Economic Sector

Last updated: Tuesday, March 26, 2019


Reforms Promote Domestic Private Sector Development

Posted: Thursday, December 13, 2018

Over the course of thirty years, Vietnam’s economy has expanded at an average of nearly seven per cent annually. As a result, per capita income has increased almost fivefold. Vietnam today has emerged as a thriving lower middle-income economy and an export powerhouse. Growth has also been inclusive, with poverty falling to just below seven per cent, compared to more than 60 per cent in the late 1980s.

Mr Ousmane Dione, Country Director of the World Bank in Vietnam, said, Vietnam’s journey to become a modernised, industrialised economy has only just begun, and past achievements are no guarantee for future success. Domestically, Vietnam will have to tackle rising structural headwinds, including a rapidly aging population, slow productivity growth and weak investment, as well as an increasing environmental toll on development. Leaning against these structural headwinds at home, Vietnam will also need to navigate a changing terrain abroad where shifting global trade patterns and the Fourth Industrial Revolution are both reshaping opportunities and creating new risks.

As we are moving into the next Socioeconomic Development Strategy and Socioeconomic Development Plan cycle, it is important to revisit Vietnam’s unfinished reform agenda and reinvigorate its growth potential, not only in terms of quantity, but most importantly in terms of quality and sustainability of growth. This is essential for Vietnam to realise its aspiration of becoming a successful upper middle-income country as envisioned in the Vietnam 2035 Report.

According to Mr Ousmane Dione, Vietnam needs to focus on key priorities. First, reforms to promote domestic private sector development will need to be significantly stepped up, making it a primary driver for improved productivity and economic growth. This entails continued effort to remove obstacles to private business and strengthen regulatory environment. In parallel, SOE reforms should focus on the adoption of international best practices in governance, including through the newly established SOE Management Committee, while accelerating and deepening equitisation and divestment especially from commercial assets. Attraction of FDI should also shift away from quantity to quality, with a focus on high-tech and high value-added investments with technology transfer to harness stronger linkages between domestic and foreign firms. This would ultimately help domestic private sector effectively join global value chains.

Second, notwithstanding current fiscal constraints, continued investment in infrastructure is critical for future growth. Again, not only quantity, but quality matters. While priority will be given to national backbone infrastructure projects such as the north-south expressway, railways, Long Thanh Airport, and key seaports, individual investments should be driven by an overall multimodal transport connectivity strategy. Given fiscal constraints, unlocking private investment could hold the key to meeting Vietnam’s significant investment needs. While a robust framework for public-private partnerships (PPPs) can contribute in this regard, deep structural reforms in key infrastructure sectors, such as power generation, can help build competitive markets for infrastructure services and crowd in private financing.

Third, Vietnam needs to emphasise more the importance of investment in human capital, especially in the context of fast-changing disruptive technologies and the digital era. As such, investment in human capital will require a life-cycle approach which entails effective coordinated efforts to improve health care and nutrition, especially in early childhood, lifelong education and skill training. According to the recent launch of the World Bank Group’s Human Capital Index, Vietnam ranks 48 out of 157 countries. This is remarkable, and the country has done particularly well in basic education. But a new set of knowledge and 21st century skills are needed to contribute to stronger productivity growth. This would require focus on the quality and relevance of the tertiary and vocational education. In addition, creating an effective institutional and incentive framework for innovation - with private firms at the centre - is critical for future growth.

Fourth, Vietnam’s rapid growth is taking an increasing environmental toll, Ousmane Dione warned. This is evident in land degradation and soil erosion, rapidly growing green-house gas emissions and air pollution, increasing water degradation, deforestation and pressure on bio diversity. Green-house gas emissions are outpacing Vietnam’s rapid economic growth, reflecting in large part a rising dependence on carbon fuelled power generation. These growing environmental stresses not only directly impact quality of life, but also potentially affect long term growth. Managing Vietnam’s natural assets and building resilience against climate change are crucial for sustainable growth in key sectors, such as agriculture, food processing and tourism.

In order to deliver these four priorities - Private sector, infrastructure, human capital, and green growth, Vietnam will require capable and effective state institutions. Effective market institutions, and a transparent, clean and accountable state are lynchpins of development. Moreover, as Vietnam has become a middle-income country, development challenges are increasingly sophisticated and cross-sectoral in nature. Hence, effective coordination across ministries and agencies, as well as between central and local authorities, is now more important than ever.

Quynh Anh

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