36744 Number10 PRIVATE SECTOR DISCUSSIONS SMEs in Vietnam : On the road to prosperity Leila Webster November 1999 iii TABLE OF CONTENTS PREFACE ........................................................................................................................................VI EXECUTIVE SUMMARY..........................................................................................................VIII INTRODUCTION........................................................................................................................XIV CHAPTER 1: PROBLEMS ..............................................................................................................1 A. THE CAR HAS SLOWED DOWN.................................................................................................1 B. WHY HAS THE CAR SLOWED DOWN ? .................................................................................. 10 1. The map is pointing in two different directions as the car is approaching a crossroads 10 2. The car is running out of gas............................................................................................ 15 3. The road is filled with roadblocks, potholes, and rocks................................................... 17 4. The driver is inexperienced and there are few to help him.............................................. 29 5. A typhoon has just torn through the neighborhood.......................................................... 31 6. In summary........................................................................................................................ 32 CHAPTER 2: SOLUTIONS........................................................................................................... 35 A. THE REGIONAL EXPERIENCE .............................................................................................. 35 B. PROMOTING EXPORTS FROM SMALL AND MEDIUM ENTERPRISES ................................. 40 C. AVOIDING THE LOW-COST LABOR TRAP........................................................................... 43 CHAPTER 3: RECOMMENDATIONS....................................................................................... 49 A. SUPPORTING THE PRIVATE SECTOR ................................................................................... 50 1. Unify the map to the extent possible................................................................................. 51 2. Fill up the gasoline tank.................................................................................................... 54 3. Clear off the road so it is level and can support a lot of traffic....................................... 55 4. Facilitate great numbers of high quality training opportunities for new drivers ........... 65 B. PROMOTING EXPORTS ......................................................................................................... 66 C. SUMMING UP......................................................................................................................... 69 BIBLIOGRAPHY............................................................................................................................ 72 ANNEX: SELECTED TABLES.................................................................................................... 76 iv v PREFACE This report provides an overview of the current status of Vietnamese private companies. It serves as a background paper for the World Bank economic report that will be presented at the Consultative Group meeting that will take place in December 1999 in Hanoi. This report is published as a freestanding MPDF Private Sector Discussions Paper that is available to the public. Many people worked hard on this report. The author received invaluable assistance from MPDF staff, including Nghiem Khanh Hien, Nguyen Diep Ha, and Heidi Brooks who compiled the mountains of data presented here; Annabelle Newbigging and Heidi Brooks who assisted greatly with editing; Bich Hanh and T.T. Dzung who set up the photographic shoot; Bich Hanh who arranged for translation and printing, and Nghiem Khanh Hien who was the patient producer of this report. Nguyen Thanh Ha from Vietbid made invaluable contributions on legal issues. Martin Bloomfield took the photos and produced the final images, and the xe om drivers at the Metropole Hotel obliged us. MPDF's manager, Tom Davenport, cheered us on as did Andrew Steer, Director of the World Bank Vietnam. First drafts were reviewed by Kazi Matin, Nisha Agrawal, Anil Malhotra from the World Bank Vietnam; Igor Artemiev from the Private Sector Development (PSD) Department of the World Bank; Dr. Le Dang Doanh from CIEM; Madame Pham Chi Lan from VCCI; Tran Vu Hoai from Galaxy Consulting, Nguyen Thanh Ha from Vietbid, and by a number of MPDF staff members. These reviewers' comments were very helpful in making needed revisions. vi vii EXECUTIVE SUMMARY i. There is a crisis in the making in the Vietnamese economy. Every year, over a million people enter the job market, but job opportunities are sorely lacking. Both the agricultural and state sectors are struggling with labor surpluses, and non-farm private sector employment is increasingly the only option for job seekers. Employment rates in domestic private firms and foreign-invested firms have grown rapidly, but due to their small size, employment opportunities with these firms remain limited. The household sector has absorbed great numbers of new entrants but over time, local markets will be saturated, and competition will drive margins down to very low levels. ii. This report argues that the key to significant new employment creation and to renewed economic growth is rapid development of export-oriented private sector companies. The analogy employed here compares the Vietnamese private businessperson to an intrepid motorist trying to find his way. He receives conflicting signals from government and society, and faces a mostly unfriendly business environment fraught with domestic and international challenges. Reaching his destination of prosperity is difficult and uncertain. This report aims to define the problems and propose solutions that will speed him on his way. The Problems iii. An overview of aggregate data reveals the following key facts: · Output growth has dropped significantly across the board, including all sectors and all enterprise groups. · Unemployment is rising, particularly in urban areas, and both agriculture and state enterprises are struggling with labor surpluses. The bulk of new entrants to the labor market are being absorbed by large and swelling informal sectors in rural and urban areas, and underemployment is a growing problem. · Foreign investment has dropped to a small fraction of levels seen a few years ago, but its contribution to Vietnam's growth and exports remains significant. · The domestic corporate private sector has very much taken the lead in the rate of employment creation even though the absolute number of employees remains small. · The non-farm, private sector provides incomes for millions of people, making its contribution to GDP sizeable although productivity is presumably quite low. · There has been little change in the state's share of the economy over the past five years as measured by share of GDP or employment. viii Sources of the Problems The map is pointing in two different directions as the vehicle is approaching a crossroads iv. That Vietnamese legal and economic systems contain fundamental internal tensions is acknowledged by all observers, foreign and Vietnamese alike. The most of these would include: (i) the incompatibility of socialist legality with the law-based state; (ii) the role of the government as chief economic strategist versus the demands of the marketplace; (iii) capital-intensive, import substitution versus labor-intensive, export-led industrial development; and (iv) reliance on state- owned enterprises as the engine of growth in the face of the urgent need for employment creation and for renewed economic growth. The car is running out of gas v. This report argues that the fuel produced by the first round of economic reform measures has been mostly used up, and that new reforms are needed to fuel a second round of growth. Vietnamese people from all walks of life rushed to take advantage of the new opportunities that were created by doi moi. Granting farmers land tenure and the freedom to farm independently, combined with lifting of price controls and devaluation of the Vietnamese dong, raised agricultural production so rapidly that Vietnam went from importing rice to become the second largest producer of rice in the world in a few short years. In short, there was pent-up entrepreneurship, sufficient resources in hand, and abundant new opportunities--and the economy boomed as a result. vi. The passage of the new Enterprise Law and other measures confirm that the Vietnamese government is taking steps to free up the private sector, but additional, larger steps are now urgently needed. There is some consensus that the most important reforms that remain involve trade policy, the financial sector, laws and regulations affected land rights and usage, privatization of the state sector, upgrades of public services, and liberalization of information channels. The road is filled with roadblocks, potholes, and rocks vii. The business environment in Vietnam is difficult for everyone to navigate, but particularly so for foreign investors and for domestic private companies--the two groups of firms that nonetheless currently have the highest growth and employment creation rates, respectively. Four aspects of the business environment appear to be of paramount importance: · Social/political culture. Negative social and political attitudes toward private enterprise color behavior toward those engaged in private enterprise, and influence individual's decisions to enter the private sector. · Laws, policies and regulations. Unclear and frequently changing government regulations and excessive bureaucracy increase the risks and costs of doing business and create an inhospitable business environment. ix · Market support institutions are weak. Stock markets, currency markets, and insurance companies scarcely exist, and courts, public information agencies, local government, banks, industry associations, trade promotion agencies and universities understandably have little experience in supporting private enterprise. · Weak business management skills. The skills needed to build and manage business are complex, yet there is a dearth of high quality, practical and relevant business management training materials in Vietnamese. A typhoon has just torn through the neighborhood viii. East Asian countries have accounted for approximately 70 percent of both foreign investment and foreign export markets, and these regional connections fueled much of Vietnam's phenomenal growth drive over the past decade. However, with the advent of the Asian economic crisis, exporters have seen world prices for their products drop precipitously, others have suffered when Asian consumers canceled or delayed orders, and all have faced dramatic currency fluctuations. Solutions Found by Others ix. The regional experience. Evidence from many countries, particularly those in Asia, shows clearly that high GDP growth is linked to export-led growth. Korea and Malaysia have maintained strong, export-oriented policies since the early 1970s, and both exports and per capita incomes rose steeply during these years. Indonesia and the Philippines alternated between an export orientation and import substitution, and both exports and GDP growth rates remained low. Thailand employed import substitution policies during the 1970s, but beginning in the early 1980s, moved to significant export promotion and growth rates soared. x. Taiwan's shift to an outward-oriented strategy to promote exports and foreign direct investment in the 1960s more than doubled its export growth rates. In China, the private sector experienced tremendous growth following major economic reform in the 1980s. Furthermore, productivity gains in private enterprises accounts for much of the remarkable expansion of the Chinese economy. xi. Export promotion programs. Experience around the world indicates that export growth does not automatically materialize even with favorable market conditions. In most countries, entry into export markets has been facilitated by private-to-private interactions with government mainly serving as facilitator. Broad-based support programs have generally been more useful than highly focused, intensive programs. The extent to which the government provides mechanisms to reduce the costs of entry into new markets, supports collective information dissemination mechanisms, and encourages competition to enhance technological development plays a major role the success of any such program. x xii . Avoiding the low-cost labor trap. This report argues that Vietnam should adopt a growth strategy that relies on export-led light manufacturing. This argument is based mainly on Vietnam's comparative advantage in labor and on the potential high gains in labor productivity. Equally important to significant entry into light manufactured exports is the ability to climb up the value-added ladder and to avoid the low-cost labor trap. xiii. Pitfalls that have hobbled the move up the value-added ladder include: (i) over-reliance on basic factors of advantage, (ii) weak understanding of customers needs and preferences, (iii) ignorance of relative competitive position, (iv) failure to forward integrate, (v) poor inter-firm co-operation, (vi) poor relations with government, and (vii) excessive government control. Strategies xiv. A move towards light manufacturing depends on the creation of a dynamic corporate private sector to lead the drive. The promise of high levels of growth and employment rests with the development of Vietnamese companies, mainly private small and medium manufacturing enterprises. Their size gives them the flexibility to respond to market demand and to make the continuous adjustments in product mix and quality that underpin continuous productivity gains. xv. The reality is that private Vietnamese manufacturers are currently not well positioned to take up this critical role; there are only an estimated 6,000 private manufacturing companies nationwide, average employment is relatively low, and they are focused in a few industries and in only a few locations. Most are engaged in light manufacturing, with large numbers engaged in the highly `footloose' industries of garments and footwear. xvi. The most urgent question, then, is how to build a private sector that can take up this leadership position as effectively as possible. The task is two-fold: the first is to free up and support the private sector generally, and the second is to promote exports of manufactured goods in such a way that firms are able to climb rapidly. Unify the map to the extent possible xvii. Formulation of a unified growth strategy with the private sector as he engine of growth depends on taking a number of steps including the following: · Build public support for private sector development by endorsing it at the highest levels. · Reconcile the Socialist legacy and the law-based State to the degree needed to formulate one unified strategy. · Shift the role of the government in private sector development to one of facilitator rather than lead agent. xi · Introduce export-led growth via light manufactured goods as the new engine of growth. · Assist state-owned enterprises to improve their competitiveness by equitizing as many as possible and restructuring or liquidating the remainder. Fill up the gasoline tank xviii. The government has been putting small but steady amounts of gas in the private sector engine over the past few years, mainly in the form of liberalizing laws and regulations. But a bigger boost is needed in the form of new policy reforms to facilitate another round of growth. The most important of these would appear to be the following: · Trade reform that guarantees private firms' access to imported inputs at international prices, creates easy-to-use channels for exports, and confronts them with the challenge of competing imports; · Financial sector reform that aims to make the perceived credit-worthiness of private firms equal to that of SOEs and that ensures that banks are able to lend long-term to private firms with viable investment projects at reasonable rates and terms; · Land reform that enables companies to secure ownership of land or land use rights that is transferable and can be used for collateral and that grants flexibility in how land is used; · Reform of regulations governing the state enterprise sector so that private firms can access national resources on the basis of merit, not on their ownership status; · Civil service reform and reorganization that dramatically improves the quality of public services available to private firms from regulatory to assistance services and that stamps out corruption among government officials; · Reform of all policies that restrict the flow of information needed by private businesses so that managers can easily locate good quality business information whether in print, electronic media, or embodied in a foreign consultant. Clear off the road so it is level and can support a lot of traffic xix. Laws and regulations. A high priority among managers is clarification and stability of government regulations as well as closure of the many discretionary loopholes in Vietnamese legislation. Legislative governance through minimum standards of commercial behavior should be adopted in preference to prescriptive subordinate legislation. Reforms should entail a reduction in licenses and permits, and the abolition of criminal sanctions for actions that do not seriously threaten public safety and property. xii xx. Building market support institutions. Markets in developed countries function as well as they do in good part due to the presence of large numbers of mature market support institutions that keep market players well informed, process market transactions and enforce the rules. Three that are critical to private sector development include: · Financial institutions. Even if all of the recommendations on financial regulations proposed above were implemented, most Vietnamese banks would not be well positioned to lend to private Vietnamese companies without substantial institutional restructuring. Helping Vietnamese banks transform and modernize will require painstaking, long term work on a bank by bank basis. · Business associations. Establishing new business associations is currently very difficult to do even though the law does not expressly forbid it. Steps should be taken to make formation of business associations easy for all that feel that they would benefit from them. · Educational institutions. Educational institutions need modernizing; materials need to be adapted to the local context and teachers need to be properly trained in effective teaching methods. xxi. Many more institutions will be needed to support growth of private Vietnamese firms in addition to these three. These would include quality control agencies, marketing agencies, transport networks, distributions systems, training institutions, agencies that facilitate international interaction, and information providers. Policy reform is key to establishing the framework within which private exporters can operate, but it is the effective functioning of support institutions that will cement their success. Facilitate great numbers of high quality training opportunities for new drivers xxii. In order to develop a vibrant group of private sector exporters that will be able move up the value chain quickly and not remain stuck at the bottom with the lowest margins, training and information services are required. Managers of private companies must take responsibility for searching out and learning what they need to learn, and it is the job of government and of market support institutions to ensure that the means of pursuing this learning are available. xxiii. More Vietnamese service companies that can offer private firms high quality, specialized business services are required. These service firms should be included in whatever private sector assistance programs are offered. Training in business management, reduced telecommunications costs, and assistance in establishing industry associations would help these firms develop and succeed. xiii INTRODUCTION i. There is a crisis in the making in the Vietnamese economy. At its heart, it is a crisis of opportunity. Well over a million people enter the Vietnamese labor force each year, and there are too few good employment opportunities available to them. Official unemployment rates in urban areas are over 7 percent, and underemployment in rural areas is estimated at roughly 30 percent. Both agriculture and state enterprises are struggling with labor surpluses, and non-farm, private sector employment is increasingly the only option for job seekers. Employment in domestic private firms and in foreign-invested companies has grown very fast, but both groups of firms remain marginal employers with only 1.3 percent and .67 percent, respectively, of total employment in Vietnam. In reality, the bulk of new entrants are being absorbed by large and swelling informal sectors in rural and urban areas.1 Informal sector jobs are critical to secure and increase incomes among low-income people, but it is also true that most informal sector jobs are low quality, low productivity employment with few opportunities for advancement. ii. The World Bank's recent comprehensive report on poverty documents the fact that, in 1997-1998, most Vietnamese citizens were much better off than they were in 1992, and that most are optimistic that the future holds opportunities for even greater improvement.2 For most Vietnamese people, access to good jobs for themselves, and perhaps more importantly, for their children, is central to any promise of future opportunity. The sheer numbers of new job entrants plus the added pressure of heightened expectations generated by dramatic, broad-based increases in income over the last five years presents the Vietnamese government with the formidable challenge of creating great quantities of reasonable quality jobs in the coming years. iii. A parallel challenge is restoration of high, pre-crisis growth rates that have fallen by roughly 50 percent since 1996. Growth rates have fallen in all sectors of the economy as domestic demand has stagnated, export growth has slowed, and imports have been squeezed to save foreign exchange. Lower growth rates will translate into production cuts, higher unemployment, and further difficulties for the banking sector that is already struggling with significant bad debt. iv. The Vietnamese government has mainly responded to the economic downturn with the universal impulse to press the accelerator harder when the car slows, i.e., to try to improve implementation of the current strategy and avoid the high costs associated with introducing a new strategy that would be costly and disruptive at best, and would fail to deliver at worst. But even as the government exhorts state-owned enterprises to increase efficiency, some government officials have also expressed greater interest in the potential role of the private and foreign 1The term informal sector is used in this report to refer to self-employed people, household businesses and microenterprises. It has no implication for the legality of these enterprises. 2 Vietnam Development Report 2000, Attacking Poverty, Joint Report of the Government-Donor-NGO Working Group, Hanoi-December 1999. xiv sectors in boosting the Vietnamese economy, and the government has enacted important policy reforms relevant to private and foreign firms during the past several years. Of late, there has been a marked increase in official interest in the potential economic contribution of small and medium enterprises (almost all of which are private). v. Debate over alternative growth models has grown more serious and more contentious as falling growth rates and the growing crisis of job creation have become more urgent. At one end of the continuum is a fairly orthodox version of a state-led economy where state-owned, mostly heavy, import-substituting industry takes the lead in output, and private sector activity is confined to households seeking to supplement incomes and to private companies that fill niches state enterprises can not reach. At the other end is a fairly orthodox version of capitalism where large numbers of export-oriented, private companies with great numbers of low-cost employees take the lead, and the state assumes the role of facilitator of the economy rather than lead actor. vi. At this point, the debate is no longer about which end of the continuum is the right end. Rather, it is about where the target zone between the poles should be drawn. This paper joins this wide-ranging and critically important debate and focuses on the role of the private sector in the Vietnamese economy, mainly that of private small and medium enterprises. We argue that, indeed, a new model is badly needed. Specifically, we argue for a new growth strategy that focuses on rapid expansion of export-oriented, private sector companies as the best means to create large numbers of sustainable, high quality jobs for Vietnamese citizens and to re-establish high and sustainable growth rates. vii. Chapter 1 outlines the current status of the Vietnamese economy and of the private sector, and then discusses factors that have led to the slowdown of the past several years. Chapter 2 examines regional and global experience in export­ led growth, private sector development, export promotion, and in moving up the value chain in exports. Chapter 3 argues for a new focus on private sector, export-led growth and offers a series of recommendations as to how such a strategy could be realized. xv CHAPTER 1: PROBLEMS A. The Car Has Slowed Down 1.01 The Big Picture. That growth has slowed significantly in Vietnam is scarcely a matter of debate.3 GDP growth has fallen from a high of 9.3 percent in 1996 to an estimated 4.9 percent for 1999.4 Growth rates have roughly halved across all major sectors: industrial growth has dropped from a high of 16 percent in 1995 to an estimated 8 percent for 1999, and growth in services has fallen from 8.8 percent in 1996 to an estimated 2.5 in 1999. The relative share of industry in GDP has shifted notably over the past 5 years: industry and construction increased from 30 percent of GDP in 1995 to 34.5 percent estimated for 1999, with small losses in shares by agriculture and services. Figure 1.1: Growth in GDP by Economic Sector, Figure 1.2: Share of GDP by Economic Sector, 1995-1999 1995-1999 35% 30% 26% 25% 24% 24% 24% 25% 20% 30% 31% 33% 34% 34% 15% 10% 44% 44% 43% 43% 5% 42% 0% 1995 1996 1997 1998 1999 (est.) 1995 1996 1997 1998 1999 Agriculture, Forestry and Fisheries (est.) Agriculture, Forestry and Fisheries Industry and Construction Industry and Construction Services Services Source: GSO (1999); GDP based on 1994 prices Source: GSO (1999); GDP based on 1994 prices 1.02 Both unemployment and underemployment are rising. Unemployment in urban areas is officially estimated at 7.4 percent for 1999 (10.3% in Hanoi), and the underemployment rate for rural areas is reported at 28.2 percent.5 Other sources cite fairly different figures, some higher and some lower. The World Bank's recent report on poverty estimates much lower unemployment rates of 2.2 percent for 1997/1998.6 The Bank's report classifies underemployment as "severe underemployment" (working less than 15 hours per week) which is estimated at 10 percent for urban residents and 12 percent for rural residents, and as "moderate underemployment" (working 16-39 hours per week) which is estimated at 12 percent of urban and rural residents for 1997/1998. 3 See Annex Tables for more complete data than are presented in the text. 4 The World Bank estimates GDP growth for both 1998 and for 1999 at 4.0 percent. 5 MOLISA defines unemployment in urban areas as those who currently are not working and underemployment as those who work less than full-time equivalent. 6 The Vietnam Living Standards Survey #2 (VLSS2) defined unemployment as anyone who had not worked in the previous 7 days and who wanted a job. Vietnam Development Report 2000, Attacking Poverty. 1 Table 1.1: Unemployment Rates 1992 1993 1994 1995 1996 1997 1998 1999 (Est.) Unemployment Rate in 8.3% 7.3% 6.1% 6.4% 5.9% 6.0% 6.9% 7.4% Urban Areas Underemployment - - - - 26.6% 25.5% 28.2% - Rate in Rural Areas Source: Statistics on Labour and Social Affairs ­ MOLISA & GSO - Socio-Economic Situation First 9 Months 1999, September 1999. 1.03 The sharp decline in foreign direct investment (FDI) over the last several years is seen clearly in Figure 1.3 below. The number of new foreign-invested projects is estimated to total 252 in 1999, a seven-year low from a high of 411 projects in 1995. Capital commitments are estimated at US$1.5 billion in 1999, an eight-year low from a high of US$8.3 billion in 1996. And FDI disbursements are estimated at US$1.4 billion in 1999, a six-year low from a high of US$3.3 billion in 1997. Figure 1.3: FDI- CommittedCapital, DisbursedCapital andNumber of Projects (1991-1999) 10,000 500 8,000 400 Projects of 6,000 300 4,000 200 Number 2,000 100 Total FDI committed capital ($ m) 0 0 Total FDI disbursed 1991 1993 1995 1997 1999(Est.) capital ($ m) Number of projects Source: MPI (1999) 1.04. Growth in exports fell precipitously in 1998, following five years of fast expansion. This is not surprising given that 72 percent and 65 percent of Vietnam's exports in 1996 and 1997, respectively, were shipped to Asian countries. Estimates for 1999 show a rebound, reportedly led by rising exports of crude oil, seafood, and rice. 1.05 Summary figures on exports show three important shifts: · The share of light manufactured goods in exports has grown rapidly from 23 percent in 1994 to 36 percent in 1998; heavy industry has fallen from 29 percent in 1994 to 24 percent in 1998; and agriculture has dropped from 48 2 percent to 40 percent. · The share of foreign-invested enterprises in total exports has soared from zero in 1993 to 22 percent in 1999. The share of domestic private sector in total exports is unknown because until 1998, private firms were not allowed to export directly but had to sell through state enterprises. · Third, the direction of trade has shifted somewhat. In 1994, Vietnamese exporters shipped 72 percent of their production to other Asian countries, but by 1998, this share had fallen to 57 percent. Similarly, 1994 exports to Europe accounted for only 14 percent of total exports, but the share in 1998 rose to 28 percent. Figure1.4:ExportsbyCommodityGroups, 1994-1998 Figure1.5:ExportsbyDestinationCountries, 1994-1998 11% 11% 11% 23% 14% 15% 28% 29% 37% 36% 14% 16% 16% 24% 29% 28% 25% 29% 28% 24% 48% 46% 72% 72% 72% 42% 35% 40% 66% 57% 1994 1995 1996 1997 1998 Light Industrial &Handicraft Goods 1994 1995 1996 1997 1998 HeavyIndustrialProducts &Minerals Agricultural, Forest &Aquatic Products Asia Europe Others Source: GSO 1998, 1999 Source: GSO 1998, 1999 1.06 Taking a Closer Look at the Engine. Analyzing the performance of the various types of enterprises that produce the output and employ the people brings insights into the dynamics behind aggregate GDP and employment figures. As regards output growth, the sterling performance of foreign-invested firms over the period is immediately clear (Table 1.2). Currently estimated to account for roughly 10 percent of GDP, these firms have managed to maintain growth rates of 15-20 percent throughout the period. In contrast, the performance of domestic private companies is very disappointing with a drop in output growth rates of 50 percent between 1996 and 1998. Growth rates of the state sector dropped as well but less dramatically. 