SOE Reform: Time Needed

Dr Nguyen Duc Thanh, Director of VEPR, said: Vietnam’s economic turmoil in recent years is caused by three main reasons. Firstly, the local economic restructuring process fails to catch up with its international integration process. Vietnam lacks a strengthened private sector, combined with the incompetent financial market and so much anti-market intervention. Secondly, the government chooses an inappropriate growth strategy for the integration process by channelling so many resources into the state-owned enterprises (SOEs). The productivity of the whole economy fails to have a chance to improve. Thirdly, economic growth has yet to bring about an improvement in productivity while rising power for SOEs has empowered them to abuse monetary and fiscal policies and state administrative measures, thus distorting the resource allocation process.

 

He said while the economy is facing internal weaknesses, the Government’s short-term and long-term macroeconomic policies have not translated into priorities. Even in the context of privatisation pressures, the turnover of GDP rates of Vietnam’s 10 leading state-owned economic groups are still among the world largest. Specifically, Vietnam's rate is up to 37.3 percent, second only to South Korea before the 1997 financial crisis but far above China (9.4 percent), Taiwan (19 percent), Indonesia (25 percent), Brazil (8 percent), Argentina (11 percent) and Mexico (10 percent).

 

Meanwhile, the current average corporate diversification of Vietnamese SOEs is the highest in the region, with 6.4 compared with South Korean chaebols (1.7), Indonesian SOEs (2.1), Philippines (3.1), and China (2.3).

Thus, according to Dr Thanh, the economic restructuring needs to pinpoint three key pillars: monetary policy reform, fiscal policy reform and SOE reform. SOEs need to transfer its dominant roles to leading and market-making roles. The State should actively drive key resources of the economy into the private sector rather than centralise for large State-owned enterprises. SOEs themselves will not be able to maintain its dominant roles but proactively withdraw from the market with a transparent and clear equitisation roadmap.

 

Former Trade Minister Truong Dinh Tuyen said the private sector is currently being squeezed and their development conditions are still unfavourable. Meanwhile, State-owned conglomerates have shadowed the economy. Or in other words, unfocused investing into various industries by SOEs is still a problem that needs to be further taken into account. However, despite a very large scope and coverage, the ICOR (Incremental Capital-Output Ratio) ratio of SOEs more than doubles the non-state sector - a mirror to low investment efficiency.

 

The World Bank's Lead Economist for Vietnam Deepak Mishra said though the Government of Vietnam has found out that SOE reform and more priority for the private sector is an inevitable mission, restructuring process must be carried out step by step, not once for all. And, this will only be successful when the private sector gets really more mature and stronger. At the current context, Vietnam still needs the State’s regulatory activities.

 

Economist Vu Dinh Anh said there are certain principles for assigning ‘jobs’ for State and private sectors because the private lacks resources. Thus, the private sector cannot meet whatever the State wants it to. The involvement of the private sector is capturing an increasingly important position but this process must be gradual, not right away. In fact, the proportion of public investment is gradually focused on the private sector. In the 2001 - 2005 period, the state sector accounted for 53.4 percent of total social investment; and the private sector contributed 32.6 percent. In the 2011-2015 stage, the state sector will reduce its investment ratio to 37-39 percent while the private sector will raise its contributions to 45-46 percent. Hopefully, the private sector will actually get mature and share the work with the State sector for the sake of more sustained economic development of Vietnam.