Developing the socialist oriented market economy in vietnam

To rapidly move from a non-market economy involving only public ownership that is, state sector and cooperatives to a market economy marked by multi-ownership, many economic components c

CENTRAL INSTITUTE FOR ECONOMIC MANAGEMENT

DEVELOPING THE SOCIALIST-ORIENTED MARKET ECONOMY

IN VIETNAM

(A REFERENCE BOOK) Edited by Dr Dinh Van An

CENTRAL INSTITUTE FOR _ ECONOMIC MANAGEMENT

THE STATISTICAL PUBLISHER HANOI 2003

THE AUTHORS:

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Chapter I : Vu Quoc Tuan & Nguyen Dinh Cung Chapter II : Le Xuan Ba

Chapter III: Dinh Van An

Chapter IV: Tran Quang Huy

Chapter V : Hoang Thu Hoa

Translator: Luu Doan Huynh

TABLE OF CONTENTS

PREFACE

CHAPTER I: DEVELOPING VARIOUS TYPES OF ENTERPRISES

CHAPTER III: INDUSTRIALIZATION, MODERNIZATION ON THE BASIS OF DEVELOPMENT OF THE ENDOGENOUS STRENGTH AND TAKING THE INITIATIVE IN ECONOMIC INTEGRATION

CHAPTER IV: HUNGER ERADICATION AND POVERTY ALLEVIATION SOCIAL EQUITY, AND COMPREHENSIVE DEVELOPMENT OF HUMAN BEINGS

CHAPTER V: ADMINISTRATIVE REFORMS

FINAL CONCLUSION

PREFACE

Vietnam's national renovation and development is regarded to have started in a comprehensive

now, it has taken place for 17 years

National renovation and development has been possible thanks to deep-going but partial preparations for many years: since 58 years ago following the Revolution of August 1945, during three decades of War of Resistance-cum-nation building, then during 10 years of national construction following the victory of the War of Resistance against US aggression, for national salvation, until the CPV Congress of 1986

Throughout that period, the country patiently endeavored to find a path and steps that are appropriate for itself, without copying and modelling on foreign countries, by combining the "fence breaking" initiatives of the people and grassroot level organizations with improvements in policy and leadership of responsible agencies of the CPV and Government The results have become increasingly clear, with initiatives assuming an ever greater value Starting with innovations within

an old framework, we thereafter did away with the old, and switched to the new

From the 1986 CPV Congress, renovation has not been confined to the economy alone, but has assumed a comprehensive character In 1996, reviewing the main lessons of

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DEVELOPMENT OF HUMAN BEINGS

CHAPTER V: ADMINISTRATIVE REFORMS

FINAL CONCLUSION

2_PREFACE

3Vietnam's national renovation and development is regarded to have started in a

Congress Until now, it has taken place for 17 years

National renovation and development has been possible thanks to deep-going but partial preparations for many years: since 58 years ago following the Revolution of August 1945, during three decades of War of Resistance-cum-nation building, then during 10 years of national construction following the victory of the War of Resistance against US aggression, for national salvation, until the CPV Congress of 1986

Throughout that period, the country patiently endeavoured to find a path and steps that are appropriate for itself, without copying and modelling on foreign countries, by combining the "fence breaking" initiatives of the people and grassroot level organizations with improvements in policy and leadership of responsible agencies of the CPV and Government The results have become increasingly clear, with initiatives assuming an ever greater value Starting with innovations within

an old framework, we thereafter did away with the old, and switched to the new

From the 1986 CPV Congress, renovation has not been confined to the economy alone, but has assumed a comprehensive character In 1996, reviewing the main lessons of

While Vietnam's renovation is valuable, this book will not deal with all aspects of it Instead, it will focus on socio-economic renovation and development, on the development of a market economy with socialist orientations

In these 17 years, renovation and socio-economic development in Vietnam have evolved both in the open light and in the dark, in clean air and in the dust of the multifaceted life of the country and its realities, as also in the context of the kaleidoscope of world events The thinking, the policies and realities of renovation have developed in accordance with a pattern combining a continuous flow of initiatives from the bottom up - that is, from the people, from the enterprises - and top-down directives - that is, policies and solutions worked out by leading organizations of the CPV and Government on the basis of reviews and studies of the initiatives of the people and grassroot levels