1.07 Public sector contribution to GDP has been remarkably constant at 50 percent over the past four years, countering any notion that the Vietnamese economy has become more private sector-led in recent years. In fact, the domestic private sector has given up some share of GDP to foreign-invested companies. 3 Table 1.2: Composition and Growth in GDP by Enterprise Form, 1995-1998 1995 1996 1997 1998 (Est.) Share Growth Share Growth Share Growth Share Growth Total GDP (in 195,566 9.0% 213,832 9.3% 231,262 8.2% 244,740 5.8% billions of VND) & Growth Rate Public 49.8% 8.4% 50.0% 9.8% 50.1% 8.4% 49.7% 5.1% - State Sector 40.1% 9.4% 40.8% 11.3% 41.4% 9.7% 41.3% 5.7% - Collective 9.7% 4.5% 9.2% 3.6% 8.7% 2.7% 8.4% 2.3% Sector Private 43.5% 8.8% 42.7% 7.3% 41.7% 5.7% 41.1% 4.3% - Households 35.9% 9.8% 35.0% 6.6% 34.2% 5.6% 33.6% 4.1% and Farmers - Formal 7.6% 4.2% 7.7% 10.6% 7.5% 6.2% 7.5% 5.3% Private Sector Foreign- 6.7% 15.0% 7.4% 19.4% 8.2% 20.8% 9.2% 18.1% Invested Sector Total 100.0% 100.0% 100.0% 100.0% Source: GSO (1999); GDP based on 1994 prices 1.08 Turning to employment creation, Vietnamese private companies have registered an outstanding performance with double-digit growth rates for the past three years (Table 1.3). The employment base among domestic private companies is very small, however, and even these high growth rates have increased the numbers of employees from roughly 360,000 in 1996 to just over 500,000 in 1998. This compares with about 1.9 million people employed in state enterprises, 1.4 million in government administration, and about 250,000 in foreign-invested firms. Table 1.3: Composition and Growth of Labour by Enterprise Form, 1995-1998 1996 1997 1998 Share Growth Share Growth Share Growth Total Labour Force & 35,791,90 3.5% 36,994,20 3.4% 38,094,2 3.0% Growth Rate 0 0 00 Public 9.1% -2.6% 9.2% 4.6% 9.10% 2.0% - State Enterprises 5.1% 3.7% 5.2% 3.8% 5.2% 3.4% - State Administration 3.6% -11.6% 3.7% 4.6% 3.6% 0.6% - Collectives Sector 0.3% 20.1% 0.4% 16.9% 0.3% -3.7% Private 90.3% 3.7% 90.2% 3.2% 90.2% 3.0% - Households and 89.2% 3.6% 89.0% 3.1% 88.9% 2.9% Farmers - Formal Private Sector 1.1% 13.7% 1.2% 12.0% 1.3% 16.2% Foreign-Invested Sector 0.6% 132.9% 0.6% 3.9% 0.7% 7.2% Total 100.0% 100.0% 100.0% Source: GSO (1999) 4 1.09 A Closer Look at the Private Sector. The private non-farm sector comprises three groups of enterprises: household enterprises, Vietnamese private companies, and foreign-invested companies. This section provides summary profiles of each group. 1.10 Household Enterprises. That the Vietnamese household enterprise sector has grown very rapidly is clear. One estimate shows growth from 840,000 enterprises in 1990 to 2.2 million in 1996, with an average of 3.3 workers (including the owner) in rural enterprises and 6.3 workers in urban enterprises.7 This study surveyed 1,000 micro and small Vietnamese enterprises in 1991 and then repeated the survey of 400 of the same enterprises plus 500 new enterprises in 1997. The findings indicated that growth in enterprise size, capital intensity and labour productivity among household enterprises was significant during the period. This consolidation took place through both entry of new enterprises and growth of existing enterprises. Table 1.4: Distribution of Non-Farm Enterprises, 1997-98 (% of enterprises) National Rural Urban Service Sector Retail Sales 36.6 33.3 43.2 Transport and Communications 5.8 4.4 8.8 Personal Services 5.0 3.7 7.7 Hotels and Restaurants 4.4 2.3 8.6 Wholesaling/agency 3.2 3.4 2.3 Sub-total 55.0 47.1 70.6 Manufacturing and Industry Food Processing 9.5 12.1 4.4 Textiles and Garments 6.9 6.4 8.0 Wood Products 6.7 8.6 2.7 Construction 2.0 2.3 1.3 Mining 1.2 1.7 0.1 Sub-total 26.3 31.1 16.5 Agriculture-Related Aquaculture and Livestock 9.2 12.2 0.1 Forestry 2.0 8.8 3.3 Other Enterprises 7.6 0.7 9.6 Sub-total 18.8 21.7 13.0 TOTAL 100.1 99.9 100.1 Source: VLSS28 1.11 The Vietnam Living Standards Survey 2 yields a rough profile of the activities of household enterprises. As seen above in Table 1.4, the great majority of these very small enterprises are engaged in retail trade, more so in urban than in 7The Anatomy and Dynamics of Small Scale Private Manufacturing in Vietnam by Maud Hemlin, Bhargavi Ramamurthy and Per Ronnas, Stockholm School of Economics, May 1998, p.44. 8Personal services includes laundry, haircuts, and funeral services; rental of household goods, sports and entertainment. Wood products include wood, bamboo and rattan processing. Aquaculture includes fish- farming and capture fisheries. Other enterprises includes metal and metal products, paper and paper products, vehicle hire/repairs, real estate, and non-governmental social relief. 5 rural areas. The substantial share of household enterprises in total manufacturing output (18%) is not surprising given the significant proportion of household enterprises involved in very small production units, i.e., a quarter of 2.2 million units is nearly 600,000 microenterprises! 1.12 Vietnamese Private Companies. Vietnam's corporate private sector consists of three legal forms: "private enterprises" (doanh nghiep tu nhan), limited liability companies, and joint-stock companies. For 1998, the GSO counted a total of 26,021 private companies nationwide of which 18,750 are "private enterprises", 7,100 are limited liability companies, and 171 are joint stock companies.9 Table 1.5: Number of Private Companies by Legal Status, 1993-1998 1993 1994 1995 * 1996 1997 1998 (est.) Private Companies 6,808 10,881 15,276 18,894 25,002 26,021 Year-on-year growth -- 60% 41% 24% 32% 4% "Private Enterprises" 5,182 7,794 10,916 12,464 17,500 18,750 Year-on-year growth -- 50% 40% 14% 40% 7% Limited Liability 1,607 2,968 4,242 6,303 7,350 7,100 Companies Year-on-year growth -- 85% 43% 49% 17% -3% Joint-Stock Companies 19 119 118 127 152 171 Year-on-year growth -- 526% -1% 8% 20% 13% Source: General Statistical Office (1999); * In 1995, the General Office of Statistics included firms from finance/credit, real estate, technology services, and sports and culture that it did not include in any other years 1.13 The number of private companies grew very quickly following liberalization but slowed down just as quickly in 1998. More specifically, growth rates fell from an annual high of nearly 60 percent in 1994 (the second year following liberalization) to only 4.1 percent in 1998. Most surprising is a decrease of 250 limited liability companies in 1998. The number of "private enterprises", typically the smallest of the enterprise types, rose by 1,250 and the number of joint stock companies by only 19--too small a number to account for those companies that were equitized in 1998 and leading researchers to wonder how the GSO is categorizing newly equitized companies. 1.14 Concerning the sectoral distribution, trading accounted for almost half of all private companies with roughly 12,753 companies in 1998, followed by 9Readers may note that this figure for private registered companies contrasts with other published figures for the private sector. The author believes that this discrepancy derives from earlier confusion about the General Statistical Office's method of classifying enterprises. The GSO's "private sector" (kinh te tu nhan) category is limited to only those enterprises registered under the specific legal form of "private enterprise" (doanh nghiep tu nhan)--the legal form for enterprises with one single owner. The GSO places limited liability companies and joint-stock companies in a category called "mixed ownership" (kinh te hon hop). MPDF has collapsed the kinh te hon hop category into the kinh te tu nhan category to reflect accurately the number of registered private enterprises but acknowledges that "private enterprises" are not actually companies but are more similar to sole proprietorships. 6 manufacturers with about 5,620 companies nationwide.10 Among manufacturers, 55 percent are engaged in food and beverage production. Other clusters of firms are engaged in wood processing, ceramics, garments, and textiles. 1.15 As regards location, the South is home to about three quarters of all private Vietnamese companies. Ho Chi Minh City alone accounts for a quarter of total companies and nearly one third of all people employed in private companies. Figure 1.6: Vietnamese Private Companies by Location, 1998 (est.) the Center 9% the North the South 18% (Minus Ho Chi Minh City) 48% Ho Chi Minh City 25% Source: GSO (1999) 1.16 Vietnamese private companies have demonstrated a strong ability to create employment even though most are quite small. Taken as a whole, the number of people working in the private sector grew by 16.2 percent in 1998 compared with 3.4 percent in the state sector. The average number of employees for all private companies was 19 in 1998; the average number of employees for manufacturers was 47; and employment among private manufacturers grew by a very high 20.8 percent in 1998--far surpassing growth in all other sectors (see Annex Table 5.6).11 1.17 Vietnamese Private Manufacturers. As shown in Table 1.6, the state sector dominates industrial production in Vietnam with a 53 percent share of total output, down 6 percent between 1995 and 1998. The foreign-invested sector's share has grown very fast, from 10 percent in 1995 to 18 percent in 1998. The formal private sector share has actually fallen since 1995, from 10.5 percent to 9.6 percent in 1998. Looking at growth rates, we see that state sector growth has fallen from 11.7 percent in 1995 to 5.5 percent in 1998, the formal private from 10.2 to 7.6, but the foreign-invested sector has risen dramatically from 15 percent in 1995 to 28 percent in 1998. 10Little is known about private sector service companies, and this is fertile ground for research. GSO data indicate a total of 26,021 registered companies in 1998 of which 12,753 are trading companies, 5,620 are manufactures, with the remainder engaged in construction, transport, mining and a large "other" category. As noted, this report emphasizes private sector manufacturing, and coverage of services is very limited in large part due to inadequate knowledge of private sector services. 11In fact, there is much anecdotal evidence that private firms are somewhat larger than official figures indicate, mainly because of under-reporting of employees to reduce taxes and because of sometimes significant number of temporary and seasonal workers. 7 Table 1.6: Composition and Growth in Manufacturing GDP by Enterprise Sector, 1995-1998 1995 1996 1997 1998 Share Growth Share Growth Share Growth Share Growt h Manufacturing 30,230 13.5% 34,339 13.6% 38,743 12.8% 42,613 10.0% Output (in billions of VND) Public 61.0% 11.9% 59.3% 10.5% 56.4% 7.3% 54.1% 5.5% - State Sector 59.6% 11.7% 58.0% 10.6% 55.6% 8.1% 53.3% 5.5% - Collective 1.4% 17.4% 1.4% 6.7% 0.9% -28.0% 0.8% 3.0% Sector Private 28.7% 16.8% 28.1% 11.3% 28.1% 12.6% 27.8% 9.0% - Households 18.2% 21.0% 17.8% 11.4% 18.3% 15.6% 18.2% 9.8% and Farmers - Formal 10.5% 10.2% 10.3% 11.3% 9.8% 7.4% 9.6% 7.6% Private Sector Foreign-Invested 10.3% 14.9% 12.5% 38.5% 15.5% 39.7% 18.1% 28.1% Sector Total 100.0 100.0% 100.0% 100.0 % % Source: GSO (1999); Manufacturing GDP based on 1994 prices 1.18 Vietnamese private manufacturers are a small and vulnerable group: small in terms of the numbers of operating companies, their average size, and their share of total employment and of GDP; and vulnerable because firms are highly concentrated in only a few industries, located mainly in a few locations, heavily dependent on the discretion of local and central officials, and frontally exposed to the economic downturn around them. 1.19 Most are producing low-entry barrier, low margin products within export industries that are among the most "rootless" in the world, e.g., garments and footwear. Firms that are selling these products through trading agents are mostly selling Vietnamese labor, which is currently better value than that of competing countries even though its productivity is generally quite low.12 Returns are also quite low in these firms; too low now with lower prices in the Asia region, to build big businesses. 1.20 Many private manufacturers are now facing tough times, and their vulnerability is becoming evident. In the mid-1990s when growth rates were high, investors plentiful, and the dong exchange rate more competitive, buyers were knocking at the doors of many private firms. This is no longer the case, and managers are faced with the demands of operating in a much more competitive marketplace. Some are proving able to meet this challenge; others are not and are 12A recent team of experts came at the request of MPDF to assess the competitiveness and constraints of the private Vietnamese garment industry, and they estimated that Vietnam's better private garment firms are operating at roughly 50% of the productivity of their Chinese counterparts. 8 closing down. Table 1.7: Private Manufacturers by Size Across Selected Industries, 1998 (est.) Less than 100 to 299 300 to 500 or Total 100 workers workers 499 more workers workers Total Firms 5155 299 72 94 5620 Food & Beverage 3026 48 10 21 3105 Garments 88 85 24 23 220 Leather 14 13 7 31 65 Wood 371 25 5 6 407 Non-metallic 627 26 3 1 657 Others 1029 102 23 12 1166 Source: General Statistical Office (1999) 1.21 In order for Vietnamese private companies to play the role in economic growth and export expansion that private enterprises have elsewhere in Asia, a major transformation would be required. As it stands now, the formal, domestic private sector comprises a relatively small group of hardworking and ambitious people, many of whom have the capacity to grow their firms given the proper incentives and resources. The challenge is to bring many more people into this small group and to help the whole group grow. That will only happen with significant improvements in the areas identified later in Chapter 1 and discussed in Chapter 3. 1.22 Foreign-Invested Enterprises. Summary facts about foreign direct investment in Vietnam include the following: · FDI has fallen from a very high 13% of GDP in 1995 to an estimated 5% in 1999, but as noted, foreign-invested enterprises accounted for a very high share of GDP (9%) and an even higher share of total exports (22%) in 1998; · In 1999, 93 percent of disbursed FDI is expected to go into seven sectors: heavy industry (21%); transport and telecommunications (15%); hotels and tourism (14%); construction (13%); agriculture and forestry (11%); apartments and offices (10%); and the food industry (9%). Light industry is expected to account for only 5.3% of FDI disbursements in 1999; · Investors from four countries (Singapore, Taiwan, Japan, and Hong Kong) account for 54% of committed capital and 48% of disbursed capital; · Ho Chi Minh City, Hanoi, and Dong Nai account for 61% of committed capital. 1.23 To summarize, the main points to be drawn from this overview of key 9 aggregate data include the following: · Output growth has dropped significantly across the board, including all sectors and all enterprise groups; · Open unemployment is rising, particularly in urban areas, and underemployment affects vast numbers of people in rural areas; · Foreign investment has dropped to a small fraction of a few years ago, but its contribution to Vietnam's growth and exports has become significant in a short period of time; · The domestic corporate private sector has very much taken the lead in the rate of employment creation even though the absolute numbers remain very small; · The household sector provides incomes for millions, so many millions that the contribution to GDP is not insignificant although productivity is presumably quite low; · There has been little change in the state share of the economy over the past five years as measured by share of GDP or employment. B. Why has the car slowed down ? 1.24 Without question, a complex interplay of factors and not any single factor has lead to the decline described above. This section continues the metaphor of the Vietnamese economy as a slowing car (or motorcycle) and identifies some of the most likely contributing factors and explains what their contribution might be. 1. The map is pointing in two different directions as the car is approaching a crossroads 1.25 That the Vietnamese legal and economic system contains fundamental internal tensions is acknowledged by all observers, foreign and Vietnamese alike. Some analysts would argue that, at this point, at least partial resolution of these tensions might be a necessary condition for further growth. Identifying their root sources is helpful in clarifying the choices that have been made to date as well as those that will be available in the future. The most important internal tensions would include: (i) the incompatibility of socialist legality with the law-based state; (ii) the government as chief economic strategist versus the demands of the marketplace; (iii) capital-intensive, import substitution versus labor-intensive, export-led industrial development; and (iv) reliance on state-owned enterprises as the engine of growth in the face of an urgent need to reestablish high growth and employment rates. As described below, each of these is closely linked to one another. 10 1.26 Incompatibility of socialist legality and the law- based state. In 1986, the Sixth National Congress of the Communist Party of Vietnam took the decision that "the management of the country should be performed by law instead of by moral concepts...It is necessary to systematically supplement and perfect the legal system so as to ensure that state machinery organizes and operates in accordance with the law".13 In 1991, the Seventh Party Conference adopted the new legal doctrine which is called the "law based state" or nha nuoc phap quyen (often mistranslated as rule of law or rule by law). At the same time, the Seventh Party Conference also reaffirmed its adherence to phap che xa hoi chu nghia or socialist legality and to the three main tenets of socialist governance which are: the people are the owners; the Party is the leader; and the government is the manager. 1.27 As confirmed in a 1994 Party communiqué: "The characteristics of our laws are different from those of bourgeois laws. Our laws are aimed at developing our nation in accordance with the socialist orientation while the laws of the bourgeois state are aimed at protecting capitalism".14 In short, in socialist legal theory, law is considered a management tool to preserve the state's interests. Where the law is unclear, officials are required to favor state interests. Understanding that socialist legality is the dominant legality in Vietnam is fundamental to understanding Vietnamese economic management. 1.28 Not surprising, co-existence of the new law-based state and decades-long socialist legality has proven problematic for the economy on many fronts, perhaps most importantly in three areas: the legislative framework, coordination of the legal framework, and implementation of the legal framework. · Most recent commercial legislation incorporates principles of equality before the law, i.e., application of these laws and regulations should not differ based on ownership. This same legislation attaches state management provisions that establish state offices as the regulators of the parties covered by the legislation, and these offices make use of a combination of licensing gateways, prescriptive regulation and general `unified management' to carry out their responsibilities. The problem arises because all parties are not equal under socialist legality within which the State's interests are paramount over 13Truong Chinh, Introduction to the Political Report, Vietnam News Agency, December 15, 1986, Part 4. 14Resolution 7, Mid-term Congress Resolution, Part V, Saigon Giai Phong, March 19, 1994. 11 private and community interests. The government has designated SOEs as the cornerstone of the economy, and their interests come above those of others, most notably private enterprises. So long as socialist legality continues to take precedence over the law-based state, it would seem that equality before the law can scarcely be realized. · This duality also underpins many of the problems in coordinating the legal framework. That private businesses are plagued by inconsistencies and overlap between high level law and lower level subordinate legislation is well documented. How does this happen? The National Assembly drafts and passes primary legislation, and the Ministries and People's Committees draft the decrees, decisions, circulars, and instructions that provide for implementation of the laws. There is no government body with the political authority to coordinate the two, i.e., to make sure that implementing legislation is consistent with both the intent and the content of the law. In fact, this system effectively shifts much of the actual rule making from the National Assembly, which is the most open, accountable state organ to much less accountable and transparent executive offices. Serious inconsistencies between the two come about as Ministries and People's Committees draft subordinate legislation that will support the socialist legality framework, delineate their political turf, exercise their rights/duties of state economic management, and resist external attempts to streamline and clarify legal rules. In addition to the obvious problems with this system, the technical quality of subordinate law drafted by Ministries and People's Committees is reportedly typically of low quality, using vague terminology and placing multiple discretionary qualifications on legal rights. · Implementation of the legal framework reflects the dominance of socialist legality within which state economic management is the primary state function. Most current commercial laws contain provisions allocating responsibility for controlling market entry to licensing authorities and for monitoring legal and regulatory compliance to market management boards at the central and city/provincial levels. Decree No 1 on Administrative Punishment for Economic Actions 1996 require market management boards to fine and/or detain those breaching license conditions or market regulations.15 Market policing is carried out by both economic police and economic security police, both controlled by the Ministry of Police. Adding to the confusion, certain Ministries and People's Committees conduct specialized inspections, e.g., the Ministry of Labor monitors compliance with the Labor Code, the Ministry of Transport inspects vehicles, traffic police control road safety, and the Taxation Department collects and monitors tax compliance. State economic management as currently practiced makes big problems for private sector enterprises. First, it creates great uncertainty as regards licensing, an area where firms typically are vulnerable to accusations of non- 15Although market management boards are legally bound to inspect all types of business, it is reportedly the case that permission from supervisory authorities is required to inspect SOEs. 12 compliance. Private firms have long complained about the requirement that they produce only the exact products/services listed on their licenses, restricting their flexibility to make even minor adjustments in their product mix.16 Second, private businesses report significant harassment and requests for informal payments from many different policing authorities with overlapping responsibilities and poor cross-agency coordination. Third, many administrative offenses are also criminal offenses under certain conditions, a fact that functions as a potent weapon in the arsenal of state economic management. For example, the administrative offences of doing `business illegally' and of `defrauding clients' become criminal offenses on the second breach;17 it is a criminal offense to intentionally conduct business without a license; 18 and perhaps, most difficult of these examples, it is a criminal offense to intentionally violate state economic management `principles and policies'.19 1.29 Government as lead economic strategist. The Vietnamese government never wavers in its stance that the state should take the lead role in economic development. This has meant an ongoing high degree of central planning of industrial development despite the considerable degree of liberalization that came with doi moi. In practice, it has also meant that the government has put in place extensive systems of controls over economic actors that reach to the level of very small details. These control systems have given government officials at all levels tremendous power, particularly over private enterprises which function outside of the state system. 1.30 With only a few notable exceptions worldwide, governments have not been successful as lead economic strategists. They are everywhere less able to read and respond to markets than are private agents. Government imposition of excessively tight controls on entrepreneurs is antithetical to what we know about what fosters dynamic business (especially small business), which is the freedom to employ resources on a highly flexible basis. A fundamental tension therefore arises between government's desire to exercise extensive control over virtually all investment decisions of any significant size and investors' needs for control over many of the same decisions, e.g., which products to make, who to buy from and sell to, whom to employ, how to finance production etc. The new Enterprise Law might be successful in setting a needed boundary between government and investor decisions, but as always, it will depend on how the Law is implemented. 16The Ho Chi Minh City People's Committee recently issued broad business licenses on an experimental basis, e.g., authorized some firms to engage in the `textile and clothing trade' and even `general manufacturing'. Rather than stimulating commercial autonomy, many participating companies have subsequently sought to return to more precise, if restrictive, licensing conditions. A representative incident explains this counter-intuitive response. A participating company licensed to "trade in consumer goods" was fined by members of the market management board which chose to classify televisions as luxury rather than consumer goods. 17The Supreme Court has directed all inferior courts not to impose 18Penal Code art. 168 (1986). Penalties range from one to seven years imprisonment. 19Penal Code art. 174 (1986). Penalties range from six months to five years imprisonment. 13 1.31 Strategy of import-substitution with heavy industry in light of Vietnam's comparative advantage in labor and need for export revenues. There is a growing tension between Vietnam's industrial strategy, which is inward looking and capital intensive, and pressures to create large numbers of jobs and to earn export revenues. The current capital-intensive model absorbs scarce capital but not the growing surplus of labor. It puts pressure on the trade balance as SOEs and many foreign enterprises import great quantities of equipment, machinery and intermediate goods that go mainly to serve domestic markets and fail to earn foreign exchange. It can only be maintained with high rates of protection. In contrast, outward-looking, light industry makes use of Vietnam's comparative advantage in labor; it earns foreign exchange; and it promotes the learning and integration that come with international trade. 1.32 The tension between the ongoing industrial strategy and the current demands of the Vietnamese economy and of the outside world is obvious in the mixed messages from the government. On the one hand, Vietnam has joined AFTA, and membership will require significant trade reform that would invariably force a re-structuring toward light industry. The government worries aloud about high unemployment rates, confirms that export promotion is a high priority, and talks often about the need to learn from and integrate with the rest of the world. But on the other, many of the investments within its control, i.e., those in state enterprises, continue to be capital-intensive and inward-looking, and high barriers continue to block entry of many competing imports that everywhere are a primary means by which such learning and integration takes place. 1.33 Prevailing ambivalence about the national strategy for industrial development is costly. Jobs are not created that could be created if more labor- intensive investments were made, and restructuring of capital intensive industries is postponed. And of course, the more capital that goes into industry that is only viable with high rates of protection, the larger the losses when protection is reduced or withdrawn. Imports are squeezed to cover shortages of export revenues. New investors either invest under the current system and join vested interests in the status quo, or they wait until trade reforms are reliably underway-- and the Vietnamese economy waits for their investment. 1.34 Reliance on SOEs as engines of industrial growth in light of obvious need for high levels of growth and efficiency. The urgent need to restore high rates of growth and to create great quantities of new jobs is obvious to all. The preferred mechanism for doing so continues to be the state enterprise sector. This is seen in preferential access to virtually all resources in the country (land, capital, technology, government contracts etc) and in extensive protection from competition. And these preferences continue despite mounting evidence that many SOEs, particularly those in heavy industry, are making losses that are seriously undermining the financial sector, knowledge that many SOEs are capital-intensive and therefore counter to Vietnam's comparative advantage in labor, and recognition that many SOEs are only viable behind high protective barriers. 