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STATE OWNED ENTERPRISE REFORM AND DOI MOI MARK II?

The Di Moi policy has brought many remarkable economic successes to Vietnam, especially in the area of macroeconomic stabilisation. But these achievements are not matched by Vietnam's record in state-owned enterprise (SOE) reform. After a decade of market building, the state-sector share of Vietnam's GDP has increased from about 33 per cent in both 1986 and 1991 to 39.2 per cent in 1996 and about 40 per cent in 2000. This growth has been accompanied by Vietnam's adoption of an import substitution strategy in spite of the experience of developing and newly industrialized countries in the region, who have taken the opposite approach. These trends are perhaps the consequence of being 'a market-based economy with a socialist orientation'.

Not surprisingly, Vietnam's economic growth has been sluggish since 1997, although there were some signs of recovery in 2000/01 due mainly to a policy of aggregate demand stimulation and due to the worldwide increase in the crude oil price. It seems tempting to blame Vietnam's economic problems on the Asian financial crisis. Certainly, the crisis faced by Vietnam's top foreign investors has adversely affected Vietnam. Yet, there were warning signs of economic slowdown well before the onslaught of the Asian crisis. For example, a good indicator is the level of foreign direct investment to Vietnam, which had begun to decline before 1997.

Vietnam is currently hoping to make substantial gains from its international economic integration efforts, particularly the US-Vietnam bilateral trade agreement (ratified in late 2001). While the gains from trade and investment with North America and European Union are significant, the reform of inefficient SOEs is by far the most important current issue facing Vietnam. This reform is indeed crucial if Vietnam to realize its average GDP growth target of about 7.2 per cent per annum in the first decade of the 21st century.

Vietnam's reform of its state sector is long overdue. About half of all SOEs in Vietnam are loss making, despite the preferential treatment they receive from the central government. Out of 17 conglomerates, which hold a majority of state capital, 12 make losses or break even. The five profit-making conglomerates are those that either exploit natural resources or enjoy a varying degree of monopoly over price setting (except the Rubber and Shipping conglomerates). All SOEs which produce essential goods such as food stuff, paper, steel, textile, cement and sugar were either making a loss or breaking even in the first six months of 2001.

The total debt of SOEs in Vietnam at the end of 2000 stood at 190 thousand billion dng (US$13.1 billion) or 33 per cent of Vietnam's GDP. Consequently, Vietnam's total public-sector debt reached US$21.3 billion or 63 per cent of its GDP (excluding inter-SOE liabilities). The gravity of this situation was somewhat lessened in the short-term by the IMF's Poverty Reduction and Growth Facility 2001/3, signed by the IMF and Vietnam in April 2001. This reform-assisting program is intended to settle non-performing loans (NPLs) to the SOEs as well as to recapitalise the state-owned commercial banks (SOCBs). It is funded by an IMF concessional loan of US$68 million and another concessional loan of US$400 million from the World Bank.

However, this program does not appear to be an effective state-sector reform in the long run. It is purely a measure which allows the state budget to absorb the burden of NPLs, which the SOEs could not repay to the banks, and to provide additional capital to the SOCBs. There is no specific and long-lasting guarantee of the SOE reform or restructuring mentioned in this facility. Although the Vietnamese government agreed to eliminate 'policy lending' (that is, lending under instruction of the government) from SOCBs except in limited and special circumstances, this is not legally binding.

For its own part, the Vietnamese government has justified its own state-sector reform program in terms of the virtual cessation of granting permission to new SOEs and the equitisation of SOEs. While these steps are necessary, they are clearly insufficient. Unlike privatisation, equitisation in Vietnam could mean the sale of public assets to the private sector without fundamental changes in the management (both personnel and style) of the enterprises. More seriously, if the equitised SOEs continue to be controlled by individuals who are well connected to the government, it remains extremely difficult to create a level playing field which will foster a climate of genuine competition.

In short, the internally-driven Di Moi Mark I has served Vietnam well in the initial stage of macroeconomic stabilisation and basic market building. It is now time for Vietnam to move decisively into the SOE restructuring and reform phase. Only this Di Moi Mark II, which can be partly driven by international economic integration, can help Vietnam to achieve it growth target for the next 8 years and beyond.

Watchpoint: Look for some progress in the Competition law and policy of Vietnam.

Dr. Binh Tran-Nam
Australian Taxation Studies Program (ATAX) University of New South Wales

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