Academic journal article Journal of Southeast Asian Economies

Restructuring the SOE Sector in Vietnam

Academic journal article Journal of Southeast Asian Economies

Restructuring the SOE Sector in Vietnam

Article excerpt

This paper assesses Vietnam's recent experience with reforming its state-owned enterprise (SOE) sector and discusses potential ways forward. It does so by: reviewing the economic principles that account for the motivations and shortcomings of state ownership; taking stock of stylized facts about the SOE sector; and assessing the legal and institutional reforms and equitizations that have taken place over the last years. The current focus on microeconomic approaches to firm productivity is highly misleading and a broader reform perspective of Vietnam's development model is needed. While there is little compelling evidence that the state of the SOE sector is as dismal as some analysts suggest, the paper highlights an increasing implementation lag of the legal reform progress--reflecting fault lines in Vietnam's political economy. SOEs can and should play a vital role in Vietnam's development strategy going forward. However, a more precise vision for the sector, based on a more elaborate assessment of market failures and externalities in different parts of the economy, is needed.

Keywords: Vietnam, state-owned enterprises, transition economics, development macroeconomics

1. Introduction

Vietnam experienced an impressive development performance over the last two decades. It transitioned from low- to middle-income status within one generation, with average growth rates around 6 per cent since 1990--one of the highest in the world. However, the current level of development poses new socio-economic and political challenges. Notably, while growth has thus far been driven by factor accumulation and structural change (McCaig and Pavcnik 2013), with surplus labour depleting and the highest returns from structural change soon to be exhausted, the focus has increasingly shifted towards reforms that improve sectoral and firm efficiency so as to use the country's resources most effectively. This is consistent with Dani Rodrik's (2013) argument that growth driven by structural transformation risks running out of steam if the fundamental capabilities involving human capital accumulation and institutions are not eventually developed. Indeed, growth in Vietnam has recently lost some momentum (cf. Pincus 2015). Even though this is partly cyclical and driven by external factors, there are rising concerns over a structural moderation of the growth rate. If the country does not manage to sustain the momentum in its reform and economic transformation, it might risk ending up in a so-called "middle-income trap". (1)

Reforming the state-owned enterprise (SOE) sector is a key challenge in this context and involves multiple inter-sector linkages and external effects. So far, a sizeable public sector has been part of Vietnam's impressive development performance. This is evident from Figures 1 and 2, which highlight that, as of 2000, about 60 per cent of Vietnamese labourers worked in some sort of SOE. (2) Since then, Vietnam's economy experienced considerable structural change (including a decline in the relative importance of SOEs, though they still remain numerous) and new challenges emerged. Constrained public resources, evident from a public debt-GDP ratio around 60 per cent, (3) require their use being more focused, effective, and tailored towards sectors with most externalities and market failures.

The aim of this paper is to discuss potential pathways of SOE reform in Vietnam against the background of those challenges and to evaluate recent reform measures. This paper argues that the existing microeconomic approaches to evaluating firm productivity of SOEs are highly misleading. SOEs perform different functions in the Vietnamese economy than private firms and hence cannot be evaluated against the same measures. Rather than attempting to get SOEs to perform like private firms and trusting the market to correct itself, this paper advocates for getting SOEs to fulfil appropriately designed objectives within Vietnam's larger macroeconomy. …

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