14 1.35 At the same time, the most likely sources of renewed growth are not being nurtured and, in fact, are discriminated against in many ways. These are Vietnam's private sector enterprises, both foreign-invested and domestic. Foreign-invested firms have earned their status as a `most likely' source of growth by their large contribution to Vietnam thus far (see first section of report for data). The output performance of domestic private firms declined in the last several years, but employment creation rates have been very high. And the performance of private firms in other economies should surely confirm this sector's ability to contribute to national growth under reasonably favorable conditions. It must also be noted that some state enterprises in labor-intensive industries are, in fact, operating profitably and with little government support. The worst problems are with SOEs in heavy industry that are not competitive and with those with monopoly power. 1.36 In summary, the economic model currently in place in Vietnam reflects socialist legality with the state as the lead economic strategist and import substitution, heavy industry and state-owned enterprises as the mainstay of industrial growth. This framework is internally consistent, transparent, and apparently accepted by the public at large. When this model failed to deliver economic growth in the late 1980s, some aspects of a capitalist economic model, notably private enterprise, were grafted onto the Vietnamese model. This solution to the acute problems at that time was immediately and tremendously successful, and deeper changes in the Vietnamese model were not required. But the internal contradictions between the Vietnamese system and the `foreign implant' remained, and some would argue that current demands in the Vietnamese economy have brought these tensions to the forefront, where they are now binding constraints on further growth. 2. The car is running out of gas 1.37 This argument says that the fuel produced by the first round of economic reform measures has been mostly used up, and that new reforms are needed to fuel further progress. As seen in the figures presented above, Vietnamese from all walks of life rushed to take advantage of the new opportunities that were created by doi moi. When private enterprise was allowed in 1990, households became microenterprises, entrepreneurs opened small businesses, and foreign investors set up joint ventures. Granting farmers land tenure and the freedom to farm independently, combined with lifting of price controls and devaluation of the Vietnamese dong, raised agricultural production so rapidly that Vietnam went from importing rice to become the second largest producer of rice in the world in a few short years. In summary, there was pent-up entrepreneurship, sufficient resources in hand, and abundant new opportunities--and the economy boomed as a result. 15 1.38 Some analysts argue that these gains can not be sustained without a further round of deep reforms that would create a new set of opportunities sufficiently broad-based and profitable to have an impact on national growth, bring the second wave of entrepreneurs to the table, and raise substantial additional resources. There is little disagreement that the Vietnamese government has been slow to launch a second round of serious reforms following the substantial structural reforms of the late 1980s and early 1990s.20 It is also true that, in the last several years, the government has made some notable efforts to level the playing field for all enterprises, perhaps culminating in the new Enterprise Law which will come into effect January 1, 2000.21 And in September 1999, the government confirmed its action plan for private sector development within the Private Sector Promotion Program that is part of the Miyazawa Initiative in Vietnam. In addition, the Prime Minister has appointed a high-level committee to draft a decree that would set up an SME policy unit within government in the year 2000. 1.39 Most observers would agree that the most important reforms still waiting in the wings include trade reform, banking reform, land reform, privatizing the state sector, improving the quality of public services, and liberalizing information channels. These choices are based on the assumptions that: Vietnamese companies, both state-owned and private, need competition to build their own competitiveness; growth of high-potential firms depends on the presence of banks whose profit orientation pushes them to lend to firms with the highest returns; access to secure land rights is fundamental to investment; state-owned enterprises (SOEs) need the discipline of the marketplace to build competitiveness; high quality public services are key inputs to creating broad-based business sectors; and an information-rich environment is the oxygen supply for business. 20See for example Vietnam 1997:2 Small, Medium, or Large? Some Scenarios for the Role of the State in the Era of Industrialization and Modernization in Vietnam by Ari Kokko and Fredrik Sjoholm. 21The Law on Encouragement of Domestic Investment, which offers incentives to domestic investors, came into effect in January 1999. Third quarter 1999 figures show an increase in issuances of Certificates of Investment Favor and private Vietnamese investors are by far the largest group of investors. 16 3. The road is filled with roadblocks, potholes, and rocks 1.40 The business environment in Vietnam is difficult for all to traverse, but particularly so for foreign investors and for domestic private companies--the two groups of firms that nonetheless currently have the highest growth and employment creation rates, respectively. There can be little doubt but that the costs of operating in the current business environment in Vietnam diminish the performance of local firms. Four aspects of the business environment appear to be of paramount importance: (i) the social/political culture--social and political attitudes toward private enterprise; (ii) the policy and legal/regulatory framework; (iii) the performance of key market support institutions; and (iv) access to effective information channels. The following sections outline the status and the main issues related to each of these aspects of the business environment. 1.41 (i) Social/Political Culture. Social and political attitudes toward private enterprise determine behavior toward those engaged in private enterprise. They are also highly influential in people's decisions to establish or work for a private business. 1.42 Public Opinion. The Mekong Project Development Facility carried out a survey in the summer of 1999 with the objective of learning more about public opinion toward private enterprise.22 The results confirmed that public opinion toward private enterprise is remarkably negative. The main findings can be summarized as follows: · Despite the diversity of the sample, respondents were highly consistent in their negative views of the private sector. The most common perceptions were that 22Report on Survey of Attitudes Toward the Private Sector in Vietnam. MPDF Private Sector Discussions No 9 July 1999. Specifically, the survey team conducted personal interviews with 60 high ranking officials from ministries and government agencies and from government organizations such as VCCI, CIEM, UAIC and VICOOPSME. Interviewers included general directors and deputy general directors of tax departments, market management forces, economic police, customs, trade, planning and investment, and industry departments in major cities and provinces. Also, this group of interviewees included general directors and deputy general director of both private and state-owned commercial banks. The survey team then convened five focus groups, with participants drawn from suppliers and customers of private firms, credit officers from local banks, final year university students, their parents, and owners of private firms. Roughly 120 people from each of these five interest groups were selected randomly in Hanoi, Haiphong, Danang, Ho Chi Minh City, and Cantho and asked to respond to questionnaires that were dropped off and picked up by survey team members. In total, 644 people were surveyed by questionnaire. 17 private firms and their owners are: unstable and vulnerable to bankruptcy, exploitative of their employees, dishonest, opportunistic, incompetent, and non-contributors to the nation. · Private firms are the least desirable employers when compared with the government, state-owned enterprises, and foreign companies by both university students and their parents. Only 8 percent of students said that they would choose to work for a private company upon graduation. Private firms were seen by almost all respondents as poor job options because they are deemed unstable, unable to offer job security, without potential for career development, and without training opportunities. · Private firms were not well-regarded as loan applicants by senior credit officers. When asked how they would choose between two equally qualified loan applicants, one an SOE and the other a private firm, 80 percent said they would choose the SOE. The main reasons for their choice included: the belief that private applicants are not honest and often misuse loans; the fact that the general policy of banks is cautious towards private firms; private firms do not have the back-up of government; private firms are not reliable; and credit officers have had bad experience with private applicants. More than 50 percent of respondents stated that it is less risky to lend to the state sector applicant, and this is mainly because state sector applicants have the back-up of the government. Others said that state projects are important to the nation, and that state firms have greater capacity to carry out their projects. · Suppliers and customers of private firms were more positive about the private sector than the credit officers. Suppliers and customers who were positive about dealing with private firms cited their better service and flexibility; those who were negative thought that private firms are weak financially, not reliable, and without the guarantee of the government. · The media had played a very important role in negatively influencing respondents' views toward the private sector. More than 85 percent of participants in all groups said that the media was their main source of information about the private sector in Vietnam. When asked for specifics, respondents cited: news on frauds of private firms, misconduct of business by private firms, news on tax evasion of private firms, articles on "ghost" companies, information on smuggling by private firms, corruption cases, news on private firms going bankrupt, and news on mistreatment of employees in private firms.23 · Government officials uniformly acknowledged the bias among policy-makers in favor of state enterprises over private enterprises, but were divided in their 23The survey team pointed out that in the media in Vietnam, news on the state sector is often filtered carefully to minimize negative impacts (and in certain cases the media may be warned not to cover certain cases). The private sector, on the other hand, is left in the free hands of the media which is, by nature, always hungry for sellable news. 18 views about how private firms should be treated. One group was unsympathetic and thought the private sector should be even more tightly controlled, citing dishonesty, source of corruption and inequality in society, and deviation from socialism as their rationale. They likened the co-existence of Vietnam's socialism and the introduction of a private sector to a `marriage of convenience' where the partners will always be suspicious of one another. The second group cited the disadvantages in areas such as investment, land, tax, import and export control suffered by private firms. This group cited lack of confidence among policy-makers in the private sector's ability to contribute to the economy and characterized private firms as the `adopted child', as compared with the state sector which is the `official child'. · There was no difference between Southerners and Northerners in their attitude towards the private sector. 1.43 Private Manufacturers' Point of View. MPDF's recent survey of 95 larger private manufacturers found that managers have very low expectations of their government, and all keep a watchful eye.24 These private manufacturers did not feel that they could count on government protection of his/her legal rights as a private company. Their confidence in the government's commitment to private enterprise is regularly undermined by contradictory government statements and policies--as well as by a stream of negative press. In short, government offers businesses little protection from corrupt officials and critical propaganda. And most Vietnamese adults have some knowledge of a long history of unpredictable and, at times, quite ruthless, policy changes toward private enterprise. 1.44 Big private firms take greater risk in Vietnam by virtue of their size--they simply have more to lose. There is also the "tall poppy" syndrome: those that stand tall are the first to be chopped down. In the past, relaxation of restrictions on the private sector has typically been followed by crackdowns that punish those who were too enthusiastic or too successful in their enterprises. With economic decisions still highly unpredictable and private sector actors continually lambasted in the press, most private sector managers prefer to keep their heads down, i.e., to stay relatively small. 1.45 With height also comes more requests for unofficial payments. Interviewers asked multiple questions about the cost to sample firms of corruption. Most managers downplayed the importance of corruption, preferring to see it as a small, acceptable tax that brings tangible benefits. "Grease for the machine" and "diplomacy" were the tongue-in-cheek terms often used to describe these investments. Numerous managers reported that they are key sources of funding for local disaster relief in bad times and for local beauty contests in good times. One manager joked that the local tax collector gets a monthly "salary" from her of 500,000VND. In effect, managers described a steady stream of small payments to many different officials. 24Vietnam's Undersized Engine: A Survey of 95 Private Manufacturers by Leila Webster and Marcus Taussig, the Mekong Project Development Facility, Discussion Paper #8, June 1999. 19 1.46 The exception to small payments (and to managers' acceptance thereof) was the customs administration where many managers reported that they must make large payments to get their products loaded and shipped. One manager broke down her payments as follows. She makes total payments per year of 500 million VND, half of this to customs officials. She ships 1,000 containers per year and for each container, she pays 250,000 VND: 100,000 to the inspector who comes to her company, 50,000 to the fellow who opens the gate at the shipyard, and 100,000 to the inspector at the shipyard. 1.47 (ii) Laws, Policies and Regulations. There are two main vantage points from which to evaluate the effects of laws, policies and regulations (hereafter, the policy framework) on private business: the first is the views of managers of companies as to the main constraints on growing their businesses and some of these can be traced directly or indirectly to the policy framework; and the second is the views of policy analysts with deep knowledge of what has been required for private sector development around the world. Here we begin by outlining the views expressed by managers of private Vietnamese companies, of foreign- invested companies, and of microenterprises and then follow on with a summary of analysts' views. 1.48 The views of managers of private Vietnamese manufacturers. The MPDF survey of manufacturers asked managers to list, in order of importance, the top three problems their business faces today.25 Most directly related to the policy framework is the fifth problem on the list: unclear government policies. Managers complained bitterly about unclear and frequently changing government regulations that have direct impact on their businesses. In their view, regulations too often are changed without warning, and the lack of specificity of laws and regulations allows mid-level officials too much discretion. Managers in the wood and furniture industries were particularly irate about a series of sudden changes in laws governing wood exports. Most troublesome concerning land and tax laws is lack of clarity--most did not really know what the laws are in these two areas. Table 1.8: Major Constraints Identified by Managers* Unable to get Lack of Insufficient East Asian Unclear investment information working economic crisis government capital capital policies 53% 41% 39% 19% 16% * Chart shows the percentage of managers from the MPDF survey of 95 larger, private manufacturers that mentioned the problem among their top three problems. 1.49 The inability to access investment capital is also closely related to the policy framework. Managers agreed that collateral requirements represent the largest obstacle to their accessing loans of significant size and maturity. Not only 25Ibid 20 are collateral requirements too high, valuations too low, and categories of acceptable collateral too narrow, but the fact that state enterprises do not need collateral to obtain loans means that the lion's share of available credit funds, most importantly scarce term resources, go to state rather than private firms. Without access to investment capital for new equipment purchases and facility expansions, many firms continue to operate with mis-matched or otherwise sub- optimal production equipment and typically in very cramped factories. 1.50 Lack of access to good quality business information, the second biggest problem, is also in part a policy issue. Without the freedom to set up fully private associations that cater to the specific needs of member firms, the kinds of processed industry and market information that business associations typically offer their members are scarcely available. Managers were most concerned about their lack of information about foreign markets, both input and output markets. Some managers expressed frustration over their inability to find information about alternative suppliers and buyers and about pricing that would strengthen their positions with buyers. Most felt that state companies always had priority access to the truly valuable information from their line ministries. 1.51 Managers took for granted the great numbers of regulations that pertain to nearly all aspects of their businesses as well as the fact that many are hard to find, vaguely formulated and variously interpreted, frequently changing, and poorly communicated. Tax and customs regulations were the most problematic.26 Maintaining conformance with applicable regulations requires much time and vigilance, and penalties for violations can be costly. As noted, criminalization of administrative infractions keeps everyone on edge-both entrepreneurs and officials.27 Decrees and statements from the central government that could be interpreted as positive for the private sector are rarely specific enough to have an impact at the local level. In the end, enforcement rests more with the discretion of the official than with the letter of the law--and herein lies the risk. 1.52 The views of managers of foreign-invested businesses.28 Between 1994 and 1997, Vietnam attracted an average of $2.2 billion dollars a year in actual foreign direct investment. However, foreign direct investment in Vietnam began to fall even before the Asian economic crisis. Foreign investors in Vietnam complain about post-approval licensing problems, perceived corruption, and an inhospitable business environment. 1.53 The Vietnamese bureaucracy is complex and opaque, and over a hundred different permits--the majority of which must be renewed annually--reportedly 26 Counter to expectations, most sample managers had not had difficulties registering their firms and obtaining licenses needed to be fully legal. In fact, 90 percent were able to register and license their firms in six months or less, 69 percent in three months or less. 27As one reviewer of this paper pointed out, "criminalization"also places a heavy and unfair burden on officials at all levels with decision-making authority over private firms, i.e., they too can be found guilty of following one regulation that is counter to another regulation. 28There has been no systematic survey of foreign-invested firms, but these firms have been active in the Private Sector Forum where they have been able to talk about constraints on their businesses. 21 must be obtained in order to operate. Investment licenses require the approval of as many as 12 different government ministries, and include details like location, amount of capital, names of local partners, capital to be imported, personnel needs, and feasibility analysis. Cementing all of these details limits the flexibility needed to operate a successful business. In addition, foreign businesses must secure State Bank approval for every foreign loan, obtain land use rights, and handle resettlement compensation issues for those displaced. The numerous steps involved in obtaining these approvals--and renewing them if any changes are made--result in high costs and investor frustration. 1.54 Perceived corruption has also had a dampening effect on FDI. The 1998 Transparency International's Corruption Perception Survey ranked Vietnam 74th of 85 countries. The Vietnamese Chamber of Commerce and Industry conducted a study that found that both SOEs and private businesses spend a full third of their time obtaining authorizations from different parts of the Vietnamese bureaucracy. These perceptions can magnify the risks associated with foreign investment, especially in long term investments and fixed assets. 1.55 Recently, foreign investors have successfully lobbied for a more supportive business climate, and as of July 1, 1999, several biases were to be phased out. Per Decision 53, two-tiered pricing systems will be gradually eliminated, registration fees for foreign companies will be decreased, taxes on Vietnamese staff salaries will be reduced, salaries can be paid in local currency, and work permit requirements for foreigners will be simplified. However, these regulations have not yet been changed in practice. Investors everywhere are reluctant to do business in inhospitable, risky, or high-cost environments, and if uncertainty is high, they expect equally high returns. Finding such returns in Vietnam has not been easy. 1.56 The views of managers of household and microenterprises. In a survey of small enterprises carried out in 1997 by the Institute of Labour Studies and Social Affairs and the Stockholm School of Economics, entrepreneurs were asked to name the three main constraints to growth of their enterprises.29 As shown in Table 1.9, problems among household and private enterprises were clustered in three main areas: limited demand, too much competition, and shortages of capital. Experience with informal sector analysis elsewhere has shown that these first two problems are actually highly interrelated in that lack of demand for any one enterprise is often a result of too many competitors and, vice versa, too many competitors is a result of insufficient aggregate demand for the number of producers. Problems underlying these kinds of constraints typically are some 29 See The Anatomy and Dynamics of Small Scale Private Manufacturing in Vietnam by Maud Hemlin, Bhargavi Ramamurthy, and Per Ronnas. The Stockholm School of Economics. Working Paper Series in Economics and Finance No.236, May 1998. This survey covered over 1,000 private enterprises, randomly selected in three urban locations (Hanoi, Ho Chi Minh City, Haiphong) and in two rural locations (Ha Tay and Long An). All enterprises were engaged primarily in manufacturing or agro-processing, and all had fewer than 100 employees. These data were broken down by enterprise type, including household and private enterprises, the two smallest size enterprises, and it is these data that are emphasized in this section. This survey was a follow up to a similar survey carried out by the same team in 1991, and comparing results allows for some conclusions about trends during the 1991-1997 period. 22 combination of: a drop in aggregate demand due to falling purchasing power among low-income consumers; market saturation (there are more producers than demand can support); and lack of product diversification on the part of microentrepreneurs (too many are selling the same product). The policy implication is a simple one: maintaining high aggregate growth rates in urban and rural areas is by far the most important means by which government can support household and small enterprises. Table 1.9: Main Constraints to Growth by Ownership Urban Rural House- Private Partner Co- Ltd. House- Private Other hold -ship operatives & hold forms share Shortage of capital 25.5 31.8 22.5 32.1 32.5 35.4 41.7 63.6 Lack of skilled 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 labour Lack of technical 1.0 0.0 7.5 1.8 0.0 0.0 0.0 4.5 know-how Limited demand 30.6 13.6 22.5 19.6 13.0 28.1 14.6 18.2 current output Too much 24.5 34.8 25.0 26.8 31.2 20.8 18.8 9.1 competition Lack of 0.0 3.0 0.0 5.4 1.3 1.0 0.0 0.0 marketing/transport Lack of modern 0.0 0.0 0.0 3.6 3.9 4.2 4.2 0.0 machinery Lack of raw 1.0 0.0 0.0 0.0 2.6 0.0 6.3 0.0 material Lack of energy 0.0 1.5 0.0 0.0 0.0 0.0 0.0 0.0 (power, fuel) Interference by 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 local officials Uncertain 1.0 1.5 7.5 1.8 5.2 1.0 2.1 4.5 government policies Inadequate 5.1 6.1 7.5 1.8 1.3 3.1 2.1 0.0 premises/space Difficult get 0.0 0.0 0.0 0.0 1.3 0.0 0.0 0.0 licenses etc. Other factors 2.0 3.0 5.0 1.8 1.3 3.1 4.2 0.0 None 9.2 3.0 2.5 5.4 5.2 3.1 6.3 0.0 Source: The Anatomy and Dynamics of Small Scale Private Manufacturing in Vietnam by Maud Hemlin, Bhargavi Ramamurthy, and Per Ronnas, 1998. Note: The entrepreneurs were to rank three options at the most. 1.57 Microentrepreneurs' third largest problem, shortages of capital, also has several policy implications. A large and growing body of knowledge about effective delivery of credit (and savings) services to microenterprises shows clearly that reaching great numbers of these tiny enterprises depends critically on building sustainable microfinance institutions and equipping them with best practice products and technologies for reaching this hard-to-reach, large group. In practice, this has meant allowing non-bank financial institutions (often credit unions and NGOs) to provide credit services as banks are rarely well-positioned 23 for this task. "Sustainable" has proven to mean financial sustainability, and the key to achieving this has been use of interest rates that are set to cover the actual cost of credit delivery. As transactions costs are high for very small loans, particularly in rural areas, this has invariably meant charging high interest rates. Experience in dozens of developing countries has shown that low-income people are willing and able to pay high rates for small loans, that indeed, access to credit funds is far more important to microentrepreneurs than the price of the funds. 1.58 The policy implications for the Vietnamese government are clear. First, abolish interest rate caps and allow microfinance institutions to charge their actual costs to their borrowers if the objective is to reach great numbers of microenterprises with very small credits. Second, devise a legal/supervisory framework to regulate/oversee the credit activities of non-bank financial intermediaries and then license those that meet the requirements.30 1.59 The views of analysts on the legal framework. Most analysts would agree that lawmakers since doi moi have enacted a legislative framework that covers most aspects of market economic activity. This framework would include the Enterprise Law 1999 which governs the two corporate legal forms in Vietnam, the Foreign Investment Law which licenses joint ventures and 100 percent foreign- owned firms, Decree 66 which regulates household producers and traders; contract law which includes the Civil Code, the Commercial Law, and the Ordinance on Economic Contracts (1989); and the Law on Land 1998. 1.60 There is some agreement that the main strengths and weaknesses of each of these pieces of legislation are as follows: · The Enterprise Law. This new law is widely regarded as a very positive addition to Vietnam's legal framework for private sector development. 31It abolishes many of the onerous requirements of previous legislation, including replacing a complicated licensing system for new companies with a one-step registration system and reversing the former framework wherein companies were told which activities government would allow them to take up, to a new framework that allows companies to engage in all activities not expressly prohibited. Market entry into key sectors such as manufacturing, construction, mining, and tourism is, however, still licensed as is import/export trade, access to foreign markets, and to technology transfers. There are reportedly some 80 licenses and permits that still control market access, and this is probably still excessive. The government has requested ministries, government agencies, and provincial/municipal authorities to abolish all rules and regulations that are contradictory to the Enterprise Law. The government will issue a regulation 30A growing number of developing countries have put regulatory frameworks for non-bank financial intermediaries in place, and information about the content and the process of doing so is available. 31 The Enterprise Law is to come into effect January 1, 2000, and the all-important implementation regulations are now under preparation. As is normally the case in Vietnam, effective implementation of this law will depend heavily on the effectiveness of implementation regulations. 