup have been active in many sectors and won consumers’ trust. However, the success of other firms has come second to their ownerships’ conflicted interests, badly impacting the formulation of government policies and the implementation of public investment projects.

Thus enterprises’ importance should not be assessed based on their ownership ratios, but on the following criteria:

- Socio-economic efficiency: Excluding some public enterprises and non-profit social concerns, the majority of enterprises pursue profit as their prime purpose. Profit has prompted enterprises to renew themselves and improve their competitiveness, and accumulate capital for development.

The country is now in critical need of large-scale enterprises, which can make bigger contributions to the socio-economic development of localities and the country as a whole.

- Market mechanism: Enterprises must be able to perform in a favourable ecosystem and freely compete in a stable, open, and transparent legal framework. They must be equally treated in access to the market, investments and business opportunities, loans, and other financial resources.

The state conducts management in a manner to facilitate enterprises’ performance, and interferes with the market when necessary in order to shun monopolies and unhealthy competition, which can distort market relations.

These two criteria can lay a foundation to create a system to assess the socio-economic effectiveness of all types of enterprises.

Accordingly, the state will make policies for developing enterprises in service of the country’s socio-economic development.

Need for equality

Equality in access to resources based on socio-economic efficiency, not equity ownership and enterprise size, is key to the usage of resources, which are always limited, for projects and other things favourable to national development.

Currently, access to land, public investment capital, bank loans, and investment funds is not equal and fair among enterprises. Specifically:

- In terms of access to land, according to the Vietnam Chamber of Industry and Commerce, “in 2016, enterprises claimed that the land usage situation became more volatile than ever… Risk in land withdrawal has reached a record level.”

While some big enterprises have been given large land areas and delayed their projects intended for the land without being punished, many small- and medium-sized enterprises (SMEs) have faced difficulties in acquiring small-sized land plots.

- SMEs have been finding it difficult to access financial sources, and have missed many investment and business opportunities, while many SOEs are wasting huge amounts of capital sourced from state coffers.

- Though some commercial banks have offered credit packages to SMEs, only 25-30 per cent of the packages’ value has been given to these enterprises annually, because of various difficulties, especially property-related mortgages.

- SMEs are also finding it difficult to access the state’s support funds due to legal barriers. Over the past few years, the government has established some support funds on technological renovation and SME support, while many localities have also had incentives for SMEs.

However, according to experts, such funds and incentives have proven not to be feasible to SMEs due to inconsistent regulations between the funds and related laws.

Removing difficulties for enterprises to be really equal in access to resources would necessitate amendments, supplementations, and perfection of the market-based economic institution. Highly-motivated officials are willing to push for these efforts and support to enterprises would be needed to make it a reality.

Development of FDI

The state has already had its own policies to develop each type of enterprises, like SOEs, non-state-owned enterprises, and FIEs.

The equitisation of SOEs and improvement of SOEs’ operational effectiveness have been conducted over the past two decades-plus, and they are now at the final stage for shaping the state economic sector in the market-based economy.

Regarding privately-owned enterprises, the resolution of the fifth plenary meeting of the 12th CPVCC also declared, “The private economic sector serves as an important driving force for economic development. The state economic sector, the collective economic sector, and the private economic sector are key to the development of the independent and self-reliant economy.”

The resolution has set out a system of ideas and solutions to the development of the private economic sector in a bid to create about two million private enterprises, which will be able to generate 60-65 per cent of GDP by 2030.

This year marks 30 years since the National Assembly enacted the Law on Foreign Direct Investment on July 29, 1987. This being the case, it seems an appropriate time to review the achievements made by foreign direct investment (FDI), as well as its limitations.

During this 30-year period, FDI has steadily grown – though it declined in the periods of 1997-2004 and 2008-2011, when the world’s economy was faced with economic crises.

But overall, FDI has served as a strong impetus of the economy. It currently accounts for 20 per cent of total development investment capital, and creates 20 per cent of GDP, about 50 per cent of industrial output, 72 per cent of total export turnover, and almost four million direct jobs and millions of secondary market jobs.

However, many FDI projects have also raised concerns over environmental pollution, transfer pricing, tax evasion, and labour disputes.

Given the country’s shift to a new development stage and the world’s investment situation becoming more favourable to Vietnam, the government needs a new, effective, and sustainable FDI attraction scheme, which will help the country receive high technologies and services induced by the Industry 4.0 revolution.

An issue of no less importance is to establish links between FIEs – especially multinational groups – with local enterprises, so that Vietnam’s enterprises can join the global value chain more effectively in the sectors its FIEs operate in.

This would help the country gradually create a stronger brand name domestically and globally, and enable the FDI sector to have a bigger spillover effect across the economy.

VIR