Vietnam Ranks 137th in World Economic Freedom Study

Vietnam Ranks 137^th in World Economic Freedom Study

Ranking 137^th out of 155 measured countries worldwide, Vietnam is now still in the group of mostly economically unfree countries with considerable government roadblocks that prevent their citizens from achieving success, according to the latest Heritage Foundation/ Wall Street Journal index.

The 2005 Index of Economic Freedom gives Vietnam the score of 3.83 in the five-point scale, achieving little improvement compared to 3.93 in 2004, 3.90 in 2003, and 4.60 in 1995. The score remains high, showing the high level of government interference in the local economy and the less economic freedom in the country.

The 11^th edition measures 155 countries against a list of 50 independent variables divided into 10 broad factors of economic freedom. These 50 variables are grouped into the following categories: Trade policy, Fiscal burden of government, Government intervention in the economy, Monetary policy, Capital flows and foreign investment, Banking and finance, Wages and prices, Property rights, Regulation, and Informal market activity.

Worldwide, the scores of 86 countries improved, the scores of 57 declined and the scores of 12 are unchanged from last year’s Index. Of the 155 countries ranked, 17 are classified as "free," 56 are "mostly free," 70 are "mostly unfree," and 12 are "repressed."

Vietnam received the highest score of 5.0 for its Trade Policy, Property Rights, and Regulation, meaning the government strictly controls these fields.

In the trade sector, the Vietnamese government is said to tightly control trade activities through a licensing system. Other restrictions include quotas, excise taxes, reference prices, or direct import bans. Vietnam is also blamed for non-transparent and highly discretionary customs valuation.

Meanwhile, property is not well protected in Vietnam. Interference in the legal process and the bribing of judges to serve particular interests is common, reports the Economist Intelligence Unit (EIU). Contractual arrangements are backed by the force of law but the legal system is complicated. Contractual disputes often involve a prolonged period of negotiation preceding any attempt to resolve the matter in court. The Economist reports that the state owns all the land and grants land-use rights to farmers, businesses, and homeowners.

In terms of high Regulation index, the US Department of Commerce reports that investors in Vietnam face poorly developed infrastructure, underdeveloped and cumbersome legal and financial systems, an unwieldy bureaucracy, non-transparent regulations, high start-up costs, arcane land acquisition and transfer regulations and procedures, and shortage of trained personnel. Issuance of investment licenses and implementation of projects often is a lengthy process during which the investment environment in areas such as taxes and procedures frequently changes. According to The Economist, medium-size businesses find it hard to grow because they cannot readily get access to land or capital, and corruption weights heaviest on small businesses.

The Foreign Investment index, however, stood as high as 4.0 as the government permits only 30 per cent foreign ownership in companies not owned by the State in 35 different sectors. According to the US Trade Representative, all enterprises operating in Vietnam may only employ foreign nationals at the lesser of 1) a maximum rate of 3 per cent of their total work force or 2) 50 persons." The International Monetary Fund reports that both residents and non-residents cannot hold foreign exchange accounts without government approval or provided the foreign exchange used to open the accounts originated outside of Vietnam; and all transactions require individual authorization from the Ministry of Finance, except for payments involving authorized imports. Controls apply to all transactions in money market and capital instruments, derivatives, commercial credits, and direct investments. Foreigners may not own land but can lease it from the government.

Vietnam also received a high score of 4.0 for its Banking and Finance and Informal Market indexes with state-owned banks still dominating the banking and finance sector, accounting for approximately 80 per cent of loans outstanding. According to the EIU, lack of transparency at most local banks, a lack of good accounting systems at domestic enterprises and the hefty bad-debt burden continue to burden local banks.

Meanwhile, Vietnam’s fiscal burden of government score is 3.8, 0.5 point better than last year due to the decrease in top income tax rate to 40 per cent from the 50 per cent reported in the 2004 Index. The top corporate tax rate has also been cut down to 28 per cent from the 32 per cent last year.

The country’s government intervention index is also 0.5 point better this year, at 3.5, because the data on government consumption are slightly more reliable than in past years. According to the Economist Intelligence Unit, however, Vietnam still has over 5,000 State-owned enterprises, and the state-owned sector generates 41 per cent of industrial output. The state is involved in finance, telecommunications, energy, and manufacturing. The EIU also reports that the state-owned sector is often given preferential treatment over the private sector in areas like tendering for public projects or access to tax breaks.

The Wages and Prices index was as high as 3.0 as the Vietnamese government still controls prices to stem inflation while Vietnam has a minimum wage. The government continues to set rates for electricity, telecommunications, petrol, water, and fares for train and air travel, reports the Economist Intelligence Unit. In most of these areas, the rates have traditionally been higher for foreigners, although harmonization is underway.

The country got the positive low score of 1.0 for its favorable Monetary Policy. From 1994 to 2003, based on data from the International Monetary Fund’s 2004 World Economic Outlook, Vietnam’s weighted average annual rate of inflation was 2.96 per cent.

Vietnam reported GDP growth rate of 7.69 per cent last year, at US$45.4 billion. Per capital income was also up to US$542 compared to US$480 calculated by the World Bank in 2003.

• (Youth)