24 on post-registration management to bolster the effectiveness of State management. The principle is that government officials should respect the rights of business people to operate their businesses in an autonomous fashion--this provision apparently is meant to keep government intervention from moving from the registration to the post-registration phase. · The Foreign Investment Law. Foreign invested firms, both joint ventures and 100 percent foreign-owned companies legally are considered domestic companies. But, in practice, foreign companies are subject to a large body of subordinate legislation issued by the government and ministries that provides a mass of prescriptive regulations, either specifically addressing or exclusively enforced against foreign-invested companies. In general, rules governing accounting, taxation, labor, import/export, and domestic distribution are much more prescriptive than those affecting domestic investors in the same industries. For example, the Ordinance on Accountancy requires all corporate entities (except limited liability companies) to audit their accounts externally, but this regulation has only been applied to foreign investors. Turnover tax is applied to actual earnings for foreign investors and to estimated earnings for domestic investors. Foreign invested companies are strictly controlled by narrow license conditions issued by the Ministry of Planning and Investment. Market entry requirements that have now been abandoned for domestic companies, such as business feasibility studies and proof of capital valuations, continue to apply to foreign investors. · Decree 66/HDBT, 2 March 1992. District level People's Committees regulate household producers and small traders under this decree. Simple establishment procedures make market entry easy and low cost. Taxes are assessed on averaged incomes for similar businesses in the same geographic location. Limitations are that these small enterprises are only allowed to operate in the district where they are licensed; and they have no legal person status and therefore legally can neither sign contracts nor export directly. Many substantive legal provisions discourage Decree 66 entities from incorporating. For example, although the costs of incorporation will presumably decline under the Enterprise Law, they are likely to remain over ten million dong, a prohibitive sum for most small businesses. Once incorporated, business profit tax is assessed on actual, not averaged profits. This would substantially increase the tax rate for profitable Decree 66 entities. Finally, restrictive land leasehold transfer rules constrain the ability of companies to sell their business as on-going ventures and the ability of creditors to recover against immovable assets. Decree 66 entities can avoid these difficulties by using allotted residential land, and this functions as a significant disincentive to moving from informal enterprise to a registered company. · Contract Law. Three main legal instruments, the Civil Code, Commercial Law and Ordinance on Economic Contracts govern commercial transactions. 25 Considerable confusion is caused by the division of contracts into income generating economic contracts governed by the Ordinance on Economic Contracts and Commercial Law, and civil contracts for daily necessities regulated by the Civil Code. Not only is it difficult to clearly define the boundary separating these forms of contract, it is also unclear whether the Civil Code applies to economic contracts or only to civil contracts. For example, technology transfer between two legal entities is subject to the Civil Code, whereas defaults on letters of credit are not subject to the Civil Code. Whichever view is correct as a matter of law, the fact that there is confusion is undesirable and Article 394 should be amended to provide expressly that the Code applies to all contracts. Article 16 of the Commercial Law requires the state to "restrict the import of goods items which can be domestically produced and meet the local demand and reasonably protect the domestic production". In addition to appearing to contradict AFTA rules, a preference for domestic production is likely to cause serious harm to the competitiveness of domestic producers. In another example of regulators attempting to improve commercial practice, Section 13 of the law protects the right to advertise, but imposes some unworkable restrictions. Article 192, for instance, prohibits advertisements that damage the interests of other traders, in the process negating one of the chief objectives of advertising-gaining a competitive advantage. · The Law on Land. Access to land is a critical factor constraining private development. Since the enactment of the Law on Land 1998, clear divisions exist in the quality of land use rights (quyen su dung dat). Urban residential occupants are allotted (giao) land, while companies can only lease (thue) land. Allotted land is available for an unspecified duration (perpetuity), may be freely transferred and bequeathed and in most other respects differs little from freehold estates.32 In contrast, land use rights leased to 'domestic economic organizations' cannot be transferred without state approval, subsist for a limited duration (the length of the investment license), can not be mortgaged (except by Vietnamese banks), and on termination revert to the state.33 The classification of land use according to the legal status of the occupant produces some market anomalies. For example, it is comparatively easy for Decree 66 household entities to mortgage hotels constructed on residential land use rights. However, otherwise identical hotels owned by companies and constructed on short-term leasehold land are extremely difficult to use as collateral. More importantly, if the hotel industry is unprofitable, Decree 66 32Law on Land art. 20 (1993); Decree No 60 CP on Dwelling House Ownership and Residential Land Use Rights in Urban Areas art. 10 (1994) (ownership of dwelling houses automatically conveys occupation rights over the substratum owned by the state); Decree No 61 CP on Dwelling House Purchase, Sales and Business arts. 12-20 (1994) (provisions for a real estate market for private dwellings). 33 Decree No 85 CP Prescribing the Implementation of the Ordinance on the Rights and Obligations of Domestic Organizations with Land Assigned or Leased by the State art. 9 (1996). The exception to this is companies working in agriculture, forestry, fisheries and salt as these companies are given "allotted" land. 26 entities can convert their buildings to any business permitted under applicable zoning provisions. Companies, however, must use leasehold land for licensed purposes, otherwise their land use right reverts to the state. 1.61 (iii) Market support institutions are weak. Vietnamese institutions were neither designed nor structured to support market development. In particular, courts, public information agencies, local government, banks, industry associations, trade promotion agencies and universities understandably have little experience with supporting private enterprise. Stock markets, currency markets, and insurance companies scarcely exist. Public services used by private business are generally not geared to their needs, and most operate with far less public assistance than private businesses in most countries. Among the most important of these for business development are financial institutions, industry associations, and educational institutions. 1.62 Financial Institutions. The banking sector in Vietnam incorporates four large state-owned banks that account for 82 percent of total financial assets in the banking system and 51 smaller joint-stock banks with public and private ownership. Vietnamese banks have allocated an increasing share of credit to registered private enterprises, but the total share remains quite small once private sector agricultural lending is subtracted. 1.63 All firm-level surveys confirm that private sector access to investment capital is virtually nil. For manufacturers, in particular, the near absence of long term credit from banks makes investment in equipment and factory facilities impossible. Short supplies of working capital reinforce private firms' "capture" by buyers that provide them with all inputs, e.g., many garment companies. Inadequate working capital also commonly forces a kind of stop/go production as firms can only afford to work order by order. Why are there such shortages of institutional finance? · Vietnamese state-owned banks, which control 80 percent of financial assets in Vietnam, still lack strong incentives to lend to the private sector as most do not face hard budget constraints and are, therefore, not compelled to lend to the most profitable investment proposals; · Government regulations discriminate against lending to private borrowers (mainly through collateral and land use regulations), which makes it more costly for banks to lend to private firms and encourages them to lend the bulk of scarce term resources to SOEs; · Caps on lending and deposit interest rates constrain banks' ability to address real or perceived high risks by charging interest rates that cover their costs. This poses particular problems for private joint-stock banks, whose costs of capital are higher and who have little in the way of a cushion if profits drop; · Banks have little experience with lending to private companies, even less with project analysis, and are therefore less confident and more likely to fail when 27 they do so. State banks in particular have long functioned more as accounting windows for the government than as autonomous financial institutions charged with earning profits. · Vietnamese banks are short of long term funds as term deposits are scarce and pools of bad debt are large and growing; · The lack of a stock market and of venture capital firms (only a few VC firms are still operational in Vietnam) has foreclosed these avenues of equity capital for private firms as well. 1.64 Industry Associations. In 1989, the Prime Minister issued Decree 01/CP and the Government Office promulgated guidelines 07/TCCP stipulating the organization and activities of public associations. Provincial governments then issued guidelines at the local level that allow groups of people and institutions to set up associations with clear objectives that are in keeping with the political guidelines of the Communist Party of Vietnam, the Constitution of Vietnam, and permitted by the People's Committees. Organizations with a national mandate must be approved by the Government's Department of Organizations, while associations at the provincial level are subject to the approval of local Departments of Organizations. 1.65 In practice, the freedom to establish private associations is quite restricted. First, the procedures are complicated, with multiple approvals. Second, a request to form a new association can be denied on the grounds that an association in that field already exists. Third, associations reportedly must be tied to a state organization. 1.66 The freedom to associate is important to business development for many well-documented reasons. Business people routinely learn a great deal from one another; membership associations can provide collective services that individual businesses cannot afford; associations can be powerful advocates for their members' interests; and associations are common sources of critical processed business information. Effective associations generally are those that function independently and are accountable, first and foremost, to their members. 1.67 Educational Institutions. Vietnam's educational infrastructure is not geared to the needs of commercial business. The MPDF's survey of 95 manufacturers found that managers with university degrees were actually less successful in business than those without such credentials! 1.68 There is a plethora of new training courses in business management on the market in Vietnam's main cities. Quality varies but many such courses have simply been transplanted from Western business schools. As a result, students study the operations of large, mostly Western, corporations. Materials are rarely adapted for use in Vietnam, and are even more rarely tailored for use in small businesses. 28 1.69 Technical training in Vietnam has largely been the responsibility of state vocational schools and colleges that were designed to serve the training needs of state-owned enterprises. Government is reportably in the process of withdrawing much of its support for the large number of industry-specific training centers in existence around the country. Though the quality of the technical training offered by these institutions may be of limited relevance to modern industry, these centers represent the only industrial training facilities available and their future is highly uncertain.34 1.70 (iv) Access to effective information channels. Vietnamese managers operate with far less information than managers in other countries could/would tolerate. Their risks are heightened by shortages of key information about products, markets, technologies, trends etc. There are few sources of up to date, high-quality information within Vietnam, and looking outside of Vietnam is not only more costly but few Vietnamese managers know where to look. Information gathering is further complicated by the Government's censorship policies, e.g., Internet firewalls and the high cost of accessing the Internet, state-control of all publishing and media, and closed stack public libraries. Reliable economic information about domestic economic trends is not available, and neither are the resources needed to filter and identify the most relevant information. Lack of high quality information about export markets leads to capture by poor-quality intermediaries, i.e., those who are unwilling to bring market information to producers. Furthermore, language barriers restrict access to information not available in Vietnamese, and limit communication with foreign suppliers and buyers. 1.71 In many ways SOEs have "blocked out" private firms in the areas of information because critical information paths lead only to state enterprises with little or no access offered to private firms. When buyers of various products come to Vietnam to find trading partners, numerous trade associations direct them to SOEs as potential partners. Information about key contracts is held internally by ministries and their enterprises with little access for outsiders. In official delegations, trade shows and commercial offices, private companies are rarely promoted, and business people face difficulties and delays in getting passports and visas for international travel. In short, most of the limited information infrastructure in place was built to channel information and opportunities to state companies. 4. The driver is inexperienced and there are few to help him. 1.72 Weak business management skills. The skills needed to build and manage a formal medium or large businesses are significantly more complex than those needed to run small informal businesses. Wits and intuition, which can be 34An MPDF survey of garment manufacturers found that graduates of vocational training schools charged with providing specialized training in garment manufacturing lacked basic sewing skills needed to operate modern machines. 29 sufficient to keep a small business afloat, are quickly overtaken by the demands of a successful large company. Vietnamese managers of small businesses would presumably view growth with some apprehension, as few would have had any formal business training. Over half of the 95 manufacturers surveyed by MPDF requested training in business management, demonstrating a keen awareness of the skills they lack. However, the Vietnamese manager who is looking for a high- quality, practical and relevant business management training course that is taught in Vietnamese will find few available. 1.73 Vietnamese business people also face a dearth of experience from which to learn. There is little experience nationally in the light manufacturing sector that is most attractive to capital-poor private entrepreneurs. Vietnam's small industrial sector is largely capital- intensive, heavy industry of the type found in most Communist countries. As a result, the pool of Vietnamese with experience in light industry is very small. Thus one of the most valuable of all business resources, one's own and others' experience, is in very short supply. 1.74 Underdeveloped business services.35 Business support services increase competitiveness by allowing businesses to outsource selected tasks to specialized experts. In developed countries, services typically account for at least one third of the inputs purchased by firms. Rapid development of the information technology and telecommunications networks that facilitate delivery of many business services has in recent years further enhanced the role of such service inputs. Nonetheless, the crucial development role played by business support services has frequently been overlooked by economic policy makers in both socialist and market economies. In a study of the availability of seven key business services (accountancy, computer services, consultancy, design and packaging, distribution logistics, market research, and training) considered crucial to a healthy and efficient private sector, researchers found that in Vietnam, few firms outsource even basic business services. 1.75 Researchers also observed that most Vietnamese managers seemed unaware of the benefits of specialization that accompany outsourcing and were, in 35For more information on the status of business services, see the MPDF report Business Services in Vietnam prepared by Service Growth Consultants, Inc. in Vancouver, Canada and Thien Ngan (Galaxy) Consulting Ltd. in Hanoi December 1998. This study focused on six business services: accountancy, consultancy, design, distribution logistics, market research, and training. Researchers interviewed 64 business service firms and 89 manufacturers in food processing, chemicals and plastics, construction materials, electronics, garments and shoes, and metal working representing both private and public enterprises in Hanoi, Ho Chi Minh City, and other provinces. 30 any case, leery of sharing business information with those outside their firms. Instead, they depended on in-house employees for these tasks--far from current thinking that building competitive businesses depends on significant outsourcing of services to specialists who can deliver high-quality services in the quantities and time period required and on a variable cost basis. In other countries, commonly outsourced business services would include: accounting, training, design, market research, data processing, advertising, and maintenance. Most private Vietnamese firms perform all of these functions in-house, thereby raising their fixed costs and foregoing the benefits of specialization. 1.76 In unpublished Asian Development Bank studies conducted by Service- Growth Consultants in Indonesia and Malaysia, both goods and service producers rated business and professional services36 as their most critical competitive input, followed by telecommunications and commercial education and training. These studies also showed that both goods and service exporters develop a relatively high dependence on imported business service inputs in order to be competitive in international markets, if comparable services of good quality are not available domestically. Thus, a development focus on strengthening business services can have beneficial spin-offs in the local economy as well as decrease an economy's import dependence. 1.77 The concept of self-regulation is at the heart of competitive business service industries. Whether mandatory (as with accounting) or voluntary (as with management consulting), most business service industries in developed economies have an industry association with the delegated legal authority to accredit professionals, and most require a minimum level of ethical conduct. Such associations typically have identified a common body of knowledge in which accredited professionals must demonstrate competence, and professional education and compliance with a code of conduct may be necessary to maintain such accreditation. 5. A typhoon has just torn through the neighborhood. 1.78 Crisis-hit East Asian countries have accounted for approximately 70 percent of both foreign investment and foreign export markets, and these fueled much of Vietnam's phenomenal growth drive over the past decade.37 The sharp reduction of intra-regional investment and trade has been compounded by a corresponding fall in the competitiveness of Vietnamese 36 "Business and professional services" in this case refers to services like accountancy, advertising, architecture and design services, computer services, consulting engineering, environmental services, legal services, management consulting, market research, and personnel supply. 37Vietnam: Rising to the Challenge, World Bank, 1998, p.3. 31 exports relative to East Asian neighbors whose currencies have depreciated by large percentages. Significant advantage based on low labor costs became less significant with the crisis. 1.79 At the firm level, exporters in labor-intensive products have seen world prices for their products drop dramatically and with them their company revenues. Others, like furniture makers and seafood processors, have been hurt when Asian consumers cut back, in some cases canceling orders, in others delaying payment. Wide fluctuations of the Yen has also been cited as a difficulty for those exporting to Japan. As shown above in Figure 1.5, Vietnamese exporters have been highly adroit at shifting their exports from crisis-hit Asian countries to sounder European markets. 6. In summary 1.80 As described in the foregoing sections, there is no single cause of the current decline in the Vietnamese economy and, as we will see in Chapter 3, nor is there a single solution. Rather, the causes are multiple and, making the situation even more complicated, the relative weights of each are unknown. 1.81 Contributing factors articulated here include: (i) underlying economic and political tensions that stem from the recent marriage of two unlike economic models, tensions that surface and create problems mainly in the areas of law, the role of government, industrial development strategy, and the legitimacy of private enterprises; (ii) the need for a further round of significant policy reforms; (iii) an unfriendly business environment characterized by broad-based negative attitudes toward private enterprises, a legal and regulatory environment that obstructs rather than facilitates private enterprise, undeveloped market support institutions, and almost non-existent channels of critical business information; (iv) a low skill and experience base among private entrepreneurs; and (v) a severe financial crisis in the region that has depressed foreign direct investment and exports. 1.82 Assigning relative weights (and therefore priorities) to factors such as these is difficult in any country, but the timing of Vietnam's recent downturn makes this task close to impossible. In fact, Vietnam's economy turned down just as the Asian crisis hit in 1997-1998, and separating out the impact of the crisis from the impact of other factors such as those listed above can only be a hypothetical endeavor. 1.83 Nonetheless, the following main facts seem clear. First, the private sector response to the first round of reforms implemented in the late 1980s and early 1990s was rapid and profound. This is well documented by GDP growth rates and by the surge in FDI and exports. The broad-based nature of this response is documented by the World Bank's report on poverty which shows a phenomenal increase in income and well-being among the majority of Vietnam's low-income populations. In short, the first round of policy reforms worked: large numbers of Vietnamese citizens responded to the opportunity to generate private incomes and 32 the economy boomed. 1.84 Second there are problems in building up from the foundation that is now in place. Many of these problems have been articulated in the sections above, and almost all are documented by empirical work with various enterprise groups. In short, there is little doubt as to their veracity. Building on the achievements to date will undoubtedly require resolution of some portion of these problems, and some are obviously more difficult to solve than others. But regardless of the difficulty, there would seem to be little choice but to attack these obstacles as effectively and rapidly as possible: future economic growth of Vietnam depends on doing so. 1.85 Third, the external environment has become far more difficult than it was even several years ago. Vietnam now has to compete for resources that came relatively easily in the early 1990s. This would mainly include foreign direct investment and export markets. And it will have to do so under the increasingly open trade regime that membership in AFTA will require. These realities bring added urgency to the tasks of creating a positive business environment and of building capacity in Vietnam's fledgling private sector. 33 34 CHAPTER 2: SOLUTIONS 2.01 As described in Chapter 1, the Vietnamese economy is now troubled on many fronts. Other countries have faced virtually all of the core problems now facing Vietnam, and many have found ways of resolving them. The Vietnamese will make their own choices about what should be done, but looking at the pitfalls and solutions of others can perhaps shed some light and speed the way. 2.02 This Chapter looks at other countries' experiences in three core areas. The first section summarizes the performance of growth strategies that are both export-led and private sector-led in the so-called "Asian miracle" and the lessons this experience offers Vietnam. The second clarifies lessons learned about what works in promoting small and medium enterprise exports. The third identifies common pitfalls encountered by countries that have committed to an export-led strategy that is based mainly on low-cost labor. These three subjects were selected for inclusion in this report because of their immediate relevance to Vietnam's situation. The reference documents for the latter two subjects were selected because, in the author's view, they represent some of the best thinking available in these areas. A. The Regional Experience 2.03 Private sector, export-led growth. "In the vast literature on economic development over the past 100 years, there is no empirical regularity that is more robust and universal across time and across countries than the positive relation between openness to trade and economic growth."38 After the spectacular success of Hong Kong, Singapore, Taiwan, and South Korea with export-oriented industrialization, there was concern that newcomers could not replicate this success as markets for labor intensive manufactured goods in developed countries were judged to be already saturated. The fallacy of this notion was demonstrated in the 1980s when China and other Southeast Asian countries successfully adopted export-led strategies and began to climb up the ladder after the others. 2.04 Evidence from many countries, particularly those in Asia, shows clearly that high GDP growth is linked to export-led growth. A 1997 study by Ari Kokko looked at the development of GDP per capita in five Asian countries between 1970 and 1993 (Indonesia, South Korea, Malaysia, Philippines and Thailand) and at the growth of exports per capita for the same years. The findings were clear. Korea and Malaysia have maintained strong, export-oriented policies since the early 1970s, and both exports and per capita incomes rose steeply during these years. Indonesia and the Philippines alternated between an export orientation and import substitution, and both exports and GDP growth rates remained low. Thailand employed import substitution policies during the 1970s, but beginning in 38James Riedel and Chuong S. Tran, The Emerging Private Sector and the Industrialization of Vietnam. MPDF. Private Sector Discussions Number 1, 1997, p.3. 35 the early 1980s, moved to significant export promotion and growth rates soared.39 2.05 In the 1950s, Taiwan pursued a fairly successful import-substitution policy for industrial production, but due to an increasing trade deficit and stagnating growth rates in 1958, switched to an outward-oriented strategy to promote exports and foreign direct investment. The effect of this policy change was significant: while exports from 1953-62 grew only 12 percent per year, between 1963 and 1972, exports grew 28 percent annually to nearly $3 billion in 1972.40 2.06 The private sector has taken the lead in economic growth and in expansion of exports everywhere in Asia. There may be no better example of the private sector role in high economic growth rates and in exports than in neighboring China. 2.07 Though absolute numbers of private and foreign-invested industrial enterprises in China remain small, these companies have played a significant role in economic growth in the late 1980s and into the 1990s. In 1986, individual, foreign-invested and private companies contributed only 4.2 percent of industrial output, but in 1996, these same enterprises accounted for 32.1 percent of industrial output. During the same period, the contribution of state-owned enterprises to industrial output fell from 62.3 percent to 28.5 percent. The average real growth rate of industrial output of state-owned enterprises (SOEs) was 8.8 percent from 1985 to 1996. In these same years, average annual real growth rates for collectively-owned enterprises (mainly TVEs) was 24 percent, for individually-owned enterprises 52 percent, and for foreign-invested and other private enterprises, it was 56 percent. 41 Figure 2.1: Share in Industrial Output By Ownership in China, 1985-1996 100 80 60 40 20 Others Collectively-Owned State-Owned 0 198 198 198 198 198 199 199 199 199 199 199 199 Source: China Statistical Yearbook, 1993, p. 412, and 1997, p. 41342 39Ari Kokko, Managing the Transition to Free Trade: Vietnamese Trade Policy for the 21st Century, (May 1997), 49-52. 40The World Bank, The East Asian Miracle, (1993), 131-32. 41The People's Bank of China, Quarterly Statistical Bulletin, 1999-1, Vol 13. (Beijing: People's Bank of China), Tables 4-5. 42Collectively-owned enterprises mainly consist of township and village enterprises (TVEs which are rural, quasi-private enterprises that function as fully private enterprises). It also includes urban collective 36 2.08 As is demonstrated in the graph below, productivity among industrial SOEs was only a little lower than the total industrial average in 1985, but ten years later it comprised only half of the national average. The growth of semi- private township and village enterprises (TVEs) during this period appears particularly dramatic in comparison to the SOE sector. Private and foreign- invested enterprises were twice as productive as SOEs at the beginning of the period and three times as productive at the end. It is clear that non-state productivity growth accounts for the remarkable expansion of the Chinese economy.43 Figure 2.2: Productivity of Industrial Enterprises in China 250,000 200,000 150,000 100,000 50,000 0 1985 1990 1991 1992 1993 1994 1995 Average SOEs TVEs FDI and Private Source: China Statistical Yearbook 1993, Table 10-17, p. 431;1996, Table, Table 12-15, p. 427.44 2.09 In 1986, SOEs accounted for more than 85 percent of total exports and by 1993, for less than one third, and current estimates are less than 25 percent. This very dramatic shift is accounted for by the stellar performance of TVEs and by foreign-invested firms in penetrating export markets. enterprises. Other types of enterprises include private and individually-owned enterprises, and foreign- invested enterprises. 