Slowing Growth and Heightened Expectations Fuel Calls to Reform Vietnam's State Sector
March 21, 2013
All political parties are focused on survival. That is certainly the case in Vietnam and in many of its neighboring countries. As economic growth moves from the fast lane to something more qualitatively sustainable, newly empowered constituents are demanding more access to information, better services from governments, more substantial social safety nets, and better economic governance.
The situation for the Communist Party of Vietnam is no different. It is clear to the party that Vietnamese citizens will no longer meekly accept what has been two different sets of rules governing companies—one for the state-owned enterprises (SOEs) and another for private companies, both domestic and foreign.
Additional impetus for change is coming from Vietnam’s pending commitments under the Trans-Pacific Partnership and frequent criticism from the media and international creditors. It was the latter that shined light on the corporate shipwreck of Vinashin, the bankrupt state-owned shipbuilding company.
The party’s natural instinct for self-preservation is therefore pushing it toward one of the hardest reform hurdles it will face: cleaning up and making transparent the state-owned sector that has been a major source of revenue for the party machinery and its cadres.
The party’s has launched an effort to address inefficiencies and lax regulation of SOEs in what may be its biggest reform effort since it launched the doi moi, or “renovation,” process to open the economy in 1986. Vietnam’s economic growth slumped to a 13-year low in 2012, due in part to a lack of confidence in the state sector, which has been widely criticized for poor management, inefficiency, and corruption.
Prime Minister Nguyen Tan Dung approved a 29-page directive on February 19 to restructure the state sector through tighter monetary policy. The new policy focuses on addressing bad debts incurred by SOEs. It looks to overhaul and consolidate state banks by refocusing them on their core business, improving payment systems, avoiding cross-ownership, and increasing transparency.
According to the directive, bad debt in banks will be cut to less than 3 percent of outstanding loans by 2015, and monopolies and businesses in the defense industry will be restructured. SOEs receive up to half of all state investment and nearly 70 percent of official development assistance. They account for 53 percent of the banking system’s bad debt, which has hurt credit growth and slowed economic expansion to 5 percent in 2012. Vietnam’s banking system has one of the highest levels of debt in the Asia Pacific, with 13 percent of loans nonperforming according to Fitch Ratings. Moody's downgraded Vietnam to its lowest rating ever last year.
The financial system is weak from carrying the heavy weight of most of the large and inefficient SOEs. Stocks fell 11 percent during the second and third quarters of 2012, due in part to the lack of confidence in the state sector.
The Communist Party understands that it is no longer sustainable to protect its failing companies. In an televised national address in October, party General Secretary Nguyen Phu Trong apologized for the lax oversight of state companies and called the coddling of SOEs a mistake, while Deputy Prime Minister Nguyen Xuan Phuc acknowledged that recruitment of employees to the public sector is plagued with corruption and labeled 30 percent of public officials ineffective. These are harsh self-assessments, but the first real step in addressing systemic problems is overcoming denial.
The World Bank, which has long hailed Vietnam as the poster child for economic development, also links the state’s falling productivity to the inefficiencies and mismanagement of its SOEs.
The government has taken some practical steps to address pervasive corruption in SOEs. It fired Chairman Dao Van Hung of Electricity Vietnam last year after the company lost $552 million. Government officials also arrested prominent heads of other major SOEs, including the head of shipping company Vinalines, Duong Tien Dung, for fraud and other charges.
The real challenge Vietnam faces is implementation of reform. It has pursued reform in the state-owned sector before in initiatives dating back to at least the early 1990s, but efforts have been partial and isolated, and tried to do just enough to divert criticism without taking aim at systemic solutions. Observers will be watching carefully to see if this time the party’s leadership understands that half-measures and quick fixes, like arresting token worst offenders, will not deliver real results. Partial reform will do little to free the economy to return to strong growth.
SOEs will almost certainly have a strong role in Vietnam’s economy going forward. However, to survive and thrive, SOEs will need to play by more transparent rules, reduce their dominant share of the economy, and provide higher returns to the government’s investment account for infrastructure, education, and health. Law enforcement will also need to pursue and punish graft, bribery, and corruption within SOEs.
Disaffection with economic governance has resulted in new and serious domestic impetus to seek changes in the country’s constitution. One of the recommendations recently made by 72 respected academics is that the state sector should not play a leading role in the national economy because of poor SOE performance and rampant corruption.
Slower growth around Asia is to be expected, but slow growth forces people to carefully examine governance and seek support from institutions. As it moves from double digit growth rates, the region will now be focusing on the quality of growth. The judges and definers of quality are increasingly the fast-growing middle classes of Vietnam and its neighbors.
The Communist Party of Vietnam recognizes that, if it wants to maintain its authority to rule, it must closely monitor state firms and hold them accountable to the approved restructuring plan. Vietnamese citizens and foreign investors will be watching carefully to see if the party and government can reform the SOEs as a signpost of whether the country will be able to return to the more robust growth rates long associated with Vietnam.
(This Commentary originally appeared in the March 21, 2013, issue of Southeast Asia from the Corner of 18th & K Streets.)
Ernest Bower is senior adviser and chair and Phoebe De Padua is a researcher for the Sumitro Chair for Southeast Asia Studies at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2013 by the Center for Strategic and International Studies. All rights reserved.