- and combining an active but gradual and cautious approach, with vigorous actions and breakthroughs in specific fields and specific times

After more than one decade of self-questioning, toss and turn, experimentations in the country coupled with observation of the world situation, we have gradually clarified our own concepts, our acts and the corresponding vocabulary, at the IXth CPV Congress (2001), we concluded that a market economy with socialist orientations Was the general model for Vietnam during the whole period of transition to socialism, a long-term strategy of the CPV and the country

The market economy with socialist orientations creates the environment and conditions for promoting industrialization,

modernization which are the former' s general and practical tasks These are the two faces of the same socio-economic cause, the objectives of which are a rich nation, a prosperous country, an equitable, democratic and civilized society

More specifically, socio-economic renovation and development comprises five closely connected components, which have been identified ever more clearly, and have been gradually and successfully implemented, from the Vllth to the VIlIth and particularly the IX Congress These are:

1 To rapidly move from a non-market economy involving only public ownership (that is, state sector and cooperatives) to a market economy marked by multi-ownership, many economic components coexisting for a long time with socialist orientations The main economic actors do not only comprise state-owned enterprises and cooperatives, but also a big number of private enterprises and enterprises with foreign invested capital

2 To create the conditions for and to bring about the birth and development of the markets of factors

of production in an open and official manner, thus causing the underground market to surface, and

to become transparent and healthy To move from command planning and subsidy-based centralized bureaucratic management to the system of market economy with socialist orientations, with the State assuming the new role of initiating, facilitating, guiding and regulating the economy in

an appropriate manner, mainly by economic means, while bringing into full play various forces of the market and overcoming its weaknesses

3 To give up the policies and methods of old-type industrialization dating from the early part of the XXth century and the wrong concept of socialist industrialization, and move to new policies and methods of industrialization, modernization, in keeping with the trends of the time and the conditions of Vietnam, with industrialization, modernization not being divided into two different stages of development but being linked with each other in a unified process This process simultaneously brings into full play the endogenous strength, endeavours to secure

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external resources, and applies the advances made by mankind in the concluding part of the XXth Century and the early part of the XXlst Century in economic and social sciences, in sciences and technology, organization and management To move from economic relations confined to the Council of Economic Mutual Assistance during the cold war to an open economy, which takes the initiative in getting itself integrated into the world economy at the bilateral, regional and global level, while preserving national independence and sovereignty, national interest and identity

4 Right from the beginning and in each step of development, to combine economic growth with social advance and social equity, to bring into full play the interaction and mutual impact between economic growth and social development, with great importance given to the development of human resources, of human beings, and the building of a new culture and a new society

5 To reform the State and the political system, with the central task being an administrative reform of the institutional system, the organization of the machinery and contingent of state employees, which should be in keeping and in step with economic reforms, should serve economic reforms and promote it

In this book, these five components will be the subjects of five chapters Each chapter will discuss about one of the five components, reviewing the achievements, analyzing the weaknesses and shortcomings, highlighting the problems that must be addressed, and making suggestions or recommendations on how to continue renovation in the years to come

The recent 17 years of renovation and socio-economic development are no smoothsailing process with steady advance in every field and at all times On the contrary, it involved hardships, ups and downs, setbacks, certain smooth and easy steps of advance but also other steps of advance which met with overwhelming difficulties, with at times increased confidence alternating with apprehension, anxiousness, hesitation and indecision All these features and nuances were often present in

the thinking, policies and practical actions, in each organization and in each human being

Sometimes, policies on continued renovation were ripe to the point of becoming dictates of life, yet they were slow in coming In general, the gap between decisions and implementation was still too large, taking sometimes many years to span Another evil which is due to many reasons is the wrong implementation of the law which often borders on distortion of the law

Yet, in spite of various bends and zigzags, in terms of the general nature, the general results, the general trend and the general orientations, the last 17 years deserve to be called as "17 years of renovation and socio-economic development of Vietnam"