43Daochi Tong, Commercial Power Centers in China: The Role of Business Groups in Policymaking (Santa Monica, CA: Rand, MR-1044.0-CAPP. October 1998.), 43-46. Productivity is measured as annual output (yuan) per capita in current prices 44 37 Figure 2.3: Exports by Type of Enterprises in China, 1986-1993 100 90 80 70 60 50 40 30 20 10 0 198 1987 1988 1989 1990 1991 1992 1993 6 SOE FDI TVE Source: 1. Nicholas R. Lardy, "The role of Foreign Trade and Investment in China's Economic Transformation", China Quarterly, 1995, p. 1075, Table 6.; 2. Yan Shaping, "Export-Oriented Rural Enterprises", JETRO China Newsletter No. 118, table II, p. 10. 2.10 Furthermore, in 1996, TVEs and the urban non-state sector provided jobs for almost twice as many people as the state sector. Employment growth in the state sector during this period was minimal, while the more dynamic TVEs employed 135 million people in 1996, accounting for 40 percent of total non- agricultural employment and 27 percent of rural employment. Another 35 percent of non-agricultural employment growth was created by urban non-state enterprises, including individual, private and foreign-invested enterprises, as well as urban collective enterprises. This is another strong argument for the importance of non-state sector growth: reduced rural-urban migration through the generation of high levels of rural industrial employment.45 45Tong, 50. 38 Million Figure 2.4: Non-Agriculture Employment by Sectors in China, 1985- 350 300 250 200 TVE Urban non-state 150 State 100 50 0 198 1986 1987 1988 198 1990 1991 1992 199 199 1995 1996 Source: China Statistical Yearbook 1997, p. 96.46 2.11 It is interesting to note the results of some research on the impact of private sector development on SOEs in China. Researchers compared the performance of SOEs in provinces where there were large numbers of private firms with the performance of SOEs in provinces with few private firms. They found that in provinces with high concentrations of non-state industry, SOE output is higher. Thus it appears that competition with non-state entities improves SOE productivity as well, another factor contributing to high rates of economic growth.47 2.12 In summary, those countries in Asia with the highest growth rates have relied heavily on private enterprise and on export development to achieve these high rates. Several started with an import substitution model that relied on protective trade regimes but abandoned this model when it failed to deliver sustainable growth and went on the reap the rewards of export-led growth. The astonishing example of private sector development in China over the past ten years documents how rapidly this transformation can take place. 46 Total non-agriculture employment includes total urban employment plus employment in township and village enterprises in Commercial Power Centers in China: The Role of Business Groups in Policy Making by Dao Chi Tong. 47 The World Bank, Bureaucrats in Business: The Economics and Politics of Government Ownership. (London: Oxford University Press, 1995) 77. 39 B. Promoting Exports from Small and Medium Enterprises 48 2.13 A recent book on promoting exports from small and medium enterprises (SMEs) in multiple countries provides valuable insights as to what works and what does not work in export promotion. These researchers carried out firm-level interviews with SME exporters in Japan, Korea, Indonesia, and Colombia. These firms were producing leather, garments, machinery, rattan furniture, woven textiles, auto parts, electronic parts, and factory automation systems. The major objective of this research was to learn more about the actual mechanisms by which these exporters had entered foreign markets and about which mechanisms were most helpful to them in this process. 2.14 These authors begin with the obvious fact that exports do not automatically materialize even with favorable market conditions. There are ex- ante transactions costs which are the search costs borne by buyers and sellers to identify trading partners. Ex-post transactions costs are the costs to one party that result from non-performance by the other. SME success in export markets requires the presence of mechanisms that reduce the cost of search to SME suppliers and to their buyers and that can reliably signal the reputation of suppliers to putative buyers and vice versa. 2.15 These mechanisms typically comprise collective marketing support systems and a range of private channels that reduce the transactions costs to firms in export markets. Private channels include: trading intermediaries, search efforts by foreign buyers, opportunities for indirect exporting through subcontracts, and the presence of other pre-existing private networks that can ease entry into foreign markets. Plus, SMEs make their own efforts to penetrate foreign markets. In general, these mechanisms complement one another, but researchers established the fact that when private mechanisms are plentiful, there is less demand for collective mechanisms. 2.16 Firms varied a great deal across the four countries in how and how easily they had entered export markets, and most of this variance is explained by three variables. First, where SMEs are embedded in well-developed, pre-existing private networks, transactions costs are low and need for collective support is low. Where SMEs are outside of the established industrial structure, transactions costs are high and entry is formidable. Second, initial entry carries high transactions costs and domestic resources are key to finance entry. Markets subsequently thicken, initiatives by foreign buyers become more important, and transactions costs of export entry diminish. Third, transactions costs are lower where international engagement is already in place, i.e., when the country is already on the export map. 2.17 In brief, Japanese SMEs were already embedded in dense pre-existing private networks, e.g., multi-tiered subcontracting relations with trading houses 48This section is taken largely from Fulfilling the Export Potential of Small and Medium Firms by Brian Levy, Albert Berry, and Jeffrey Nugent with Jose Francisco Escandon, Motoshige Itoh, Linsu Kim, and Shujiro Urata. Published by Kluwer Academic Publishers (1998 or 1999). 40 and with input suppliers. In Indonesia, Chinese Indonesians made use of overseas connections to link up with an informal but powerful private network to help them make export connections. Korea had an established strong reputation for exporting and many export traders already in place to serve the needs of larger firms, both of which were leveraged by Korean SMEs. 2.18 Of most relevance to Vietnam were the strategies used by non-Chinese Indonesians SMEs and by Colombian SMEs, neither of which had pre-existing networks into which they could fit or experience in foreign markets to build upon. These firms used a mix of collective and direct selling approaches. External buyers came only later after some export presence had been locked in and at this point, these buyers became most important. The idea here is that export entry begets export entry and a cumulative process takes hold as transactions costs fall over time and opportunities for entry expand. 2.19 For new entrants, collective support mechanisms are most important. Firms value participation in trade fairs at home and abroad very highly. Only for garments and textiles was provision of market information more important than fairs. Introduction of buyers by promotion agencies was of very limited usefulness to all groups of firms. 2.20 Who should provide collective marketing mechanisms? Researchers have found that institutional capacity of governments in most developing countries to deliver useful export services is very limited. A light-touch intervention that provides producers with opportunities to find the kinds of assistance they need for themselves, e.g., an agency that offers partial subsidies to firms for trips overseas, for consultants and to develop marketing materials is best. Industry associations can be useful, but many do not fulfil their roles very effectively. Many are not professionally staffed, are not truly accountable to their members, are captured by powerful players, and their umbrella organization lacks credible autonomy from government. The best associations are close to their members and specialized in particular industries. 2.21 The role of government is most effectively that of facilitator. High profile national agencies have absorbed enormous resources in many developing countries and they simply do not work. The main reason is that most SMEs enter export markets through private channels, not public ones. For firms that use collective marketing mechanisms, decentralized organizations like industry associations, chambers of commerce and local government have proven most effective at service delivery--so long as they are not dominated by large firms. The national government should market the country, raising international awareness of benefits of doing business with this country; facilitate formation of industry-specific associations that are responsive to SME concerns and encourage them to provide export marketing to their members; and encourage the emergence of private providers of export marketing services, including for-profit trade fair promoters. Indirect actions to foster development of private networks that are the bedrock of export marketing efforts are helpful, i.e., subcontracting and entry of large and small export traders. 2.22 This research also looked in depth at how exporters had acquired the 41 technological capabilities that they needed to enter and succeed in export markets, i.e. the skills to develop new products and acquire new production capabilities and improve upon those that a firm already has at its disposal. Results were interesting and highly relevant to Vietnam. An important influence on technical effort and performance is the extent to which government policies expose firms to domestic and international competition, which acts as a spur to improve capabilities. Another is education policy in science and engineering as this is the supply of technologically useful human capital for manufacturing. Third are the kinds of external technology support available to firms from private and public sources. 2.23 Researchers distinguished three categories of external support. The first is learning from international engagement, i.e., what exporters can learn from buyers, suppliers and others with whom they have contact in foreign markets. Second, exporters can learn from horizontal sources, i.e., from other more advanced firms in their own economies. Where learning from these sources is limited, the challenge of acquiring needed technologies is much more difficult, and this is when SME exporters turn to the third option of external support programs. 2.24 Support programs are of two basic categories: those that are broad-based and those that are high-intensity. Broad-based support increases the overall availability of useful information and let firms judge what they need. This might involve sponsoring courses, facilitating use of a specialized consultant for a firm or a group of firms, facilitating information sharing among firms, provision of testing and inspection services, and assistance on common technical problems. High intensity technical support from public agencies has not worked as it is too specialized and institutionally demanding. A highly focused approach is only appropriate for very complex technologies. 2.25 Researchers concluded that private mechanisms play the leading role in firms' acquisition of technical capability. Based on this, the priority task for public policy then is to ensure that the business environment facilitates rather than blocks private-to-private information flows. This means openness to expatriate workers, consultants and technical transfer from abroad, investment in human capital especially engineering education, and broad availability of communications technology so firms can find the information they need. 2.26 Summing up, this research on how to promote SME exports effectively is relevant to Vietnam on several counts. First, it points to the difficulties of new entrants to export markets when mechanisms to reduce the costs of doing so are not in place, e.g., pre-existing private networks, effective exports support institutions, and a strong reputation as an exporter. Collective mechanisms become more important, e.g., training courses, trade fairs, and information channels. This is very much the situation of Fledgling Vietnamese exporters. Second, it points out that entry into export markets is largely a private-to-private interaction with government serving mainly as facilitator. Third, technological capabilities required for success in export markets come most rapidly and effectively from exposure to domestic and international competition. And fourth, it concludes that broad-based support programs are generally more useful than highly focused, intensive programs. 42 C. Avoiding the Low-Cost Labor Trap49 2.27 This report argues that Vietnam should adopt a growth strategy that relies on export-led light manufacturing. This argument is based mainly on Vietnam's comparative advantage in labor and on the potential productivity gains in available in manufacturing. Equally important to significant entry into light manufactured exports is the ability to climb up the value-added ladder and realize higher and higher returns, i.e., to avoid being trapped by the low-cost labor advantage that allowed entry initially. 2.28 Asian countries have been highly successful at creating wealth from export-led light manufacturing, but many other developing countries have found themselves stuck in low-cost labour traps unable to build on this initial entry point. What are the key variables that have allowed some countries to enter the marketplace on the basis of their comparative advantage in low-cost labor and to then subsequently move rapidly to build competitive advantage with higher value- added products? 2.29 Consultant/researchers with long experience working with exporters in multiple countries in Central and Latin America have looked deeply into this subject and have published a new book that outlines the mistakes that have been made by many export manufacturers who have entered the market on the basis of low-cost labor but have failed to move up the value-added ladder. The authors identified the main mistakes these exporters have made, labelled them patterns of uncompetitive behavior and made a series of recommendations for how to do it differently. This section summarizes these seven patterns as follows. Pattern One: Over-reliance on Basic Factors of Advantage. 2.30 Clearly, firms might have little choice but to enter export markets on the basis of wage rates, but there are dangers in continuing to rely on low wages as the main source of competitive advantage. There are three problems with relying mainly on low-cost labor as the main source of competitive advantage over a long period of time. These include: · Lack of sustainability. Because there will always be another country that has superior natural resources or cheaper labor or production costs, relative ccompetitiveness will change, wage rates will rise, and raw materials will be exhausted. · Guaranteed low incomes. Cost competition from other resource-rich countries creates pressure to keep costs low, which creates an incentive for producers to keep wages low; the average worker, therefore, does not reap the benefits of growth. Better to develop capacities that enable companies to pay workers well. 49This section is based on work by Michael Fairbanks and Stace Lindsay, Plowing the Sea: Nurturing the Hidden Sources of Growth in the Developing World. (Boston: Harvard Business School Press, 1997). 43 · Can give away too much. Countries risk giving too much control to external factors, especially if part of the export promotion policy involves the export of natural resources at subsidized exchange rates. In this case, not only are these resources depleted, but the benefits of low prices are reaped by wealthy foreign customers. 2.31 Opportunity One: Develop More Complex Sources of Advantage. Export-oriented companies must build long-term sources of advantage by exporting complex products produced through low-cost strategies that offer higher-order advantages like distribution efficiency, alternative sourcing programs, new manufacturing processes, or targeted customer strategies. Moving up the Value Chain.... Manageress B runs a tea plantation in Northern Vietnam. She established it six years ago and exports tea to the UK and Japan. She approached MPDF as she wanted to expand her business to attract new buyers. She understood that it was necessary to enhance her processing capacity to increase the value of her tea, but did not know how to go about it. After undertaking an initial feasibility study, MPDF assisted Manageress B to formulate a proposal to obtain a bank loan for new equipment. MPDF then introduced her to a consultant specialising in tea processing. He not only instructed her workers in new techniques and effective machinery operation, but also used his contacts to introduce her to new customers. One year on and Manageress B has increased her sales volume by fifteen percent. She has new equipment and is employing new processing techniques. The quality of her tea is now greatly improved and the orders from her customers are increasing. By giving Manageress B the opportunity to learn from others, MPDF enabled her to help herself. Pattern Two: Weak Understanding of Customers Needs and Preferences. 2.32 Competing effectively in an open economy begins with a decision regarding which customers to serve and how best to serve them. If an enterprise declines to choose specific consumer segments based on a rational analysis of the market, it will be forced by the competition into sectors with lower marginal profits and tight cost competition. At the core of all contemporary management thinking is the notion that in any business the customer is paramount. Despite the importance of obtaining and using customer knowledge effectively, in the developing world, customer knowledge is often inadequate for successful competition. 2.33 Opportunity Two: Invest in Knowledge about More Demanding and Sophisticated Customers. Too many Vietnamese producers rely exclusively on trading agents to relay customer demand. While this is acceptable as an entry 44 point, producers must find more direct ways to learn about their customers whether by making trips abroad, accessing electronic information or establishing relationships with buyers who are willing to transmit this information. In fact, some garment producers are already producing for fairly demanding and sophisticated customers in Japan and Western Europe and yet, they have little first-hand access to these customers. Pattern Three: Ignorance of Relative Competitive Position. 2.34 Not knowing one's position relative to other competitors creates two types of uninformed and often detrimental choices. The first type is the decision not to take advantage of opportunities that might present themselves to firms in a given country. This response often is driven by fear of the competition and may be rooted more in perceptions than in facts. The second type is choosing to make investments in areas where critical variables are unknown, especially the industry's attractiveness for the average participant and the firm's competitive position relative to the other industry participants. These are critical questions, and before any firm anywhere invests in an opportunity, it should know the answers to the questions these two variables imply. If the basis of the competition is cost, then relative cost position analysis is most critical. If the basis of the competition is differentiation, then analysis of customer satisfaction relative to the competition is most critical. 2.35 Opportunity Three: Understand and improve relative competitive position. Vietnamese companies' abilities to make these kinds of informed choices are highly contingent on their gaining access to high-quality current information on world markets for their products. This is rarely possible at this point, mainly due to expensive information channels, i.e., the high cost of telecommunications and Internet access and to the lack of specialised business associations able to supply this information on a collective basis. This is also where a well-developed consulting industry becomes important. And learning to assess relative competitive position should be a central component of management training courses. Pattern Four: Failure to Forward Integrate. 2.36 Forward integration is often not perceived as a source of advantage, because knowledge of outbound distribution logistics and end-user preferences does not affect what leaders see as the country's real assets--its low-cost labor. However, distributors/brokers are channels that add value that the buyers of the product want, and they should be considered allies that can be leveraged. In many cases, however, the distributors are extracting profits without adding value. Forward integration requires firms to make a difficult move into a different competitive arena. The challenge is for the exporter to realize when a particular part of the distribution channel no longer offers a unique advantage. Using a particular channel is worthwhile only if it gives useful information about the needs of final consumers. This knowledge then presents manufacturers with the opportunity to develop products and services for which customers may be willing to pay more. 45 2.37 When exporters have developed a channel strategy that does not provide them with any market feedback, they often see the distribution system as a "black box," i.e., once their product leaves the factory, they have no idea what happens to it. The distributor charges them a fee and sells the product, but they do not know how effectively the work is being done. Reliance on natural resource-based products often limits competition to questions of price and scale. This, in addition to historic dependence upon government policies to facilitate exports, has inhibited firms' abilities to think creatively about how to distribute their products. Firms must design vertical or forward integration strategies that enable them to secure essential market information that will improve their ability to compete effectively. 2.38 Opportunity Four: Study the Potential for Forward Integration. Vietnamese producers often know very little about how their products are distributed (and to whom). Many work with only one agent who has appeared at their doorstep. Developing distribution systems that add value would first depend on increasing the pool of distributors that are available, i.e., creating the opportunity to choose the best distributor from those who are available. This requires information and collective efforts to improve distribution channels. It also requires repeated, broad exposure to the larger world and its distribution systems so that the possibilities become known and forward integration becomes possible. Getting to know your customers... "After I left the army I decided to set up my own business so I could provide for my family. I joined up with a friend who was working for a State - owned garment manufacturer, and together we set up this garment factory". Manager A's story is not unusual. Yet unlike many other manufacturers in his position, only six years after establishing his business, he is now dealing directly with his final customers: several major European retailers. Starting out was a different story. Operating through a Taiwanese agent, he was producing CMT (Cut, make, trim) sports shirts and anoraks: the agent would send him the material and trimmings, his workers would assemble the garments and he would re- export the garments to Taiwan, earning about $2 per item. Knowing nothing about his final customer, he was unable to broaden his product range or even contribute to product design. However, through what he puts down to "good relations" (quan he) with his agent, he has gradually become more self-sufficient. Through his agent, he has been able to meet his final customers who now regularly visit the factory, providing him with training, machinery, and technical expertise. The factory is now equipped with CAD ( Computer Assisted Design) equipment which enables it to produce its own designs. Manager A has located alternative supply sources which are cheaper and more efficient than previous ones, and his customers encourage him to participate in product development. "I can now earn up to four times more than I could before, so business is much better. I have a good relationship with my agent and my customers, which enables me to expand". "I'm quite lucky", he adds. 46 Pattern Five: Poor Inter-firm Cooperation. 2.39 Cooperation among firms is not usually understood as a source of advantage because most firms see themselves as rivals in the quest for access to their country's raw materials. An attitude of distrust is particularly prevalent in economies that have long been protected by the government from competition and that tend to perform most activities in-house. This lack of trust and cooperation limits the ability of supplier and purchaser firms to specialize in the development of specific input industries and ultimately limits the capacity of the industry to innovate and upgrade. Three means of addressing this vacuum are: · Treat cooperation, coordination, and/or transfer of advantages between related and supporting industries as a source of competitive advantage. · View related and supporting industries as a mechanism for upgrading the industry and improving the national development as well as a unit of analysis. · Create explicit strategies for competition that encourage related and supporting industries to make decisions that are aligned and complementary with other firms in a cluster. 2.40 Opportunity Five: Understand the Gains to be had from Cooperation, and Improve Relationships Among Firms. Mechanisms by which firms can associate regularly with one another are sorely lacking in Vietnam, in part due to lack of freedom to establish independent business associations and in part due to low awareness of the benefits that can come from cooperation. The more often managers can interact in areas of common interest, the more likely they are to reap these benefits. Pattern Six: Poor Relations with Government. 2.41 As competition intensifies and both private and public sectors become more desperate, they often move into opposing positions. The public sector accuses the private sector of incompetence, and the private sector blames government of failing to create a "level playing field." Rather than working together to build industry competitiveness, much time and energy is wasted blaming one another instead of addressing the problem. Rather than creating wealth by building competitive advantage, private and public sectors argue about how to allocate finite resources. 2.42 Opportunity Six: Government and Business Must Work Together for the Benefit of Both. There is much scope in Vietnam for better cooperation between government and business. As documented in Chapter 1, distrust between the two groups is profound. Opportunities to work together on common goals could go far to break down some of this distrust. This could take place through formal government and business consultations, but it could also occur by more informal means of sitting on joint committees, sharing training classrooms, and finding ways to trade information. 47 Pattern Seven: Avoid Too Much Government Control. 2.43 In environments where the government makes most economic decisions, market learning is virtually nonexistent. In many countries, government have tried to direct the industrialization process and the result is usually a complex legal and regulatory environment that actually inhibits innovation and national upgrading. By employing high tariffs, a devaluing currency, and increased state participation in natural resource extraction, governments create incentives for business leaders to become less competitive, and the private sector becomes more proficient in lobbying than learning. 2.44 The government's role is to do everything for the private sector that it can possibly manage to do, except to impede competition. It has the opportunity to develop specialized infrastructure, provide world class primary education, and create incentives for the private sector to develop university and technical education together with fostering an environment for government-to-private- sector and private-sector-to-academic alliances for training. The government can also foster an environment where domestic and international alliances take place--again, as long as it does not impede competition. On the demand side, the government can stimulate market learning opportunities and create antitrust legislation that fosters competition and attractive industry structures. 2.45 Opportunity Seven: Reduce Economic Intervention on the Part of Government. In fact, this is a central message of this report. There are many ways by which government can support private firms, but in the end, each firm has to find its own competitive edge. The challenge for government is to leave firms enough space within which they can do this. 48 CHAPTER 3: RECOMMENDATIONS 3.01 This report recommends that Vietnam shifts as quickly as is feasible to an industrial growth strategy that is based on the rapid expansion of exports. Expected gains are increased growth rates, significant accumulation of foreign exchange, and rapid improvements in the competitiveness of Vietnam's manufacturing base. Not only is this strategy conceptually sound, but it has been thoroughly validated by the experience of most other countries in Asia, which have reaped high gains in growth, employment, and competitiveness. 3.02 This report also recommends establishment of a concerted program to develop a dynamic, broad-based corporate private sector to lead this drive in manufactured exports. This recommendation rests on the belief that the private sector offers Vietnam the best hope for rapid economic growth, export expansion, and employment generation. As documented above, the experience of private sector development in China offers a powerful example of the substantial and rapid contributions private enterprise can make to national growth and employment. 