Vietnam: Further Reforms Needed

2002

Dr Binh Tran-Nam

Early in 2001 Vietnam's National Assembly adopted an average target of 7 per cent-7.5 per cent GDP growth rate per annum for the next ten years. This target, set by the Ministry of Planning and Investment, aims at doubling Vietnam's real GDP by the end of the first decade of the 21st century. Vietnam's current population growth rate is 1.7 per cent per annum and decreases very slowly. After allowing for population growth, the government target, if achieved, will increase Vietnam's GDP per capita by about 70 per cent after ten years. Since Vietnam's costs of living will rise as the economy becomes increasingly open to international trade, its accumulated growth in GDP per capita (per person per dollar - PPP$) will be even less than 70 per cent over the same period. This means Vietnam's currently low ranking in terms of GDP per capita in PPP$ (160 out of 206 countries in 1999, will only improve slightly if the growth target is reached.

But even this modest target seems difficult by Vietnam's recent experience. After a decade of speedy growth, Vietnam slowed down considerably in 1998 and 1999 when GDP growth rates dropped to 5.8 per cent and 4.2 per cent respectively. Although the GDP growth rate has improved to 6.7 per cent in 2000 and is likely to reach 7 per cent this year, it is unlikely that Vietnam will immediately return to the high-growth path in the near future (although the trade agreement between the US and Vietnam and subsequent trade treaties may raise Vietnam's growth rates). This seems consistent with the experience of China, which started the reform process about a decade ahead of Vietnam.

To achieve its growth target Vietnam then has no other choice but to continue and accelerate its reform efforts. There is now a consensus in the economic development literature that not only macroeconomic stabilisation should proceed trade liberalisation, but also goods market should be liberalised before financial markets, and microeconomic reforms, such as privatisation, should be implemented first. According to this theory, Vietnam must accelerate its microeconomic reforms, among which the reform of state-owned enterprises (SOEs) is perhaps most urgent and feasible.

Reform of SOEs in Vietnam has proceeded in three stages: reorganisation and restructuring of SOEs, establishment of conglomerates (tap doan or tong cong ty) and equitisation of SOEs. The establishment of conglomerates, as a means to capture economies of scale, has not been successful and privatisation has been slow. Yet there are signs that the government is committed to pursue an active SOE reform program. The government suspended the licensing of new SOEs from early July 2001, and this temporary ban is likely to last two or three years (although certain SOEs can still be established with the Prime Minister's approval). Further, the government has begun to evaluate the feasibility of SOEs. For example, the Ministry of Finance of Vietnam has agreed to conduct a series of diagnostic audits (operational reviews/viability assessments) of large textile SOEs funded by a grant from the Australian government.

The above observations indicate that the Vietnamese government fully recognises the importance of SOE reform and is committed to a well-defined and active SOE reform schedule. It remains to be seen how the government will handle the short-term adjustment costs of such policy (that is, urban unemployment) in the presence of a currently depressed agricultural sector.

However, it is to be hoped that Vietnam can learn something in this respect from China's experience in reforming its SOEs.

WATCHPOINT: Look out for new SOEs established under the Prime Minister's discretion.

 

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