This spirit pervades each Chapter and the whole book

We are sincerely grateful to the Danish International

Development Agency (DANIDA) which, within the framework of the Project on "Enhancing the Capacity of Economic Research and Analysis", has provided financial assistance in the compilation and publication of this book All the authors wish to thank Senior Consultant Tran Duc Nguyen, Professor Dao Xuan Sam and other colleagues of the Central Institute for Economic Management (ClEM), the Research Commission of the Prime Minister for their valuable views which have helped us to correct and enhance the contents of the book Having chosen a most important subject, we have had to write it within a short period of time for the purpose of timely publication Therefore, the book must contain many weaknesses and shortcomings We look forward to remarks and suggestions from our colleagues and readers

Hanoi, November 2003 On behalf of the authors,

Dr Dinh Van An

67

external resources, and applies the advances made by mankind in the concluding part of the XXth Century and the early part of the XXlst Century in economic and social sciences, in sciences and technology, organization and management To move from economic relations confined to the Council of Economic Mutual Assistance during the cold war to an open economy, which takes the initiative in getting itself integrated into the world economy at the bilateral, regional and global level, while preserving national independence and sovereignty, national interest and identity

4 Right from the beginning and in each step of development, to combine economic growth with social advance and social equity, to bring into full play the interaction and mutual impact between economic growth and social development, with great importance given to the development of human resources, of human beings, and the building of a new culture and a new society

5 To reform the State and the political system, with the central task being an administrative reform of the institutional system, the organization of the machinery and contingent of state employees, which should be in keeping and in step with economic reforms, should serve economic reforms and promote it

In this book, these five components will be the subjects of five chapters Each chapter will discuss about one of the five components, reviewing the achievements, analyzing the weaknesses and shortcomings, highlighting the problems that must be addressed, and making suggestions or recommendations on how to continue renovation in the years to come

The recent 17 years of renovation and socio-economic development are no smoothsailing process with steady advance in every field and at all times On the contrary, it involved hardships, ups and downs, setbacks, certain smooth and easy steps of advance but also other steps of advance which met with overwhelming difficulties, with at times increased confidence alternating with apprehension, anxiousness, hesitation and indecision All these features and nuances were often present in

the thinking, policies and practical actions, in each organization and in each human being

Sometimes, policies on continued renovation were ripe to the point of becoming dictates of life, yet they were slow in coming In general, the gap between decisions and implementation was still too large, taking sometimes many years to span Another evil which is due to many reasons is the wrong implementation of the law which often borders on distortion of the law

Yet, in spite of various bends and zigzags, in terms of the general nature, the general results, the general trend and the general orientations, the last 17 years deserve to be called as "17 years of renovation and socio-economic development of Vietnam"

This spirit pervades each Chapter and the whole book

We are sincerely grateful to the Danish International

Development Agency (DANIDA) which, within the framework of the Project on "Enhancing the Capacity of Economic Research and Analysis", has provided financial assistance in the compilation and publication of this book All the authors wish to thank Senior Consultant Tran Duc Nguyen, Professor Dao Xuan Sam and other colleagues of the Central Institute for Economic Management (ClEM), the Research Commission of the Prime Minister for their valuable views which have helped us to correct and enhance the contents of the book

Having chosen a most important subject, we have had to write it within a short period of time for the purpose of timely publication Therefore, the book must contain many weaknesses and shortcomings We look forward to remarks and suggestions from our colleagues and readers

Hanoi, November 2003 On behalf of the authors,

Dr Dinh Van An

67

multi-Over the past years, the Constitution has institutionalized the development of the multisectoral economy, with concomitant recognition and protection of the multiownership system, including the private property In addition to this, the CPV and Government have gradually worked out and improved rules and regulations with respect to the enterprises from various economic components

This chapter focuses on four types of enterprises: state-owned enterprises, private enterprises, cooperatives, and enterprises with foreign invested capital On the basis of the production and business activities of these enterprises, the Chapter will put forth a number of solutions and measures, as a contribution to the study and search for economic institutions which are in keeping with the characteristics of Vietnam and world economic integration, and for helping to enhance the efficiency and competitiveness of the enterprises

Of all changes related to the shift from the subsidy-based bureaucratic centralized economic planning system to the market economy, reforming state-owned enterprises (SOEs) is a most complex issue, involving numerous difficulties These difficulties and complexities are not only caused by viewpoints and policies, but only by professional and technical issues