3.03 This recommendation also is based on the belief that state enterprises are limited, and will continue to be limited, in their ability to achieve the kinds of productivity gains that underpin rapid growth, and on the reality that the bulk of state enterprises, certainly in the industrial sector, are capital-intensive and over- staffed, rendering them unable to absorb more labor. As documented in the World Bank's recent report on poverty, there is still room for productivity gains in the agricultural sector, mainly through further diversification in agricultural production, but there is little room for further employment absorption. The household sector will continue to absorb new entrants because there is nowhere else for those in search of income opportunities to go, but productivity gains will be minimal and contribution to GDP therefore equally limited. The potential of the foreign enterprise sector to contribute to growth is increasingly being realized, but the capital-intensive nature of most foreign-invested enterprises has thus far precluded significant employment creation.50 3.04 The promise of high levels of growth, exports and employment rests with development of Vietnamese companies, mainly with small and medium enterprises engaged in light manufacturing.51 The smaller size of these enterprises gives them the flexibility to respond to market demand and to make the continuous adjustments in product mix and quality that underpin continuous productivity gains. A focus on manufacturing means higher value-added products and higher contribution potential. Light manufacturing takes advantage of Vietnam's comparative advantage in labor and brings high levels of job creation. 50In fact, it is estimated that only 12 percent the total stock of FDI in 1998 is invested in labor-intensive light manufacturing. 51Private sector services firms have grows quickly in number in the 1990s. Most are engaged in trading activities. The potential for broad-based growth in high value-added services is unclear to the author for lack of information but theoretically should be significant. 49 3.05 This report has clarified the reality that private Vietnamese manufacturers currently are not well positioned to take up this critical role. Over the past two years, private manufacturers have registered the high rates of output and employment creation, but figures presented in Section II show a clear slowdown over the past 24 months. At end-1998, the number of private manufacturing companies was estimated at a very small 6,000 companies nationwide. Average employment in these firms is estimated at 47 employees. The Mekong Project Development Facility estimates that there are fewer than 500 private Vietnamese manufacturers with more than 100 employees. And at present, Vietnamese manufacturers are very narrowly focused in a few industries and in relatively few locations. Most are engaged in light manufacturing, with large numbers engaged in the highly "footloose" industries of garments and footwear.52 3.06 The most urgent question, then, is how to build a private sector that can take up this leadership position as effectively and efficiently as possible. Almost as important is the challenge to develop a private sector that moves quickly up the ladder to realize the gains of higher value-added products and avoids the pitfalls described in Chapter 2. The task is two-fold: the first is to free up and support the private sector generally, and the second is to promote exports of manufactured goods in such a way that firms are able to climb rapidly. The two sections of this chapter contain sets of recommendations for how these tasks might best be addressed.53 A. Supporting the Private Sector 3.07 This section returns to the cluster of obstacles to private sector development (PSD) identified in Chapter 1 and offers some ideas for their resolution. To recap, these were: (i) a series of contradictions underpinning the Vietnamese economy (the map is pointing in two directions); (ii) gains from the first round of deep reforms have been almost fully realized now (the car is out of gasoline); (iii) the business environment is terribly difficult (the road is filled with roadblocks, potholes, and rocks); (iv) private entrepreneurs need substantial skills upgrading, and quality, accessible business services are not numerous (the driver is inexperienced and there are few to help him); and (v) private sector firms have suffered ill effects from the Asian crisis (a typhoon has just torn through the neighborhood). This section addresses each of these issues, laying out what the principles of change might be and identifying specific reform measures where applicable and where known to the author. We also recognize that some of these recommendations could only be implemented in the long run and that some are much more difficult than others. 52 The small size of the registered private manufacturing sector should not be understood by the reader to mean that the Vietnamese private sector lacks dynamism. Anyone who visits Vietnam can attest to the dynamism of Vietnamese entrepreneurs and to the fact that many are thriving. Rather, the point here is that very few have been able to grow their companies to a point where they can create significant employment and make a solid economic contribution to GDP and exports. 53 Most of the recommendations contained here are of most relevance to private Vietnamese companies mainly to Vietnamese manufacturers. Those that pertain to household enterprises and to foreign-invested firms are noted as such. Clearly, many measures that would help free up private firms would also promote exports. Section two will simply address some possible special measures. 50 1. Unify the map to the extent possible 3.08 Chapter 1 characterizes the economic model currently in place in Vietnam as based on state economic management with the state as the lead economic strategist and with import substitution, heavy industry, and state-owned enterprises as the mainstays of industrial growth. As noted, this framework is internally consistent, publicly affirmed, and well known by the public at large. To the extent that elements of other growth models, i.e., private enterprise, have been grafted onto the current model, contradictions have been introduced. To date, these contradictions have been more or less contained as opportunities in private enterprise have been fairly compartmentalized in agriculture, the household sector, and to some extent, the foreign-invested sector. The industrial sector has implicitly been reserved for state enterprises, and the interlocking obstacles described in this report have effectively capped the growth of private manufacturers. 3.09 To the extent that the analysis presented here is correct, i.e., that restoring high growth rates depends, at least in part, on growing the private manufacturing sector, the stage is set for implicit tensions to become more important than they have to date. The needs of a larger corporate private sector will inevitably run counter to the practices of state management that are in place in Vietnam. If the decision is taken to foster the development of Vietnamese private manufacturers, acknowledging the tensions that will arise from this decision and thinking carefully about how best to reconcile them will be important. 3.10 Three points might be helpful in this very difficult task. First, significant stocks of state and private enterprises have co-existed in China for 15-20 years and, as noted, growth rates in China have soared on continuously growing output from private enterprises. Of course, it has to be noted that, in many ways, China simply postponed resolution of the tension between the two economic models. And at this point, the Chinese government faces very large problems with significant numbers of large public enterprises that are loss-makers and a drain on the national budget and with a banking sector that is choking on bad debt created by these loss-makers. Only an in-depth analysis could estimate the costs and benefits of maintaining dual systems over this long period. Nonetheless, the Chinese example does stand as an example of operating dual systems over time without resolving core contradictions between the two and of reaping significant gains in the process.54 3.11 Second, economic growth is not a zero-sum game, i.e., multiple parties can win, especially when wealth creation is understood as a matter of adding value to basic resources and not just as obtaining access to these resources (which indeed are finite). To the extent that Vietnamese producers, both public and private, 54The Chinese strategy has been to foster growth of a dynamic private sector along side the state sector, as some have commented: "to grow their way out of the planned economy" by having a robust private sector as the engine of growth. Vietnamese strategies have not included development of a private export-oriented industrial sector that can assume this critical role. 51 understand and adopt this view, tension between them might decline. A concerted national focus on raising value-added in all sectors would not only boost revenues but would also re-focus enterprise managers on value-added rather than simple access to resources. 3.12 Third, there are likely numerous areas where the inconsistencies that plague private companies could be resolved without creating significant tension. This would include searching out and abolishing legal and regulatory contradictions that contribute little of real value to the dominant state sector but cause significant difficulties for private firms. 3.13 This being said, we recommend action in the four areas identified in Chapter 1 as sources of tension and of constraints to private sector development and in need of change. One additional area, that of unifying public opinion in support of private sector development, has been added here at the top of the list in the belief that public awareness and acceptance of private enterprise would greatly aid in successful reform in the other four areas. The second set of recommendations concerns drafting, coordinating, and implementing the legal framework as it relates to enterprise entry and operations. Here, the underlying assumption is that a clear, consistent, and reliable legal framework is indispensable to business development and probably not where parallel (and often opposing) systems should/can be maintained. Such as legal/regulatory framework protects everyone, officials who are implementers as well as business people. The third area concerns the role of government in fostering private sector development; the fourth concerns introduction of light manufactured exports as the new engine of industrial growth; and the fifth focuses on the role of state enterprises in industrial growth. 3.14 Unifying Public Opinion in Support of Private Sector Development: (i) the Party might consider issuing a resolution acknowledging the contribution made to national development and employment creation by private entrepreneurs, and making the promotion of SMEs (perhaps from all forms of ownership) the responsibility of the whole of society, including state officials;55 (ii) as soon as it is feasible, the Government might consider amending the Constitution along the lines of recent changes to the Chinese constitution that removed any reference to the 'leading role of the state sector'; (iii) in the near term, the Government could undertake a vigorous public campaign that explains the need for and contributions of the private sector, including clear messages to state-run 55 It would be a grievous mistake in such a campaign if SMEs were defined literally to include only those firms with fewer than 200 employees which is the formal, national definition, as Vietnam badly needs larger private firms as well, especially to create jobs. 52 press to desist from gratuitous defamation of private companies;56 and (iv) the Government should undertake an equally vigorous internal campaign among its own officials to clarify that their job is to assist and not block private business, including a credible warning of zero tolerance for harassment of and extortion from private enterprises. 3.15 Socialist Legality and the Law-based State: (i) elevate the status of laws above Party and State policy; create inalienable private commercial rights that can only be abrogated or altered by laws; remove administrative and criminal penalties for private commercial activities that do not seriously threaten public safety and property; remove the Prime Minister's right to review court decisions and make sure to publicize all court judgements; (ii) bridge the gaps between adoption and implementation of legislation by establishing workable linkages between the National Assembly and the Government to coordinate the legal framework and improve consistency between laws and implementing legislation; (iii) change the legislative process so that all subordinate legislation issued after a certain date requires approval from a committee attached to the National Assembly; (iv) limit discretionary power of government bodies in issuing subordinate legislation and require that subordinate legislation is supported by publicly available memoranda that explain the provisions of the legislation and justify why the legislation the most appropriate and cost effective response to bring transparency to legal implementation; (v) consider the suitability of given institutions to implement proposed laws; and (vi) evaluate the impact of new laws and regulations on the public in line with a policy of democratizing the law- making process. 3.16 The Role of the Government in Private Sector Development: (i) define the role of government as facilitator rather than as actor, and as noted above, a facilitator that does all possible to promote private business except for blocking competition from any source; (ii) do not `pick winners', i.e., favor one industry over another; better to `level the playing field' and let the most competitive industries and firms surface; (iii) in the spirit of the new Enterprise Law of 1999, lighten up government control over private firms, i.e., leave entrepreneurs lots of space to use resources flexibly and simply monitor compliance with the basic rules instead of requiring permission for each transaction; and (iv) take measures to build trust between government and private entrepreneurs, opening up the dialogue between the two groups and getting them working on the same team. 3.17 Introduction of Export-led Growth: (i) identify the changes in trade policy that would be needed to facilitate this shift and lay out a rapid but fair public time- table for gradually making them, including a plan for dealing with the strong objections of those whose viability currently depends on high levels of import protection; (ii) identify biases against exports in other parts of the regulatory 56Such a campaign could make use of multiple media and distribution channels. For example, it could include national contests for "entrepreneur of the year" and special "start your micro- business" programs in schools. 53 framework, e.g., in tax regulations, and lay out what needs to be changed and a timetable for doing so; (iii) identify obstacles that continue to block private firms' abilities to export directly into foreign markets (despite their legal right to do so) and clear them away as rapidly as possible; (iv) clean up the administrative aspects of exporting, i.e., attack inefficiency and corruption in the various processes and offices that are involved; and (v) government should take on the task of marketing Vietnam as a desirable exporter, using effective, modern means. 3.18 Assist State-owned Enterprises to Improve their Competitiveness: (i) privatize as many SOEs as possible as fast as possible, maximizing shares of private ownership and releasing SOEs from their current limbo wherein state support is being withdrawn but enterprises remain publicly owned and therefore constrained in their ability to realign resources, product mix, and markets in line with profit maximization, i.e., untie their hands so they can compete; (ii) restructure those SOEs that are not slated for privatization as quickly as possible to stem government losses and improve prices and products for other economic actors; and (iii) remove preferences for SOEs and subject them to competition from domestic and foreign sources as quickly as possible to help them build competitiveness. 2. Fill up the gasoline tank.57 3.19 The government has been putting small but steady amounts of gas in the private sector engine over the past few years, mainly in the form of liberalizing laws and regulations. But a bigger boost is needed in the form of a second round of policy reforms to facilitate a second round of growth. Priority reforms for private sector development can fairly easily be deduced from the needs of firms. The most important of these would appear to be the following: · Trade reform that, to the extent possible, guarantees private firms access to imported inputs at international prices, creates easy- to-use channels for their exports, and confronts them with the spur of competing imports; · Financial sector reform that aims to: make the perceived credit worthiness of private firms equal to that of SOEs with banks that have the resources and willingness to lend long-term to private firms with viable investment projects at reasonable rates, using reasonable means of securing loans, and at reasonable rates of efficiency; improve access to good quality financial services from banks; open access to a stock market to raise equity funds upon meeting reasonable qualifications; open access to business insurance; and facilitate access to 57This section talks about needed policy reforms only in general terms, as the optimal content and sequencing of such reforms is in the domain of experts. 54 venture capital where appropriate; · Land reform that opens access to private companies to secure ownership of land (or land use rights) that is transferable and can be used for collateral and grants them flexibility in how land is used such that uses can change as needed so long as zoning requirements are met; · Reform of regulations governing the state enterprise sector so that private firms can access national resources on the basis of merit, not on their ownership status. This means that the system of preferences for state enterprises, which applies to most types of national resources from credit funds to government contracts, needs to be dismantled so that `the playing field is level', i.e., state and private firms have more or less equal access to resources. · Civil service reform and reorganization that dramatically improves the quality of public services available to private firms from regulatory to assistance services and equally dramatically stamps out corruption among government officials; · Reform of all policies that restrict the flow of information needed by private business so that managers can easily locate good quality business information whether in print, electronic media or embodied in a foreign consultant, with easy access to updated information on applicable laws and regulations that affect their businesses; business owners also need to be able to travel abroad easily when the need arises. 3. Clear off the road so it is level and can support a lot of traffic 3.20 Much is needed to create a business environment that supports private enterprise. Some changes could be enacted quickly, and others involve building institutions which is a long term effort. Consistent with the main obstacles identified in Chapter 1, this section contains recommendations for improvements in three areas: laws and regulations, market support institutions, and information channels.58 3.21 There is consensus among analysts that the main objectives should be to promote vigorous competition among all enterprise groups through ensuring equal treatment in legal and regulatory matters as well as in access to resources, create and maintain efficient mechanisms for the timely entry and orderly exit of enterprises, and adhere to a general policy of non-interference. 58The fourth obstacle identified in Chapter 1, social/political culture, is not discussed here as it was addressed in the section above. 55 3.22 (i)Laws and regulations.59 As indicated in Chapter 1, a high priority among managers is clarification and stability of government regulations as well as closure of the many discretionary loopholes in Vietnamese legislation. The legal system needs to shift gradually from state economic management to a facilitative model that codifies and permits defined activities and confines explicit approval to borderline cases or exemptions. All business activities should be permitted unless they are specifically prohibited by law. These reforms would require a reduction in licenses and permits, legislative governance through minimum standards of commercial behavior in preference to prescriptive subordinate legislation, and the abolition of criminal sanctions for actions that do not seriously threaten public safety and property. General Principles · Reduce the number of commercial licenses and permits required and establish sunset clauses in all remaining licenses requiring their abolition and replacement with normative legislation within a specified period. Where licenses are denied, state officials should be required to write a publicly available (not just to the applicant) report giving reasons. · Remove remaining discrimination against private sector participation in foreign-invested joint ventures; · Reduce state economic management by abolishing most administrative and criminal penalties for private commercial activities; state sanctions should only apply to serious breaches of public safety and property damage; distinctions between socialist and private property, and article 164 should be removed from the Criminal Code. · Reduce the number of prescriptive sub-ordinate rules governing business practices issued by Ministries and People's Committees and use general behavioral standards set out in National Assembly laws as the primary method of business regulation. 59Recommendations in this section were culled from numerous policy documents including the UNIDO Research Report on Improving Macroeconomic Policy and Reforming Administrative Procedures to Promote Development of SMEs in Vietnam, papers by Ari Kokko, a paper on FDI by FIAS, reports from CIEM, reviews of the informal private sector by documentation from the Private Sector Forum, and consultations with ILO, local lawyers. Priority ordering of recommendations was based on the priorities of these writers as well as on internal consultation with MFDF investment officers. 56 · Integrate FDI policy into overall industrial development policy. At present, foreign investors enjoy a series of special preferences but are discriminated against in other areas. A system in which foreign investors have few special benefits but face no special discrimination might be better for all in the long run. The Enterprise Law · Issue decrees to implement the Enterprise Law, clarify where registration is automatic, and avoid imposition of numerous controls in implementing legislation. · Disallow the Registrar of the companies to request documents which are not in the list per the Enterprise Law (Article 13). In particular, the registrar should not have the power to examine a company's finances, require proof of the sources of funds, or demand additional reports. · Centralize the business registration function in one Government body. Disallow ministries and agencies from introducing sectoral requirements for company registration. · Keep the list of Specialized Laws which overrides the authority of the Enterprise Law as short as possible, dealing mostly with use of natural resources, environment, and infrastructure (per Article 2 of Enterprise Law). State-owned Enterprise Law should not be a Specialized Law under Article 2. · The list of sectors banned or with conditional entry for private businesses (Article 6) should be short, and relate to security, safety, public health and similar areas. · Establish one (short) negative list of business activities which require business licenses (dealing with safety, health, requiring professional qualification). Discontinue the many short-term licenses with frequent renewal that are not justified. · Issue decrees requiring companies to publicly disclose information concerning membership, share holding and share capital (where applicable), and debts secured against company assets. · Clarify that foreign joint ventures and 100% foreign-owned investment entities are regulated by the Enterprise Law. · Cancel the numerous regulations that intervene in the area of the Enterprise Law implementation. The Law on Land · Amend the 1998 Law on Land to grant companies the same legal rights to land as urban residential allotments. Or more realistically, create a standard 57 leasehold interest of fifty years (in conformity with Indonesian practice) that is available to any legal entity, including foreign and domestic investors. Rights attached to the leasehold interest would permit any use allowed by relevant zoning schemes, mortgages by domestic and foreign banks, and unconditional rights of disposal. · Allow companies from any sector to directly lease land at market-negotiated prices from both state and private land use right holders. · Amend the Land Law to update property registers, accelerate the registration processes and reduce fees and taxes, and ensure fair and transparent dispute resolution. · Issue policy regulations on the transfer of assets and land-use rights. · Compensation paid to occupiers of land acquired by domestic and foreign investors should be governed by a uniform and transparent valuation system that reflects market values. Financial Regulations · Abolish caps on interest rates: the government should allow the market to determine interest rates as banks will not finance longer maturity projects unless they are adequately compensated for the risks. · Abolish regulations on collateral and allow banks to secure loans as they see fit. · Help banks manage their risks by establishing a centralized registration system available to the public. · Strengthen the financial system by adopting internationally accepted accounting and auditing principles, and use the information gleaned to eliminate bad debt and improve the quality of lending. · Issue regulations governing loan securities and deposit insurance to protect depositors and lenders. · Open the stock market, as it would considerably assist in Vietnam's equitization efforts, but rules for participation should not be overly restrictive, i.e., should not exclude foreign and domestic private companies from participation. Other · Allow private enterprises to export and import any item permitted by law 58 without justification; simplify customs regulations and administration; and rationalize import duties with domestic taxes to reduce rates of effective protection. · Continue tax reforms that simplify taxes and make them fairer by eliminating differential treatment. The VAT should be further simplified, the number of related regulations much reduced, and the tax base broadened by reducing exemptions and reducing the 4 rates to a single rate for all non-exempt goods and services; address issues related to the application of the new tax law on a timely basis; remove "effective tariffs" on imported inputs; and unify and rationalize corporate income tax and individual income taxes. · Work out legal mechanisms by which people can work in locations other than where they have residence. · Establish the legal basis for creating a centralized, publicly accessible database of registered enterprises and company information. · Continue efforts via Decree 57 to open international markets to all enterprises, including SMEs, by speeding the issuance tax code requirements or removing them altogether. · Draft a new Law on Associations (or revise the current one) giving any business group the right to establish organizations for the purpose of promoting the interests of their members. · Allow private and state-owned commercial entities to resolve disputes through non-state arbitration. Enact a decree recognizing the validity of non-state arbitration and authorize state organs to register and enforce awards made by these bodies. · Amend the Law on Business Bankruptcy 1994 to provide that certain acts, such as non-payment of debts after stipulated periods, constitute automatic acts of bankruptcy. Apart from essential personal items, all assets belonging to bankrupts should be made available for distribution to creditors without the need for state approval. Laws and regulations affecting household enterprises specifically · Amend Decree 66/HDBT to allow household enterprises to operate their businesses in any district of the country rather than only in the district where they are licensed. · Take all reasonable measures to reduce the costs associated with moving from 59 household enterprise to formally registered enterprise, e.g., reduce registration costs to a minimum and reform land laws so that restrictions on use of land are not a disincentive to moving from household to company status. Laws and regulations affecting foreign investment specifically · Eliminate the numerous procedures and rules that complicate foreign investment without serving any major Vietnamese national objectives (regardless of original intentions, government review of feasibility plans and the like has not prevented the licensing of a large number of unrealistic projects); permit project/licensing changes via notification and not lengthy approvals; remove licensing requirements for non-sensitive sectors and where they do exist, limit government approval requirements regarding location, capital levels, etc.; only require feasibility studies for large projects like Group A or BOT. · Reduce burdensome post-licensing requirements by lifting approval requirements that do not serve Vietnamese national interests and establishing an institution to streamline the remaining approval process; reduce the number of central approval agencies and thereby increase the authority of MPI and move to a "one-stop" FDI application agency; empower individual ministries to make decisions about discrete steps in the regulatory process and eliminate line ministry project review, which represents a conflict of interest as these ministries also supervise SOEs that would compete with these foreign- invested firms; and clarify the role of provincial authorities in FDI approval to simplify the present 2-step process. · Permit existing joint ventures to alter their ownership structure and choose their own corporate form and/or partners. Allow foreign-invested companies to organize themselves as shareholding companies instead of confining them to limited liability companies (which have a very rigid capital structure and shares that are not freely transferable or tradable on the stock market). · Eliminate any remaining impediments to 100% foreign ownership of companies and increase the number of economic sectors and activities open for participation by 100% foreign invested companies by switching from a positive list of allowed sectors to a negative list of sectors that are off limits. · Guarantee foreign direct investors' access to foreign exchange conversion mechanisms and move towards current account convertibility; eliminate regulations that force companies to convert their foreign exchange income into dong; instead, give them incentives to do so by facilitating an efficient forward exchange market and freeing the dong from the fixed exchange rate; and ease tight controls on foreign exchange and help foreign investors access foreign exchange for export production. · Remove discriminatory policies that increase Vietnamese production costs like dual pricing systems, very high taxation of skilled Vietnamese workers 60 working in foreign firms, and tying salaries and land rents to the dollar; calculate and pay Vietnamese employees of foreign-invested enterprises in Vietnamese dong; eliminate the Degree 85 requirement that foreign firms must hire labor through a centralized government agency; reduce income taxes on foreigners; abolish supplementary personal income tax; unify corporate income tax rate for foreign and local; and levy the same rate of excise tax on domestic and imported goods. · Provide foreign-invested enterprises with clear, guaranteed long-term access to land and eliminate the requirement that land be identified at the start of a project. · Provide a more favorable environment for technology transfer by lowering barriers to market entry, easing visa requirements for foreign technicians, and eliminating government regulation of technology transfer agreements; enhance SME technology use through depreciation and incentives for the lease or purchase of such technology (new or used); remove technology-transfer arrangements with foreign investors from government control; and lower the cost of international telecommunications and internet usage. · Make mortgage security available to foreign lenders which would make it easier for them to move forward with large complex projects not implemented under BOT law; the key objective is equal treatment of foreign and domestic lenders regarding forms of security. · Foreign-invested enterprises should be permitted to apply internationally accepted accounting standards and practices. · Amend Decree 12 to remove the 5% limit on the deductibility of advertising and marketing expenses. There should also be no limitation in the deduction of input VAT for advertising services that form part of normal business operation costs. · Courts should be required to recognize and enforce all lawfully determined arbitration awards issued by the Vietnam International Arbitration Center and foreign non-government arbitration centers. 