Its economy needs urgent reform as a competitiveness study finds it lagging behind its Asean peers
Thirty years have passed since Vietnam began its "Doi Moi" (renovation) reform, dismantling the central planning system in pursuit of a market economy. However, the reform was carried out in half-hearted fashion.
The effects of this are rampant market as well as state failures, as manifested in the country's multiple ailments: a chronic budget deficit, high public debt, proliferation of non-performing loans and an inefficient yet dominant state sector.
According to the World Bank, Vietnam's real GDP growth has significantly slowed from an average of 7.2 per cent between 1990 and 2007 to 5.7 per cent from 2008 to 2014.
And compared to its Asean counterparts, its competitiveness has plunged. An analysis by the Asia Competitiveness Institute (ACI) shows that Vietnam's "overall competitiveness" score has plunged more negatively, or further from the regional average, between 2009 and 2013.
ACI's Competitiveness Index found that Vietnam remains uncompetitive in a wide array of areas. The most salient, recurring indicators are the prevalence of market distortions; issues of corporate governance and lack of transparency; and quality of human capital.
Hence, Vietnam's membership in the Trans-Pacific Partnership (TPP) - it was one of 12 signatories on Feb 2 - may seem to have come at an opportune time.
However, the TPP is not the "holy grail" for Vietnam's structural problems.
Indeed, high-profile default cases of large state-owned enterprises (SOEs) such as Vinashin and Vinalines are just the tip of the much bigger iceberg of poor governance, corporate graft and misallocation of resources in favour of the ailing state sector.
To remedy Vietnam's lack of competitiveness, three pillars of policy reform are required.
Deepening SOE reform
Despite three decades of economic reform, SOEs tend to occupy the majority of land allocated for business activity and are often granted a considerable portion of new land provided by the government for business rental. Private firms applying for new industrial land are required to go through complex procedures, which typically take two to three years, and reportedly involve corruption.
Another area where favouritism prevails is access to credit. SOEs are still able to obtain bank loans even when their asset size or profitability does not meet the banks' lending criteria.
In terms of market access, while the government usually offers important opportunities for firms to grow and become competitive through state contracts, the eligibility criteria for bidding are clearly biased toward SOEs.
Given its economic woes, Vietnam must not militarise or further escalate the dispute, or else it will get side-tracked from reform. Instead, Vietnam should draw on its rising economic leverage from TPP membership to facilitate the conclusion of the Code of Conduct between Asean and China.
The promulgation of the third Enterprise Law and the launch of a new round of SOE restructuring in 2005 raised new hopes for private sector development, as well as more robust economic growth for Vietnam. But progress has been notably slow, with the state-owned sector still accounting for a significant 40 per cent of annual total investment in Vietnam.
According to the latest World Bank Report, as of the first quarter of last year, only 29 SOEs were equitised, out of the target of 289 for the whole year. The key obstacle to the reform process lies in big state-owned groups such as Vinalines, MobiFone and Vinacomin. The amount of state resources held by these groups, as well as their impact on the economy, has made it difficult for the government to evaluate and move forward with the privatisation plans.
To be sure, levelling the playing field between state-owned and private enterprises is one prominent provision under the TPP. While Vietnam has been granted concessions in complying with this provision, it is vital that Vietnam puts in place fundamental market institutions required for local enterprises to develop and be able to cope with the anticipated surge in foreign direct investment.
To that extent, deepening the SOE reform entails relinquishing the state's direct involvement in the economy to focus on its facilitative role of setting transparent rules and enforcing them, while protecting society from negative externalities.
Vietnam, therefore, must make it the top priority to move towards a rule-based, transparent and competitive economic environment through streamlining bureaucracy and strengthening capacity building.
Building transparent corporate governance
Without competitive enterprises, it is hard to envisage how Vietnam could benefit from the TPP. Yet, corporate governance remains problematic even amid the rapid development of the legal and regulatory framework for investor protection.
For instance, new laws on independent audits were enacted in 2011, and in 2013, the State Securities Commission of Vietnam (SSC) revised Corporate Governance Regulations and a Model Charter that detail good practice for listed companies. But weaknesses remain in terms of poor disclosure, outdated accounting standards, lack of internal control mechanisms and limited accountability of firm management.
In fact, current practices in many public enterprises fall far short of what is required in the revised Corporate Governance Regulations, which also highlights the government's difficulties in enforcing the rule of law.
The roles and functions of the SSC could actually be enhanced as an independent supervisory body to ensure compliance. Incentives for firms to uphold accountability to investors should be introduced. For example, the rankings of the Corporate Governance Scorecard could be made public. An organisation dedicated to providing training and technical support to firms could be established, ideally with international industry experts on board or acting as advisers.
Upgrading labour skills
The central thrust of Doi Moi reform has been resource mobilisation from agriculture to manufacturing and services, on the back of a large young, literate and low-cost workforce.
However, such a model is not sustainable, as competing based on cheap labour is simply a race to the bottom, especially when Vietnam's youth population is shrinking. Only by upgrading labour skills and labour productivity can Vietnam maintain healthy growth and successfully industrialise.
After 30 years of reform, firms still find it hard to find skilled workers to fill jobs, particularly managers, executives and technicians. Foreign corporations have also been complaining about the lack of reliable local suppliers.
In fact, many foreign textile companies have announced million-dollar investment plans in Vietnam to take advantage of the TPP's "yarn forward" rule. Upstream electronics manufacturers are expected to follow suit to supply technology giants, such as Samsung, Foxconn and Intel, which are already present in Vietnam.
Measures to support and upgrade best-performing local firms, as well as pair them with multinational corporations, should be put in place. Tax incentives could be introduced to foreign firms engaging in technology transfer with local suppliers.
Most importantly, technical education and training must be revamped in alignment with industry needs. Collaboration between universities, industry associations and multinational corporations is vital.
GEOPOLITICAL CONFLICTS MUST NOT DERAIL GROWTH
Geopolitically, Vietnam is also at a delicate juncture as tensions with China have reached new levels since May 2014's sovereignty dispute near the Paracel and Spratly islands.
Given its economic woes, Vietnam must not militarise or further escalate the dispute, or else it will get side-tracked from reform. Instead, Vietnam should draw on its rising economic leverage from the TPP membership to facilitate the conclusion of the Code of Conduct between Asean and China.
By emphasising pluralism, Vietnam could play a critical role in strengthening Asean's unity and preventing the bloc from splitting over China.
Singapore, as the third largest foreign investor in Vietnam, is also a TPP member and could become a key strategic partner to Vietnam.
If Vietnam fails to address its shortfalls, the window of opportunity may last at most 10 years. Instead of just "renovating" (Doi Moi) the economy, Vietnam has to focus on "revitalising" (Hoi Sinh) it.
•Tan Khee Giap, Nguyen Le Phuong Anh and Luu Nguyen Trieu Duong are respectively co-director, research fellow and research assistant at the Asia Competitiveness Institute at the Lee Kuan Yew School of Public Policy, National University of Singapore.
A version of this article appeared in the print edition of The Straits Times on February 25, 2016, with the headline 'Make or break for Vietnam in the TPP era?'. Print Edition | Subscribe
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