61 3.23 (ii) Building market support institutions. Markets in developed countries function as well as they do in good part due to the presence of large numbers of mature market support institutions that keep market players well informed, process market transactions and enforce the rules. Three such institutions were selected in Chapter 1 as being of particular importance to private sector development in Vietnam. These included financial institutions, business associations, and educational institutions, and each is briefly discussed in this section. · Financial institutions.60 Even if all of the recommendations on financial regulations proposed above were implemented, most Vietnamese banks would not be well positioned to lend to private Vietnamese companies without substantial institutional restructuring. As is well known, banks under socialist regimes function more as accounting windows for the government than as independent organizations, i.e., they lend to state enterprises as instructed. They are not expected to break even or make profits. This means that not only have they not developed the skills to differentiate between viable and non- viable projects, but also their internal organizational structures and procedures are geared more to accounting than to real financial intermediation. Helping Vietnamese banks transform themselves into modern banks will require painstaking, long term work on a bank by bank basis to devise new organizational structures and procedures to carry out the new functions. Skill building is a major part of this work.61 · Business associations. As noted in Chapter 1, establishing new business associations is very difficult to do even though the law does not expressly forbid it. Whether new legislation is required or simply reform of existing legislation is sufficient, steps should be taken to make formation of business associations easy for all who feel that they would benefit from them, even if they are required to register and submit periodic reports on their activities.62 In all regions of the world, business associations are a significant source of assistance to private companies, particularly when companies are small as in 60As with the policy reforms identified above, the contents and sequencing of bank restructuring is a topic for the experts. 61Banks' eagerness to learn is well demonstrated by the Mekong Project Development Facility's (MPDF) experience with bringing project appraisal training into the banks. With the help of Swinburne University in Australia and along side two Vietnamese banks (the Vietnam Industry and Commercial Bank and the Maritime Joint Stock Bank, MPDF developed a comprehensive training package for Vietnamese loan officers. This course was adapted for Vietnam, translated into Vietnamese and handed over to 18 trainers in the two banks after they completed a course in how to use the package. Within six months of its completion, Income Bank had trained 600 of its loan officers and Maritime all of its 50 or so loan officers--both on their own with no further assistance. This package and training of trainers has now been delivered to eight Vietnamese banks that are interested in building project appraisal skills among their loan officers. 62It is important to note here that this recommendation that private firms be able to set up their own business associations is in no way a statement about the performance of the Vietnamese Chamber of Commerce and Industry in representing and serving the interests of private firms. To the contrary, VCCI is doing an excellent job on both fronts. But its constituency is large and varied, and experience has shown that smaller associations established by groups of entrepreneurs with common interests can be very effective in serving the specialized needs of members. 62 Vietnam. Most deliver variations on three core services to their members: processed information of all kinds on the domestic and international markets; a forum where members can interact and learn from one another; and a platform from which members can bring their interests to the government. In addition, business associations are common delivery channels for donors and others to deliver services to smaller companies in developing countries. Vietnamese private companies badly need all of these services and could potentially access them more effectively if they were freed to set up their own associations. In the twenty-first century, it will be critical for industry associations, chambers of commerce, academic institutions and labor unions to view their roles as champions of business leaders differently. Developing processes and programs to educate, train, and inspire leaders in the private sector to develop more competitive strategies must take priority over endless lobbying and criticism of the government. These organizations are uniquely positioned to encourage dialogue between government and business, but they should implement innovations without waiting for government initiatives. Specifically, industry associations and chambers of commerce need to create more executive education programs focused not only on improving the operational efficiencies of businesses but also teaching business owners and public officials to direct their view to the horizon of possibilities.63 · Educational institutions.64 In the long run, educational institutions need modernizing from top to bottom if the Vietnamese are to compete in global markets. In the short run, the focus should be on improving the quality and the reach of the many short-term, business training courses that have sprung up in the main cities. First, course materials need to be selected and tailored for use in Vietnam rather than simply imported wholesale. In fact, core business principles and skills are much the same wherever they are practiced; what differs is how they are applied, the examples that are used to teach students, and the learning technologies that work best in different cultures. Second, care is needed to increase the number of Vietnamese lecturers who are well qualified to teach business courses and to decrease the number of expensive foreigners in this area so that training courses can be financially sustainable. Third, adult training approaches need to be used more extensively, i.e., short courses that focus on building practical skills, typically in a highly participatory way. And fourth, re-training will be important for many newcomers from the state sector. 3.24 Many more institutions will be needed to support growth of private Vietnamese firms in addition to the three discussed above. The success of Asian exporters described in Chapter 2 did not come about as a result of simply 63Taken from Plowing the Sea. 64Apparently, much analysis of Vietnam's educational institutions has been completed, including the system of vocational training institutions, and this section speaks to the issue of educational reform only in very general terms as the author lacks specialized expertise in this area. 63 changing strategies, policies, and laws and regulations. These changes were key to establishing the framework within which private exporters could operate, but it was the effective functioning of support institutions that cemented the success of participating firms. These institutions would include quality control agencies, marketing agencies, transport networks, distributions systems, training institutions, agencies that facilitate international interaction, and information organizations. All of these are needed in Vietnam. 3.25 The Mekong Project Development Facility has learned valuable lessons from its work in institution­building in Vietnam over the past several years. Mainly this experience has confirmed the reality that institution­building is a lengthy and messy process. More specifically, public and private institutions must have incentives to serve private sector customers. The dominant state sector undermines these incentives as it typically offers larger contracts that often embody subsidies not available to private firms, and state enterprises have preferential access to resources such as export quotas and government contracts which translate into significant business for support institutions. As a result, support institutions' products and services remain geared to the needs of state enterprises and are often not appropriate to the needs of private firms. Similarly, agency staff often do not have the skills to offer products and services that meet the needs of private clients. Distribution networks for support services are also geared to the needs of state enterprises which are typically the main consumers of support services. And many Vietnamese organizations that offer support services are public institutions without a mandate to operate efficiently and cost effectively. 3.26 Reorientation of these institutions such that they serve the needs of private firms involves a broad-based withdrawal of subsidies to force efficiency and implementation of measures to make SOEs and private firms more or less equal as customers, e.g., withdrawing training subsidies from SOEs so that their employees' training needs are no more dominant in classrooms than those of private sector employees. Many support institutions need rationalizing so their structures are well-suited to the needs of the marketplace. New products and services need to be introduced, and staff skills need to be strengthened. All of these tasks take time and are labor-intensive. Many donor programs finance technical assistance for Vietnamese institutions that work in these areas, but few such programs seem cognizant of the urgent need to reorient these institutions to meet the needs of private sector development. 3.27 (iii) Open up information channels. The Vietnamese private sector will never be able to excel in export production without substantially expanded access to business information. As noted, most now work virtually in the dark in all areas, relying on trade intermediaries to read markets for them and paying a high cost of doing so. Remedying this situation would require a new receptivity to the global information age on the part of government, which would need to open all possible communication channels for businesses to locate needed information. It would also mean making information channels equally available to all rather than reserving them for SOEs and thereby undermining private firms' ability to 64 compete. 3.28 Specific actions that would improve the current situation would include: (i) significantly lowering the cost of telecommunications generally and of access to the Internet specifically; (ii) accumulating, processing and broadly disseminating good quality, timely economic information on economic and business trends; (iii) facilitating access to and publication of high quality business information via all media channels, including newspapers, television and publishing houses, including making economic data collected by government agencies publically available; (iv) facilitating all major educational institutions to offer broad based training in use of the Internet; and (v) allowing and, indeed encouraging, various mechanisms by which private businesses can share information and learn from one another. 4. Facilitate great numbers of high quality training opportunities for new drivers 3.29 If, as described in Chapter 2, the objective is to develop a vibrant group of private sector exporters that will be able move up the value chain quickly and not remain stuck at the bottom with the lowest margins, supplying them with the kinds of training opportunities and information described above is a pre-requisite. But more is needed. 3.30 First, managers of private companies must take responsibility for searching out and learning what they need to succeed once government puts in place a suitable framework. In its survey of 95 larger manufacturers, researchers were struck by the large numbers of managers who blamed their problems on government's failure to grant them special privileges. It seemed obvious that many private sector entrepreneurs need a deeper understanding of their role in building their businesses and a willingness to undertake this role. As referenced in Chapter 2, company managers have to take responsibility for critical firm-level learning, including gaining in-depth understanding of customer needs in the market segments they are targeting, careful cost management, and analysis of competitors. It is the job of government and of market support institutions to ensure that the means of pursuing this learning are available; carrying through is the responsibility of managers. Efforts to direct managers in these directions rather than in lobbying for special privileges (as opposed to asking for fair treatment) will be important. 3.31 Researchers who carried out MPDF's survey of larger manufacturers encountered many private firms that were already trapped in low-margin positions without obvious means of extricating themselves. Comparing the most successful private firms surveyed with the least successful demonstrated this phenomenon very clearly. The most successful firms had either located a high-demand niche in the domestic market (food products, basic consumer goods) or a high-return niche 65 in export markets (cashews, coffee, some seafood and garments). And these firms most often sold directly into Western markets without the use of East Asian trading agents. The typical troubled firm was producing in the same industries as more successful firms, but it was at the lower value-added end of the spectrum and was significantly smaller. It was likely producing garments for sale through a trading agent from Taiwan or Korea, and its manager knew little about the final destination of the product or about the final consumers. 3.32 Second, a much larger number of Vietnamese business services companies that can offer private firms high quality, specialized services are needed. UNCTAD has described the timing of service provision in three stages: "upstream" (feasibility studies; research and development activities); "onstream" (accounting, engineering, and administrative services); and "downstream" (advertising, warehousing, and distribution). To the extent to which firms can access quality affordable services in all of these areas, their competitiveness will grow. 3.33 There are several ways to support development of business services firms in Vietnam. First, service firms should always be included in whatever assistance programs are offered, as they too need to learn the basics of business management. Second, reducing prices of telecommunications and of Internet access would be of particular assistance to this group as they are typically more dependent on these than other firms. Third, permitting establishment of private professional associations would also be especially useful for this group in part because the hallmark of competitive business service industries is self-regulation. Whether mandatory (as with accounting) or voluntary (as with management consulting), most business service industries in developed economies have an industry association with the delegated legal authority to accredit professionals and require a minimum level of ethical conduct. Such associations typically have identified a common body of knowledge in which accredited professionals must demonstrate competence, whether by examination, experience, or a combination of both. Increasingly, associations also require continuing professional education to maintain such accreditation, as well as evidence of conformity to the industry's code of conduct. B. Promoting Exports 3.34 If implemented, many of the above recommendations would greatly encourage export production in Vietnam. But in addition to improving their business environments, many countries have chosen to put in place some special measures to promote exports, and this section makes several recommendations about what these might look like. Ari Kokko's work is very useful in thinking about the kinds of export promotion strategies other countries have employed and 66 about those that Vietnam might employ.65 3.35 A major consideration in promoting exports is whether the incentives used are to be neutral with regard to industry or will target specific sectors. In Kokko's view, Vietnam would likely benefit most from a neutral export promotion policy including tax exemptions, credit, and infrastructure investments that enable the market to identify areas of Vietnam's greatest comparative advantage. For example, Korea channeled subsidies to strategic sectors, but the focus on steel, petrochemicals and nonferrous metals was ultimately counterproductive and costly. In Taiwan, however, the strategy of selective export promotion based on comparative advantage and existing technology was extremely successful. In addition to fortuitous choices, foreign direct investment and technology transfer also played a role in successful export growth. 3.36 In other Asian countries, a floating or artificially undervalued exchange rate policy was used to increase the effect of trade liberalization and make exporters more competitive on the world market. Exporters were allowed to import inputs at world market prices, and they received special access to credit. Potential exporters were encouraged to enter international markets by public policies including tax breaks, the deliberate creation of trading companies and exporter associations, and increased investment in education and infrastructure. 3.37 Generally speaking, export promotion interventions fall into one of four categories: input-related, output-related, macroeconomic, and institutional. Most countries have implemented these schemes in an indirect fashion, because direct interventions can lead to retaliatory responses from other countries and may be viewed as contrary to the spirit of WTO and AFTA. Table 3.1: Export Incentives in East and Southeast Asia. 65 Ari Kokko, Managing the Transition to Free Trade: Vietnamese Trade Policy for the 21st Century, (Stockholm: May 1997), 52-57. Much of this section is taken directly from this work. 67 Type of Export Promotion Scheme Specific Policies Input-related incentives Tariff and tax exemptions or rebates on imported inputs Wastage allowance subsidies Reduced prices on public utility inputs Accelerated depreciation Reduced interest rates Preferential access to credit Output-related incentives Preferential access to production loans Domestic tax exemptions or rebates Import entitlements linked to exports Export credits Preferential access to foreign exchange loans Subsidized shipment insurance Direct export subsidies Macroeconomic incentives Exchange rate policy Trade liberalization FDI policies Institutional incentives Export processing zones Trade information centers Infrastructure investments Source: Adapted from Alavi (1996), taken from Ari Kokko, Managing the Transition to Free Trade: Vietnamese Trade Policy for the 21st Century 3.38 In thinking about the kinds of export promotion programs Vietnam might undertake, it is helpful to remember the principles articulated in Chapter 3. To recap, these included: (i) the difficulty of new entrants into export markets in the absence of an established network of private firms and of a national reputation in international markets and their need for collective mechanisms to assist them; (ii) the proper role of government as `light touch' facilitator of export support services rather than the direct provider; (iii) the powerful role of competition and education policies in helping firms build their technical capabilities; and (iv) where export support programs are put in place, they should be broad-based programs that focus mainly on creating an information-rich environment. 3.39 In practice, these findings imply that private Vietnamese exporters need lots of assistance to enter export markets and then to move up the value chain once they have entered. Collective mechanisms that lower information costs would be particularly useful. These might include partial sponsorship to attend trade fairs, courses that focus on providing needed information and upgrading skills, partial subsidies to employ consultants, and provision of great quantities of quality information about the demands of foreign markets. Government should avoid costly national export promotion organizations and focus its efforts on highly decentralized programs if it chooses to get involved in service provision. And such programs should be broad-based ones, avoiding highly specialized interventions that are best reserved to complex, high tech industries. Finally, subjecting firms to constant competition is the path to their building competitiveness. 68 C. Summing Up 3.40 This report has documented the recent decline in the Vietnamese economy and has offered a series of explanations for the downturn. From the macro to the micro level, these include: lack of a unified national economic strategy, a policy framework in need of further deep reforms, a difficult business environment, weak business management skills among private sector managers and undeveloped business services that could help them. In addition, the regional financial crisis has made the external environment much more difficult. Chapter 1 provides an analysis of these problem areas. 3.41 Chapter 3 opens with the recommendation that Vietnam shift as quickly as possible to an industrial growth strategy that is based on rapid expansion of exports and that the private sector lead the charge. This is followed by a long list of recommendations for actions that should remedy problems identified in Chapter 1. The main headings in each area are shown in Table 3.2 below, and subheadings are found in the text of Chapter 3. 69 Table 3.2: Summary Table of Change Agenda Integrate Initiate a new Improve the Upgrade different models round of policy business business into one unified reforms to environment skills of strategy that facilitate a new private promotes private round of private sector sector growth sector growth managers Build public Reform the trade Reform Increase support for regime to favor government training private sector greater openness regulations that opportunities development affect private available to Actions Reform banking sector so private sector to be Unify the legal policies to open environment is taken system access to private more business Support firms friendly development Shift of business government role Reform land laws Build market services from economic to open access to support actor to private firms institutions economic facilitator Privatize and Open up restructure SOEs information Focus on channels export-led Reform and growth upgrade the civil service. Assist SOEs to improve their Liberalize policies competitiveness that restrict information flows 3.42 This agenda for change is truly formidable and, in some cases, controversial. Selectivity and prioritization are an obvious must, and the Vietnamese government is confronted with this challenge on a daily basis. In theory, one would proceed from the macro to the micro; in practice, there is and will continue to be ongoing work at all four levels. In theory, one would focus first on those areas with potential for the largest impact; in practice, one often begins where there are windows of opportunity. Formulating a strategy that is effective and workable will be no small task. It will require a disciplined application of the enormous pool of energy and skills available in Vietnam. 70 71 BIBLIOGRAPHY Ari Kokko, Managing the Transition to Free Trade: Vietnam Trade Policy for the 21st Century, May 1997. 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UNIDO-MPI Project, Assistance to Industrial Small and Medium Enterprise in Vietnam (US/VIE/95/004), Research Report on Improving Macroeconomic Policy and Reforming Administrative Procedures to Promote Development of Small and Medium Enterprises in Vietnam, by the Research Group Nguyen Dinh Cung, John Bentley, Le Viet Thai, Hoang Xuan Thanh and Phan Nguyen Toan, Hanoi January 1999. 75 ANNEX: SELECTED TABLES 1) GDP Figures Table 1.1 GDP by Economic Sector 1995-1999 (based on current prices) Table 1.2 Share of GDP by Economic Sector 1995-1999 (based on current prices) Table 1.3 Growth in GDP by Economic Sector 1995-1999 (based on current prices) Table 1.4 GDP by Economic Sector 1995-1999 (based on 1994 prices) Table 1.5 Share of GDP by Economic Sector 1995-1999 (based on 1994 prices) Table 1.6 Growth in GDP by Economic Sector 1995-1999 (based on 1994 prices) Table 1.7 GDP by Enterprise Sector 1995-1998 (based on current prices) Table 1.8 Share of GDP by Enterprise Sector 1995-1998 (based on current prices) Table 1.9 Growth in GDP by Enterprise Sector 1995-1998 (based on current prices) Table 1.10 GDP by Enterprise Sector 1995-1998 (based on 1994 prices) Table 1.11 Share of GDP by Enterprise Sector 1995-1998 (based on 1994 prices) Table 1.12 Growth in GDP by Enterprise Sector 1995-1998 (based on 1994 prices) Table 1.13 GDP for Public, Private and FDI Sectors, 1995-1998 (based on current prices) Table 1.14 Share of GDP for Public, Private and FDI Sector, 1995-1998 (based on current prices) Table 1.15 Manufacturing GDP by Enterprise Sector 1995-1998 (based on current prices) Table 1.16 Share of Manufacturing GDP by Enterprise Sector 1995-1998 (based on current prices) Table 1.17 Growth in Manufacturing GDP by Enterprise Sector 1995-1998 (based on current prices) Table 1.18 Manufacturing GDP by Enterprise Sector 1995-1998 (based on 1994 prices) Table 1.19 Share of Manufacturing GDP by Enterprise Sector 1995-1998 (based on 1994 prices) Table 1.20 Growth in Manufacturing GDP by Enterprise Sector 1995-1998 (based on 1994 prices) Table 1.21 Output per Employee, 1995-19998 Table 1.22 Manufacturing Output per Employee, 1995-1998 2) Employment Figures Table 2.1 Total Labour by Enterprise Form 1995-1998 Table 2.2 Share of Labour by Enterprise Form 1995-1998 Table 2.3 Growth of Labour by Enterprise Form 1995-1998 Table 2.4 Employment for Public, Private and FDI Sectors 1995-1998 Table 2.5 Share of Employment for Public, Private and FDI Sector 1995-1998 Table 2.6 Total Labour by Economic Sector 1995-1998 Table 2.7 Share of Labour by Economic Sector 1995-1998 Table 2.8 Growth of Labour by Economic Sector 1995-1998 Table 2.9 Unemployment Rates in Urban Areas by Provinces, 1997-1999 3) Export Figures Table 3.1 Total Exports and FDI Exports Table 3.2 Exports by Destination Countries, 1994-1998 Table 3.3 Exports by Commodity Groups, 1994-1998 76 4) FDI Figures Table 4.1 FDI- Committed Capital, Disbursed Capital and Number of Projects 1988 - 1999 Table 4.2 FDI Disbursements as Share of GDP, 1992-1999 Table 4.3 FDI Disbursements by Sector, 1988- 1999 (US$) Table 4.4 Vietnam - FDI Disbursement by Sectoral Share by Year, 1988-1999 Table 4.5 Growth Rate of FDI Disbursements by Sector, 1993-1999 Table 4.6 Share of FDI Exports and Imports in Total Exports and Imports Table 4.7 Share of FDI Employment in Total Employment Table 4.8 Top Five Foreign Investors in Vietnam from 1/1/1988 to 14/10/1999 Table 4.9 Top Five Locations for FDI from 1/1/1988 to 14/10/1999 5) Private Sector Figures Table 5.1 Number of Private Companies by Legal Status, 1993-1998 Table 5.2 Location of Private Companies by Firm Size, 1998 (est.) Table 5.3 Location of Private Companies by Number and Size, 1997 and 1998 Table 5.4 Private Companies by Economic Sector, 1993-1998 Table 5.5 Location of Private Manufacturers by Firm Size, 1998 (est.) Table 5.6 Location of Private Manufacturers by Number and Size,1997 and 1998 Table 5.7 Private Manufacturers by Industry, 1995-1998 Table 5.8 Private Manufacturers by Size Across Selected Industries, 1998 (est.) 77 Table 1.1: GDP by Economic Sector, 1995-1999 1995 1996 1997 1998 (est.) 1999 (est.) Total GDP * (in billions of 228,893 272,035 313,624 368,692 390,177 VND) Agriculture, Forestry and 62,219 75,514 80,826 93,068 99,967 Fisheries Industry and Construction 65,820 80,877 100,595 117,803 131,355 Services 100,854 115,644 132,203 157,821 158,855 Source: GSO (1999); GDP based on current prices Table 1.2: Share of GDP by Economic Sector, 1995-1999 1995 1996 1997 1998 1999 (est.) (est.) Total 100% 100% 100% 100% 100% Agriculture, Forestry and 27.18% 27.76% 25.77% 25.24% 25.62% Fisheries Industry and Construction 28.76% 29.73% 32.08% 31.95% 33.67% Services 44.06% 42.51% 42.15% 42.81% 40.71% Source: GSO (1999); GDP based on current prices Table 1.3: Growth in GDP by Economic Sector, 1995-1999 1995 1996 1997 1998 (est.) 1999 (est.) GDP * (in billions of VND) 228,893 272,035 313,624 368,692 390,177 GDP Growth 27.56% 18.85% 15.29% 17.56% 5.83% Agriculture, Forestry and 27.33% 21.37% 7.03% 15.15% 7.41% Fisheries Industry and Construction 30.39% 22.88% 24.38% 17.11% 11.50% Services 25.93% 14.66% 14.32% 19.38% 0.66% Source: GSO (1999); GDP based on current prices Table 1.4: GDP by Economic Sector, 1995-1999 1995 1996 1997 1998 (est.) 1999 (est.) Total GDP * (in billions of 195,567 213,833 231,264 244,740 256,824 VND) Agriculture, Forestry and 51,319 53,578 55,895 57,867 60,818 Fisheries Industry and Construction 58,550 67,016 75,474 81,989 88,531 Services 85,698 93,239 99,895 104,884 107,475 Source: GSO (1999); GDP based on 1994 prices 78 Table 1.5: Share of GDP by Economic Sector,1994-1999 1995 1996 1997 1998 (est.) 1999 (est.) Total 100% 100% 100% 100% 100% Agriculture, Forestry and 26.24% 25.06% 24.17% 23.64% 23.68% Fisheries Industry and Construction 29.94% 31.34% 32.64% 33.50% 34.47% Services 43.82% 43.60% 43.20% 42.86% 41.85% Source: GSO (1999); GDP based on 1994 prices Table 1.6: Growth in GDP by Economic Sector, 1995-1999 1995 1996 1997 1998 1999 (est.) (est.) GDP * (in billions of VND) 195,567 213,833 231,264 244,740 256,824 GDP Growth 8.99% 9.34% 8.15% 5.83% 4.94% Agriculture, Forestry and 9.64% 4.40% 4.32% 3.53% 5.10% Fisheries Industry and Construction 15.98% 14.46% 12.62% 8.63% 7.98% Services 7.00% 8.80% 7.14% 4.99% 2.47% Source: GSO (1999); GDP based on 1994 prices Table 1.7: GDP by Enterprise Sector, 1995-1998 1995 1996 1997 1998 (est.) GDP * (in billions of VND) 228,893 272,035 313,624 368,692 Public 114,997 135,905 154,887 181,087 - State Sector 91,977 108,634 126,924 148,108 - Collective Sector 23,020 27,271 27,963 32,979 Private 102,468 116,024 130,287 151,388 - Households and Farmers 85,448 95,896 107,661 125,336 - Formal Private Sector 17,020 20,128 22,626 26,052 Foreign-Invested Sector 11,428 20,106 28,450 36,217 Source: GSO (1999); GDP based on current prices Table 1.8: Share of GDP by Enterprise Sector, 1995-1998 1995 1996 1997 1998 (est.) Total 100.00% 100.00% 100.00% 100.00% Public 50.24% 49.96% 49.39% 49.12% - State Sector 40.18% 39.93% 40.47% 40.17% - Collective Sector 10.06% 10.02% 8.92% 8.94% Private 44.77% 42.65% 41.54% 41.06% - Households and Farmers 37.33% 35.25% 34.33% 33.99% - Formal Private Sector 7.44% 7.40% 7.21% 7.07% Foreign-Invested Sector 4.99% 7.39% 9.07% 9.82% Source: GSO (1999); GDP based on current prices 79 Table 1.9: Growth in GDP by Enterprise Sector, 1995-1998 1995 1996 1997 1998 (est.) GDP * (in billions of VND) 228,893 272,035 313,624 368,692 GDP Growth 27.56% 18.85% 15.29% 17.56% Public 51.36% 18.18% 13.97% 16.92% - State Sector 28.42% 18.11% 16.84% 16.69% - Collective Sector 26.73% 18.47% 2.54% 17.94% Private 48.36% 13.23% 12.29% 16.20% - Households and Farmers 33.46% 12.23% 12.27% 16.42% - Formal Private Sector 20.03% 18.26% 12.41% 15.14% Foreign-Invested Sector -0.11% 75.94% 41.50% 27.30% Source: GSO (1999); GDP based on current prices Table 1.10: GDP by Enterprise Sector, 1995-1998 1995 1996 1997 1998 (est.) GDP * (in billions of VND) 195,567 213,833 231,264 244,740 Public 97,345 106,862 115,811 121,710 - State Sector 78,367 87,208 95,638 101,070 - Collective Sector 18,978 19,654 20,173 20,640 Private 85,067 91,262 96,483 100,618 - Households and Farmers 70,287 74,913 79,128 82,338 - Formal Private Sector 14,780 16,349 17,355 18,280 Foreign-Invested Sector 13,155 15,709 18,970 22,412 Source: GSO (1999); GDP based on 1994 prices Table 1.11: Share of GDP by Enterprise Sector, 1995-1998 1995 1996 1997 1998 (est.) Total 100.00% 100.00% 100.00% 100.00% Public 49.78% 49.97% 50.08% 49.73% - State Sector 40.07% 40.78% 41.35% 41.30% - Collective Sector 9.70% 9.19% 8.72% 8.43% Private 43.50% 42.68% 41.72% 41.11% - Households and Farmers 35.94% 35.03% 34.22% 33.64% - Formal Private Sector 7.56% 7.65% 7.50% 7.47% Foreign-Invested Sector 6.73% 7.35% 8.20% 9.16% Source: GSO (1999); GDP based on 1994 prices Table 1.12: Growth in GDP by Enterprise Sector, 1995-1998 1995 1996 1997 1998 (est.) GDP * (in billions of VND) 195,566 213,832 231,262 244,740 GDP Growth 8.99% 9.34% 8.15% 5.83% Public 8.42% 9.78% 8.37% 5.09% - State Sector 9.42% 11.28% 9.67% 5.68% - Collective Sector 4.48% 3.56% 2.64% 2.31% Private 8.77% 7.28% 5.72% 4.29% - Households and Farmers 9.78% 6.58% 5.63% 4.06% - Formal Private Sector 4.23% 10.62% 6.15% 5.33% Foreign-Invested Sector 14.98% 19.41% 20.76% 18.14% Source: GSO (1999); GDP based on 1994 prices 80 Table 1.13: GDP for Public, Private and FDI Sectors, 1995-1998 1995 1996 1997 1998 (est.) Public Sector 114,997 135,905 154,887 181,087 Private Sector 102,468 116,024 130,287 151,388 FDI 11,428 20,106 28,450 36,217 GDP * (in billions of VND) 228,893 272,035 313,624 368,692 Source: GSO (1999); GDP based on current prices Table 1.14: Share of GDP for Public, Private and FDI Sectors, 1995-1998 1995 1996 1997 1998 (est.) Total 100% 100% 100% 100% Public Sector 50.24% 49.96% 49.39% 49.12% Private Sector 44.77% 42.65% 41.54% 41.06% FDI 4.99% 7.39% 9.07% 9.82% Source: GSO (1999); GDP based on current prices Table 1.15: Manufacturing GDP by Enterprise Sector , 1995-1998 1995 1996 1997 1998 (est.) Manufacturing GDP (Billions of 34,318 41,290 51,700 63,668 VND) Public 19,910 22,590 27,174 32,532 - State Sector 19,381 22,020 26,746 32,066 - Collective Sector 529 570 428 466 Private 10,481 13,029 14,952 16,846 - Households and Farmers 6,817 8,457 9,791 11,135 - Formal Private Sector 3,664 4,572 5,161 5,711 Foreign-Invested Sector 3,927 5,671 9,574 14,290 Source: GSO (1999); Manufacturing GDP based on current prices Table 1.16: Share of Manufacturing GDP by Enterprise Sector, 1995-1998 1995 1996 1997 1998 (est.) Manufacturing GDP 100.00% 100.00% 100.00% 100.00% Public 58.02% 54.71% 52.56% 51.10% - State Sector 56.47% 53.33% 51.73% 50.36% - Collective Sector 1.54% 1.38% 0.83% 0.73% Private 30.54% 31.55% 28.92% 26.46% - Households and Farmers 19.86% 20.48% 18.94% 17.49% - Formal Private Sector 10.68% 11.07% 9.98% 8.97% Foreign-Invested Sector 11.44% 13.73% 18.52% 22.44% Source: GSO (1999); Manufacturing GDP based on current prices 81 Table 1.17: Growth in Manufacturing GDP by Enterprise Sector, 1995-1998 1995 1996 1997 1998 (est.) GDP (in billions of VND) 34,318 41,290 51,700 63,668 GDP Growth 28.90% 20.32% 134.79% 138.05% Public 20.72% 13.46% 20.29% 19.72% - State Sector 20.21% 13.62% 21.46% 19.89% - Collective Sector 42.97% 7.75% -24.91% 8.88% Private 41.14% 24.31% 14.76% 12.67% - Households and Farmers 50.19% 24.06% 15.77% 13.73% - Formal Private Sector 26.91% 24.78% 12.88% 10.66% Foreign-Invested Sector 45.18% 44.41% 68.82% 49.26% Source: GSO (1999); Manufacturing GDP based on current prices Table 1.18: Manufacturing GDP by Enterprise Sector, 1995-1998 1995 1996 1997 1998 (est.) GDP * (in billions of VND) 30,230 34,339 38,743 42,613 Public 18,449 20,378 21,857 23,055 - State Sector 18,014 19,914 21,523 22,711 - Collective Sector 435 464 334 344 Private 8,672 9,655 10,871 11,851 - Households and Farmers 5,492 6,116 7,072 7,763 - Formal Private Sector 3,180 3,539 3,799 4,088 Foreign-Invested Sector 3,109 4,306 6,015 7,707 Source: GSO (1999); Manufacturing GDP based on 1994 price Table 1.19: Share of Manufacturing GDP by Enterprise Sector, 1995-1998 1995 1996 1997 1998 (est.) Total 100.00% 100.00% 100.00% 100.00% Public 61.03% 59.34% 56.42% 54.10% - State Sector 59.59% 57.99% 55.55% 53.30% - Collective Sector 1.44% 1.35% 0.86% 0.81% Private 28.69% 28.12% 28.06% 27.81% - Households and Farmers 18.17% 17.81% 18.25% 18.22% - Formal Private Sector 10.52% 10.31% 9.81% 9.59% Foreign-Invested Sector 10.28% 12.54% 15.53% 18.09% Source: GSO (1999); Manufacturing GDP based on 1994 prices Table 1.20: Growth of Manufacturing GDP by Enterprise Sector, 1995-1998 1995 1996 1997 1998 (est.) Manufacturing Output (in billions 30,230 34,339 38,743 42,613 of VND) GDP Growth 13.54% 13.59% 12.83% 9.99% Public 11.86% 10.46% 7.26% 5.48% - State Sector 11.73% 10.55% 8.08% 5.52% - Collective Sector 17.57% 6.67% -28.02% 2.99% Private 16.78% 11.34% 12.59% 9.01% - Households and Farmers 21.00% 11.36% 15.63% 9.77% - Formal Private Sector 10.15% 11.29% 7.35% 7.61% 82 Foreign-Invested Sector 14.94% 38.50% 39.69% 28.13% Source: GSO (1999); Manufacturing GDP based on 1994 prices Table 1.21: Output per Employee, 1995-1998 Year 1995 1996 1997 1998 (est.) Total (in millions of VND) 6.62 7.60 8.48 9.68 Public 34.48 41.81 45.57 52.24 - State Sector 28.38 34.62 38.85 44.35 - Collective Sector 244.98 241.71 212.05 259.68 Private 3.29 3.59 3.91 4.40 - Households and Farmers 2.77 3.00 3.27 3.70 - Formal Private Sector 50.63 52.68 52.86 52.37 Foreign-Invested Sector 116.81 88.26 120.19 142.76 Source: GSO (1999); GDP based on current prices Table 1.22: Manufacturing Output per Employee, 1995-1998 Year 1995 1996 1997 1998 (est.) Total (Millions of VND) 0.99 1.15 1.40 1.67 Public 5.97 6.95 8.00 9.38 - State Sector 5.98 7.02 8.19 9.60 - Collective Sector 5.60 5.05 3.25 3.67 Private 0.34 0.40 0.45 0.49 - Households and Farmers 0.22 0.26 0.30 0.33 - Formal Private Sector 10.90 11.97 12.06 11.48 Foreign-Invested Sector 40.14 24.89 40.45 56.33 Source: GSO (1999); Manufacturing GDP based on current prices Table 2.1: Total Labour by Enterprise Form, 1995-1998 1995 1996 1997 1998 (est.) Total Labor Force 34,589,600 35,791,900 36,994,200 38,094,200 Public 3,335,387 3,250,481 3,398,811 3,466,400 - State Enterprises 1,772,100 1,837,900 1,907,800 1,971,928 - State Administration 1,469,321 1,299,755 1,359,143 1,367,472 - Collective Sector 93,966 112,826 131,868 127,000 Private 31,156,381 32,313,614 33,358,677 34,374,111 - Households and Farmers 30,820,244 31,931,541 32,930,668 33,876,630 - Formal Private Sector 336,137 382,073 428,009 497,481 Foreign-Invested Sector 97,832 227,805 236,712 253,689 Source: General Statistical Office (1999) 83 Table 2.2: Share of Labour by Enterprise Form, 1995-1998 1995 1996 1997 1998 (est.) Total 100.00% 100.00% 100.00% 100.00% Public 9.64% 9.08% 9.19% 9.10% - State Enterprises 5.12% 5.13% 5.16% 5.18% - State Administration 4.25% 3.63% 3.67% 3.59% - Collective Sector 0.27% 0.32% 0.36% 0.33% Private 90.07% 90.28% 90.17% 90.23% - Households and Farmers 89.10% 89.21% 89.02% 88.93% - Formal Private Sector 0.97% 1.07% 1.16% 1.31% Foreign-Invested Sector 0.28% 0.64% 0.64% 0.67% Source: General Statistical Office (1999) Table 2.3: Growth of Labour by Enterprise Form, 1995-1998 1996 1997 1998 (est.) Total Labor Force 35,791,900 36,994,200 38,094,200 Growth Rate 3.48% 3.36% 2.97% - State Enterprises 3.71% 3.80% 3.36% - State Administration -11.54% 4.57% 0.61% - Collectives Sector 20.07% 16.88% -3.69% - Households and Farmers 3.61% 3.13% 2.87% - Formal Private Sector 13.67% 12.02% 16.23% Foreign-Invested Sector 132.85% 3.91% 7.17% Source: General Statistical Office (1999) Table 2.4: Employment for Public, Private and FDI Sectors, 1995-1998 1995 1996 1997 1998 (est.) Total Labor Force 34,589,600 35,791,900 36,994,200 38,094,200 Public Sector 3,335,387 3,250,481 3,398,811 3,466,400 Private Sector 31,156,381 32,313,614 33,358,677 34,374,111 FDI 97,832 227,805 236,712 253,689 Source: General Statistical Office (1999) Table 2.5: Share of Employment for Public, Private and FDI Sectors, 1995-1998 1995 1996 1997 1998 (est.) Total 100.00% 100.00% 100.00% 100.00% Public Sector 9.64% 9.08% 9.19% 9.10% Private Sector 90.07% 90.28% 90.17% 90.23% FDI 0.28% 0.64% 0.64% 0.67% Source: General Statistical Office (1999) 84 Table 2.6: Total Labour by Economic Sector, 1995-1998 1995 1996 1997 1998 (est.) Total 34,589,600 35,791,900 36,994,200 38,094,200 Agriculture, Forestry and Fisheries 24,121,700 24,775,300 25,443,400 26,155,293 Industry and Construction 4,582,400 4,628,500 4,632,500 4,788,152 Services 5,885,500 6,388,100 6,918,300 7,150,755 Source: General Statistical Office (1999) 85 Table 2.7: Share of Total Labour by Economic Sector, 1995-1998 1995 1996 1997 1998 (est.) Total 100.00% 100.00% 100.00% 100.00% Agriculture, Forestry and Fisheries 69.74% 69.22% 68.78% 68.66% Industry and Construction 13.25% 12.93% 12.52% 12.57% Services 17.02% 17.85% 18.70% 18.77% Source: General Statistical Office (1999) Table 2.8: Growth of Labour by Economic Sector, 1995-1998 1995 1996 1997 1998 (Est.) Total 34,589,600 35,791,900 36,994,200 38,094,20 0 Growth Rate - 3.48% 3.36% 2.97% Agriculture, Forestry and Fisheries - 2.71% 2.70% 2.80% Industry and Construction - 1.01% 0.09% 3.36% Services - 8.54% 8.30% 3.36% Source: General Statistical Office (1999) Table 2.9: Unemployment Rates in Urban Areas by Provinces 1997 1998 1999* General 6.01% 6.85% 7.40% A. By Provinces Red River Delta 7.56 8.25 9.34 North East 6.34 6.60 8.72 North West 4.73 5.92 6.58 North Central Coast 6.68 7.26 8.62 South Central Coast 5.42 6.67 7.07 Central Highlands 4.99 5.88 5.95 North East South 5.89 6.44 6.52 Mekong River Delta 4.72 6.35 6.53 B. By Main Cities Hanoi 8.56 9.09 10.31 Quang Ninh 7.06 6.80 9.29 Danang 5.42 6.35 6.64 Ho Chi Minh City 6.13 6.76 7.04 Dong Nai 4.03 5.52 5.87 Source: Statistics on Labour and Social Affairs ­ MOLISA - * As of mid-1999 86 Table 3.1: Total Exports and FDI Exports 1995 1996 1997 1998 1999 (est.) Total Exports (Millions of 5,448.95 7,255.87 9,185.00 9,361.00 10,899.00 US$) Growth Rate 34.40% 33.16% 26.59% 1.92% 16.43% Central SOEs 2,531.26 3,261.36 3,640.93 - - Provincial SOEs 2,477.60 3,208.50 3,754.03 - - FDI 440.09 786.01 1,790.04 - - Source: GSO (1999) Table 3.2: Exports by Destination Countries, 1994-1998 1994 1995 1996 1997 1998 (Est.) Total (Millions of US$) 4,054.30 5,448.95 7,255.87 9,185.00 9,361.00 Asia 2,919.40 3,944.70 5,251.50 6,017.10 5,362.00 - South East 892.90 1,112.10 1,777.50 2,022.50 1,976.50 - Other Asian Countries 2,026.60 2,832.60 3,474.00 3,994.60 3,385.50 * Share 72.0% 72.4% 72.4% 65.5% 57.3% * Growth Rate 34.7% 35.1% 33.1% 14.6% -10.9% Europe 562.20 893.00 1,174.60 2,207.60 2,603.00 * Share 13.9% 16.4% 16.2% 24.0% 27.8% * Growth Rate 37.4% 58.8% 31.5% 87.9% 17.9% Others 572.70 611.25 829.77 960.30 1,396.00 * Share 14.1% 11.2% 11.4% 10.5% 14.9% * Growth Rate 40.2% 6.7% 35.7% 15.7% 45.4% Source: GSO 1998, 1999 Table 3.3: Exports by Commodity Groups, 1994-1998 1994 1995 1996 1997 1998 (Est.) Total (Millions of US$) 4,054.30 5,448.95 7,255.87 9,185.00 9,361.00 Heavy Industrial Products & 1,167.60 1,377.70 2,085.00 2,574.00 2,219.00 Minerals Share 28.8% 25.3% 28.7% 28.0% 23.7% Growth Rate 15.1% 18.0% 51.3% 23.5% -13.8% Light Industrial & 938.20 1,549.80 2,101.00 3,372.40 3,359.00 Handicraft Goods Share 23.1% 28.4% 29.0% 36.7% 35.9% Growth Rate 78.2% 65.2% 35.6% 60.5% -0.4% Agricultural , Forest & 1,948.10 2,521.10 3,068.30 3,238.50 3,783.00 Aquatic Products Share 48.1% 46.3% 42.3% 35.3% 40.4% Growth Rate 34.9% 29.4% 21.7% 5.5% 16.8% Others 0.30 0.30 1.60 0.10 - Share 0.0% 0.0% 0.0% 0.0% - Growth Rate 50.0% 0.0% 433.3% -93.8% - Source: GSO 1998, 1999 87 88 lat - 960 566 7 - ng 000 To 2,840 - 5.3% 36, 15, 490,1 14, 9 252 9991 0,1793 %00. 199 511,1 5.9% 490,1 %83. (Est.) -1 -3 -2 %68.9 ractibt su 003, 8991 082 13 2% 356,2 956,1 8% 0% -15. -56.7% -39. 83. enhtdnas 9891 1%.7 956,1 296,863 1999 99 of 7 5 19- 2% 74, 1988 7991 033 -9.8% 443,5 250,3 8% 7% ansion nths 12. 50,23 93,3 11 -34.4% 22. 59. ts exprof 9791 31 mo8 0 ojec Pr 9691 663 9% 10.- 299,8 11.6% 646,2 9% 0.9%- 31. italp first 9991 8%. 10 64,62 53,02 10, ofre 1 41 1992- mbuNd 9591 7%. 11 37,47 9%. 83 71,62 3%. 9%. 37 35 cadnalatip thefo 9691 27 11 gurefi P, ca GD 8%. 12 17,62 39,88 0 97, anlatipaCd 8 22 10 9491 36 8%. 33 44,04 6%. 48 46,91 alu 1%. 1%. 77 48 oject act pr the oferahS 9591 5 5 5%. 95, seru 9391 27 0%. 22 41 2,7 1%.46 99 1,0 sbiD 9%.871 4%. 40 wenfot mofr asstne 9491 12 46,91 85,20 17 10 5 4 lizeda rsemu 1 tal,ipaCd 92 19 3%. 95 %5. 39 %0. 7%. 99 64, 19 28 1,6 59 85 23 annu sbiD 3 6%.8 1,0 17,56 commitmen is 13 10 04 FDI 199 91 152 - - 213 - %5. ng reu 19 1,0 20 fig addi mmitteoC 2:4.el % by 9991 2 4.0 394 35 Tab 211 199 110,5 1811,1 FDI- 88-91 - 5851 9901 - - - 4.1:elbaT inedatboe ents.m m) wer mmit ($la co )m capital ($ capital la al ($ )nb s ects figures capit capit proj capital capit ese capital VND project wen of# ttedim ittedmm sedr tted co disbursed of of of mmi Th*- red expi ursedb icerpt e OSG com disbu & of dis rat er rateh FDI rateh FDI rateh cod/e MPI andde MPI mb ce: FDI (curren * ncell Nu Growt Total m) Growt Total Growt Disburs Sour ca FDI/GDP taloT GDP changexE urce: So D US 243, 073 5 262 254, 07 298 926 758, 9 952 964 162 889 378 047 62, otalT 442 095, 188, 000 805, 447,, 83,2 919 580,, 427, 479, 173, 479, 603, 269 ofltai yamst ecj beoslan catc 741,2, 955,2, 389, 838,1, 054,1, 907 868,1, 55, 3891, 824, 358,1, 168, 108, 560, 219, apc proe 16, d 9 5 6 som 3 0 8 ojerp ).st usea isht (E 6400,50 96 93 31 77 39 94 urse 09,8 78,13, 2560, 6633, 8499, 71 07 01 8370,08 39, 68, 82, 47,12, 5658, 49 6758,27 7096, 21 73, 94, 18,19, 99,41, 69,3 9813,22 1999 155, 100, 112, 743, sbdifot e,mite 3059, 5671, 996 9 5372, 7778, 6473, 8233, 40 2956, 014 2553, 097 626 3 99 0795, 50 84 1998 19,4 53,3 730,3,4 00 25 41 93 59,1 23,1 05,1 57,1 378,3, 02 93,2 205,8,6 37 99,1 231,0,4 824,1,1 714,1, 44 bec)noillim5 80,91, ,6651 samehtta or;t S$)U( 4881, 9420, 2661, 6617, 9767, 1746, 3659, 115 4087, 680 8286, 128 975 mounaltaotehT SD 9813, 0772, 23 18 77 36 80 32 37 815, 99 803, 94 738, 161, 39 92 sec" 1997 99 716, 261, 119, 569, 249, 306, 453, 11, 267, 89, 456, 59, 16, 186, 764,,3 .9991fo (U9991 19- of ourismT 88 6364, 9961, 1005, 2933, 069 5 5185, 7963, 03 6782, 5361, 0539, 233 523 759 hs 1974, 19,r 11 48 92 38 602, 62 51 69 83 09 381, 033, 449, 88 mont ndeeht nda 1996 534, 399, 135, 429, 80, 749,2, 110, 317, 266, 105, 324, 13, 13, 89, 8 822,2, Sectoyb 6451, 0194, 000 4 8085, 6121, 1521, 2003, 28 4731, 8975, 3183, 557 283 501 6415, otelH"otnid .d 02 98 395, 42 10 24 17 82 21 39 966, 895, 950, 47 cad 1995 fie 344, 560, 57, 890,9, 279, 182, 138, 286, 279, 266, 156, 14, 15, 88, 680,2, rstfiehtfoser byltaip urse guif ssialc ountec sementsrub 9983, 2467, 622 3542, 5736, 682 1791, 159 1734, 760 525 577 7 0 79 00 1503, 67 77 374, 41 07 488, 22 187, 69 268, 255, 826, 43 istcej leiptr 1994 372, 714, 21, 187, 145, 60, 319, 22, 122, 75, 56, 12, 125,9, 051,3, DisIDF:3.4 122,2, ualtcaeth sbdidtealumu 167 0 6 0 2 dou 3 7660, 00 7165, 0782, 334 6341, 78 647 380 155 87 45 000 7683, morf prolteoha orelb 440, 30 70 63 876, 81 865, 369, 082, 673, 22 199 eds accltaot 91, 321,3, 763,1, 668,8, 712,9, 257, 125, 180, 64, 143, 49, 37, 62, 70, ble 107,1, ali teda e,lp Ta 294 3 229, 000 543 996 693 519 000 683 173 0 3 215 890 968 000, 785, nnua timse xamer beyamtcej Fo proa 885, 70 1992 27, 492,4, 652, 148, 876, 351, 680, 912, 622, 00 74 are the 179, 22, 21, 19, 61, 17, 31, 370,8, 978,7, 065,9, 110, 522, res ors.t 0 guif hus,T.t 386 906 088 753 141 619 237 956 456 000 832 000 al ecj 9,579 2,953 -1991 514, 00 339, 80, 25, 103,4, 579, 098, 19, 28, 307,1, 072, 383, 741, 18, 37, 262,1, 160, 000, 57 nu pro 22, 10, an omfrtnereffid 1988 227, 475, tlyhgisl sectnereffid3 noti or2 uc strye n s orF tio ­ 9991ehT- Office & yr & lth cena is926,6 onstrcasa Industryyv Ga/muel Infrastructure yrstu Fin & tonideifi dust ourismT s Hea- edi PZE Ind In ulture iont seir ngi LA ,9291 asscl ssif eaH tro Pe IP/ ghtiL Food ricgA &letoH vicer Se &sntemtrapA tionat icanu onti nsporarT mmocel Te onstrucC ltureuC ducaE nk Fishe Ba TOT MPI:ecruoS 16,2 be cla 90 29 %96.1 %28.1 % 2.4 %31.1 % % 6.5 5.6 %51.1 % % % % % % % % 0.3 8.6 5.1 8.4 1.0 0.7 3.5 Total 100.0 ) 99 9%. 0%. 6%. 2%. 7%. 19 20 1%.0 4%.0 3%.5 2%.9 11 13 3%.0 9%.9 15 12 2%.1 2%.0 0%.0 0%.0 (Est. 10 % % % % % % % % % % % 8 2.2 8.0 6.2 5.3 8.0 0.2 3.4 2.0 0.6 0.1 99 199 %21.2 %97.1 %84.1 %10.1 100.0 19 0% 1% 0% 1% 1988- 97 19 19. 9%.6 2%.3 15. 6%.6 1%.8 12. 3%.0 1%.7 4%.2 12. 6%.1 4%.0 0%.5 0%.001 ear,YyberahS 6 199 %98.1 %24.1 % 4.8 %25.1 % % 2.9 3.9 %21.1 % % % 0.1 9.4 3.7 %51.1 % % % % 0.5 0.5 3.2 100.0 oralt 8% 9% 4% 7% 4% ecS 95 19 12. 20. 1%.2 10. 8%.6 2%.5 10. 4%.0 10. 9%.9 8%.5 6%.0 6%.0 3%.3 0%.0 10 bytn me 4 seru 199 %67.1 %73.3 % % % % 1.0 8.8 6.8 2.8 %05.1 % % % % % % % % 1.0 5.8 3.5 2.7 0.6 0.4 0.1 100.0 sbiDI FD- 93 3%.8 2% 4% 3% 0% 19 23. 3%.0 11. 16. 9%.5 13. 2%.0 5%.4 4%.3 6%.5 8%.0 9%.0 %4.6 0%.0 ma 10 ietnV % % % % % % % % % % % % 2 5.3 0.9 4.3 4.0 3.8 0.1 3.4 6.0 1.6 1.5 1.7 4.4: 199 %44.3 %71.1 %0.12 100.0 lebaT 8- 9% 7% 91 0%.0 3%.5 9%.0 1%.4 9%.5 3%.0 8%.3 9%.7 2%.0 3%.0 7%.4 1%.2 198 19 16. 47. 0%.001 uretc ­ yr tru Forestry m Office & cation ncea Industy Gas/m & & on n Fin fras In stryu stryu ure ourisT no MPI eul Ind PZ Ind & ices entsm muni Health- se Heav Petro IP/E htgiL Food Agricult Hotel Serv Apart Transportati Telecom Constructio Culture catiudE &gnik urce: Fisheri Ban TOTAL So %03. %89. %72. %05. %84. %22. %26. %46. %94. (Est.)9 -6 -9 -9 -7 -4 -2 -3 -3 -7 %35.6 %72. %37. %37. %48. %52. 0 5 . 99 -5 -7 -8 -7 -6 199 (Est.)9991 0.79,32 5.22,03 899.0,1 858.0,1 %02.2 %8.72 19fosht 0 0 0 4% 5% 5% 1% 7% 6% 2% 4% 1% 4% 7% 8% 1% 4% 2% 2% mon8 8 -41. 35. 3%.9 -63. -72. -50. -65. -65. -71. -24. -56. -32. -26. -99. -47. 9891 982.,1 668.,2 361.,9 04.94 21. 23. st 11, 199 0. fireht 5%. %9. of 9 199-3991 97 %14.3 %64. %91. -3 -1 %62.3 % % 209.9 176.9 %82.4 % %.50 %15. 329.8 -1 %01.4 % 346.4 %04.2 % 108.4 %43.3 srtop 97 19 0.09,71 0.09,82 85,19 3.295, 19 24 11 resu fig 19 mId 6 786.0 7.24 9. 55 %8. %3. 199 2,0 7,2 6.341, 10 18 11 actualeth Sector,yb 3%. 8%. 6991 55 -28 8%.631 7%. 7%. 0%. 0%. 2%. %7. 2%. 6%. 0%. % 53 -55 -20 11 -72 -4 -60 2%.701 6%.0 3%.5 anstropxE -10 -18 5 440.0 18.6 98.4 45.5 mofr 8.1 ed Totalni 199 1,4 5,4 8,1 %0.81 ementss 3 8 % % -7.7 %51. % % %40. %45. % % % % rtso 4 352.0 600.5 8.7 Imp 199 4,054. 5,825. %3.01 estimatsaw Disbur 95 -2 168.5 %19.4 %55.2 128.5 -1 -5 128.1 253.7 178.0 %76.1 %24.7 19 15.482 %36.2 FDI of andsrto resu 1 0 0.0 7%. %8. 4%. 0%. 0%. 7%. 7%. 9391 7.052 8.6% 0.0% 2,985. 3,924. fig9991 Rate thw 4991 6%.703 %8.771 6%.345 1%. 49 -19 -6 0%.221 0%.8 115 0%.641 4%.101 -9 48 -6 -95 91 ExpIDF of 0.0 7. 8. Gro are 9291 0.211 ualnnA 580,2 540,2 3%.4 %00. Sh Ex/Im % % % % % % % % % % % 4.5: 0. 8.6 7.1 52 .00 1. ble 3 227.9 %2.34 %16. -2 454.9 754.1 226.4 134.4 159.4 178.4 %28.1 %85. 641.7 -3 111.8 6:4.el 91 %.52 %00. Ta 199 19 87,02 1.83,32 trynuoC Tab tro for O no GS y FOB),m CIF),m Export mpI ($ alto m, ure restr ducatiE- ec port yrstu truct Fo & ytr ismru Office )m )m port($xE alotT/tro Im & on alth Export/T Ex/IIDFrfo Indy Gas/m rt Infras dustry &eru unication Finan I ($ ($ To ts Indust Indo & enm tatir He- rto mpIIDF spo mmo tioncutr po MPI re se &gn ltu heri LAT MP: Country Country FDIfo of Ex Imp ce: urce Heav Petroleu IP/EPZ Ligh Fo Agricult Hotel Services Apart Tran Telec Cons Cu Fis Banki TO So FDI FDI taloT taloT Share arehS Sour 94 69 9 8 490 % ed %6. %2. %9. % %7. %3. 199 3,6852 7.2 0.7% 38, mitt 10 14 13 8.9 4.1% 51 48 0.0%01 isbursed/ComD l pita Ca 2 d Million) 453 7 199 71,632 499, 3.9% 0.6% 36 9991/01/ 20,61 861,2 031,2 60,31 636 2397, 22,47 15, burse (USD Dis ment 14 ploy to88 mE 19/11/ total of %59.1 %34.1 %3.11 %1. 9.0% 9.0% 63 %96.3 %.00 Total in 9691 50,87 2 10 79, 22 35 9%.231 6%.0 romf Share ma etniV edt oyment la ins Million) 556 198 754 mmit Empl Capit 976,6 119,5 040,4 215,3 206,3 22, 13, 35, vestor Co (USD FDI of arehS 5991 8327,9 5894,3 .3%0 Inngei - For totalfo ectsj % 2%. %0. 8%. %3. 7%. 8.9 3.5% Five pro 19 11 10 53 46 0%.001 4.7: Top Share Table ntem of tsc )0 00'( t oyplme 4.8:elbaT 78 10 88 No. 248 535 307 300 97 1,4 1,3 2,7 Proje cerof men uro employ t/totalnemy y ndslaIsni lab FDI ment ed countries of plome Countr ong apore Virgh Total oylp rse em ployme rateh FDI of OSG: Sing Taiwan panaJ Hongk itisrB Sub Oth Total MPI are urce 1 2 3 4 5 urce: FDI Total Growt Sh So Rank So Table 4.9: Top Five Locations for FDI from 1/1/1988 to 14/10/1999 Rank Province Project Capital No. of Share Total Share Projects Committed Capital ($ m) 1 Ho Chi Minh City 769 27.6% 9,507 26.6% 2 Hanoi 329 11.8% 7,970 22.3% 3 Dong Nai 246 8.8% 4,409 12.3% 4 Binh Duong 234 8.4% 1,870 5.2% 5 Haiphong 83 3.0% 1,371 3.8% Sub total 1661 59.6% 25,126 70.3% Other provinces 1,127 40.4% 10,628 29.7% Country total 2,788 100.0% 35,754 100.0% Source: MPI Table 5.1: Number of Private Companies by Legal Status, 1993-1998 1993 1994 1995 * 1996 1997 1998 (est.) Private Companies 6,808 10,881 15,276 18,894 25,002 26,021 Year-on-year growth -- 59.8% 40.4% 23.7% 32.4% 4.1% "Private 5,182 7,794 10,916 12,464 17,500 18,750 Enterprises" Year-on-year -- 50.4% 40.1% 14.2% 40.4% 7.1% growth Limited Liability 1,607 2,968 4,242 6,303 7,350 7,100 Co. Year-on-year -- 84.7% 42.9% 48.6% 16.7% -3.4% growth Joint-Stock 19 119 118 127 152 171 Companies Year-on-year -- 526.3 -0.8% 7.6% 19.7% 12.5% growth % Source: General Statistical Office (1999); * Figures for 1995 are different from those from other years as the General Statistical Office used a somewhat different classification system that one year. Table 5.2: Location of Private Companies by Firm Size, 1998 (est.) Less than 100 to 299 300 to 499 500 or more Total 100 workers workers workers workers The North 4266 127 20 15 4428 The Center 2228 54 6 4 2292 The South 18905 251 63 82 19301 Totals 25399 432 89 101 26021 Source: General Statistical Office (1999) 97 Table 5.3: Location of Private Companies by Number and Size, 1997 and 1998 1997 1998 1997 Ave. 1998 Ave. Numbe Numbe `98/'97 Employees Employees `98/'97 r of r of growth Per Firm Per Firm growth Firms Firms Totals 25002 26021 4.1% 17 19 11.8% The North 4187 4428 5.8% 22 25 13.7% Hanoi 2040 2062 1.1% 19 21 1.1% Hai Phong 413 480 16.2% 26 44 71.1% Ha Tay 178 237 33.1% 32 24 -23.8% Thai Binh 163 180 10.4% 36 30 -16.5% Hai Duong 156 175 12.2% 20 31 57.6% Others 1237 1288 4.1% 22 23 1.9% The Center 2087 2292 9.8% 18 21 20.9% Khanh Hoa 416 468 12.5% 11 12 7.0% Danang 358 393 9.8% 19 20 3.2% Quang 212 230 8.5% 10 13 27.2% Nam Phu Yen 220 225 2.3% 10 10 1.8% Nghe An 154 204 32.5% 14 16 15.7% Others 727 772 6.2% 26 26 0.0% The South 18728 19301 3.1% 16 18 11.7% Ho Chi 6304 6279 -0.4% 24 25 6.0% Minh City Tien Giang 1027 1050 2.2% 10 12 20.6% Kien Giang 990 1039 4.9% 8 9 4.4% Ben Tre 912 912 0.0% 9 10 15.3% Dong Nai 733 780 6.4% 20 22 11.1% Others 8762 9241 5.5% 12 15 21.2% Source: General Statistical Office (1999) - (Both 1997 and 1998 figures are estimated). 98 hatt 97'/ wtho % % % % % %2. %5. ryog `98 gr 4.1 -6.5 9.7 0.0 7.3 12 34 8 12 35 0 2 5 9 199 (est.) 260 127 562 167 58 92 529 catellahctaca lat To 317 6 71 20 33 45 56 is 96'/ thwo * %3. % %2 -- -- %7. -- hertO ies. `97 gr 32 7.4 or -11. 36 ** eg ers 6; 7 9 2 2 9 cate rk wo 63, ov ) 998 199 00252 13 512 167 548 82 393 199ni est.( 13 3 78 94 93-191 6/'95 thwo abehtfo %7 %1 %2 1998 morero * -- -- `9 gr 23. 66. 15. %19. teelpmo -- inc Sector,c * . weres anyotnitif e,ziS 500 m ers 99 9961 8948,1 6962,1 5,767 a.n. a.n. 60 to rk N.A Firyb count, ers wo onomicE ur 14 1 57 72 % by 5/'94 %4. %3. %0. %1. %4. %0 fact `9 growth 40 96 14 45 73 15 -35 icststiatS emhtrofnio iesna of Manue 30 mp 95 19 Co 2765,1 3 3 645,7 006,5 294,1 29 55 98 iceffOl ra shafhguoner 499ot0 ivat ers Pr ateivrP htwo %8. %22. %2. %1. -- -- %2. eneGeht of cleaani ontia work992 58 72 214 299 `94/'93 gr 59 11 32 93 27 Loc 5.4: 4 18 Table 199 22 108 4983, 2934, 2 9 89 16 2151, tognid esitivi Accor* actreihtt 5.5:elbaT to001 001 s 93 08 2 por 19 68 835,1 322,3 er 2 5 )99 46 n.a. n.a. 189,1 );99 (19 reton an th rkow 826 5 30 422 515 (19 fficeO did Less al ies anp ticis athtsei fficeO al Comet gn tatSlar uri anpmoc ivarP e factu trops ** eneG htu eneG North So tal To Trad Man Construction Tran Mining Other urce: forstnuo So acc The retneCehT ticisattSlar The Totals urce: So 93 Table 5.6: Location of Private Manufacturers by Number and Size, 1997 and 1998 1997 1998 1997 Ave. 1998 Ave. Numbe Numbe `98/'9 Employee Employee `98/'97 r of r of 7 s Per s Per growth Firms Firms growt Firm Firm h Totals 5122 5620 9.7% 39 47 20.8% The North 657 713 8.5% 46 67 44.6% Hanoi 304 276 -9.2% 38 53.8 43.4% Hai Phong 67 91 35.8% 78 170 219.5 % Thai Binh 69 50 - 63 77 23.4% 27.5% Ha Tay 35 44 25.7% 96 78 -18.5% Hai Duong 6 40 566.7 6 60 872.6 % % Others 176 212 20.5% 35 37 4.8% The Center 218 336 54.1% 35 39 11.9% Danang 47 60 27.7% 51 54 7.3% Nghe An 0 50 -- 0 21 -- Khanh Hoa 25 47 88.0% 63 55 -13.9% Thua Thien-Hue 26 38 46.2% 16 16 -3.1% Quang Ngai 35 29 - 16 15 -2.6% 17.1% Others 85 112 31.8% 30 45 48.0% The South 4253 4571 7.5% 38 36 -4.5% Ho Chi Minh 842 700 - 100 131 30.6% City 16.9% Dong Thap 321 437 36.1% 12 13 7.3% Tien Giang 367 390 6.3% 10 15 54.0% Kien Giang 276 325 17.8% 8 9 17.2% Can Tho 286 292 2.1% 13 13 1.2% Dong Nai 283 290 2.5% 34 42 23.4% Binh Duong 285 283 -0.7% 95 130 37.5% Others 1593 1854 16.4% 17 24 41.1% Source: General Statistical Office (1999) - (Both 1997 and 1998 figures are estimated) Table 5.7: Private Manufacturers by Industry, 1995-1998 Code 1995 1996 `96/'95 1997 `97/'96 1998 `98/'9 growth growth (est.) 7 growt h Totals 5006 5064 1.2% 5122 1.1% 5620 9.7% Food & D15 2662 2692 1.1% 2843 5.6% 3105 9.2% Beverage Textiles D17 121 122 0.8% 103 -15.6% 104 1.0% Garments D18 190 192 1.1% 274 42.7% 220 - 19.7% 100 Leather D19 46 47 2.2% 74 57.4% 65 - 12.2% Wood D20 426 428 0.5% 470 9.8% 407 - 13.4% Paper D21 93 95 2.2% 113 18.9% 126 11.5% Chemicals D24 58 58 0.0% 125 115.5% 100 -20% Rubber & D25 94 95 1.1% 161 69.5% 149 -7.5% Plastic Non- D26 647 654 1.1% 687 5.0% 657 -4.4% metallic Others * 564 576 2.1% 108 -91.2% 544 403.7 % Source: General Statistical Office (1999) * Others is a catch all category that accounts for companies that did not report their activities in a clear enough fashion for them to fit into any of the above categories. Table 5.8: Private Manufacturers by Size Across Selected Industries, 1998 (est.) Less 100 to 299 300 to 499 500 or Total than 100 workers workers more workers workers Total Firms 5155 299 72 94 5620 Food & Beverage 3026 48 10 21 3105 Garments 88 85 24 23 220 Leather 14 13 7 31 65 Wood 371 25 5 6 407 Non-metallic 627 26 3 1 657 Others 1029 102 23 12 1166 Source: General Statistical Office (1999) 101