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1 So far, SOEs occupy an important position in Vietnam's economy: in 2000, SOEs accounted for 39,5%

of total industrial output value, over 50% of exports turnover, 39,2% of total state budget revenues (State budget subsidies to SOEs in various forms will be dealt with later)

In the past, the Government provided assistance to SOEs in many ways: tax exemption, tax reduction, easy loans, loans without collaterals, debts freezing, debs rescheduling, turning debts into state budget allocations, allowing the indebted SOEs to export in order to repay their debts, allowing them to win bids and allowing them to act as contractors of many state investment protests, allowing them to deduct amortization for the purpose of re-investments etc Yet, SOEs remain seriously unviable, due to poor competitiveness; poor quality of the goods and their high production cost, many goods produced by them are more expensive than similar imported goods(iron and steel, fertilizers, cement, sugar ); big debts, with increasing overdue debts and bad debts (SOEs account for 74,8% of the overdue debts to state commercial banks); too small size; backward technology etc Some SOEs, which had been continually incurring losses without any hope

of salvation improvement, should have been declared bankrupt, yet they were allowed to continue their existence with continued losses each year

In view of this, reforming the SOEs became a most urgent task,

and this urgency had been felt ever more deeply in the context of integration into the regional and world economy As many SOEs supply main goods and services as inputs for other enterprises, these goods and services of poor quality and high cost, if not urgently remedied, would make it very difficult to reduce the prices of inputs, and enhance the competitiveness of the enterprises in the whole country

As required by the reforms, the SOEs must be restructured in order to have a rational structure, must focus on key branches and

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fields and important areas; their ownership must be diversified, moving from a single ownership system - state ownership - to a multiownership system, including private ownership; the aim of the reforms is, among other things, to make efficient use of the work force and the material and technical basis of the SOEs and to develop their production and business capacity

In accordance with the resolution of the 3rd CC Plenum of the CPV (September 2001) on SOEs, by 2005

we will have basically completed the reorganization and restructuring of state enterprises (about 5.175 SOEs

by the end of 2002) with the following measures: equitization; turning a number of SOEs or enterprises associated with political, socio-political organizations into limited liability companies with sole proprietorship; some SOEs will be transferred, sold, contracted or leased Yet, in accordance with the approved itinerary, by

2005 there would still remain about 2.934 SOEs including 1929 SOEs wherein the State has 100% of capital,

a number of equitized enterprises wherein the State hold "golden shares" or a decisive proportion of shares, SOEs merged with other SOEs, and SOEs that are contracted In view of this, should we say that there still remain too many SOEs, and the SOEs reforms are not in keeping with the requirements?

2 Over recent years, the reforms of SOEs has been slow, has come up against my difficulties and

hindrances, with many ups and downs Following is an account of what has happened:

In order to enhance the efficiency of the existing SOEs, while increasing the number of SOEs wherein the State holds 100% of capital or holds a decisive proportion of shares that would operate in key fields and important regions, many efforts and experiments have been made to find an efficient formula relating to the contents, methods of organization, management and regulation of SOEs One of these formulas is the establishment of State Corporations 90 and 91 Yet, SOEs cannot be really held accountable for their production and business activities as the

powers and responsibility of the directors general, director and their relations with the management' board are not clearly specified; there still are many constraints imposed by line organizations (ministries, state corporations, local authorities) mainly with respect to the investment plan, disposition of personnel; the mechanism on managing state capital in SOEs has not been clearly specified etc The SOEs are being managed by too many line organizations, a fact which leads to lack of unified views and causes great difficulties to the enterprises It is hoped that the amendments to the Law on State Enterprises will help work out a solution to the above hindrances

A matter of concern is that following reorganization, in 2003 the business efficiency of state corporations 91 declined as compared with 2002: 1 VND of the owner produced 2,14 VND in turnover, 1 VND of business capital produced only 1,61 VND in turnover (corresponding figures of 2002: 2,32 and 1,72 VND) The pre-tax interest rate on business capital was estimated at 11,44%

and the pre-tax interest rate on capital of the owner is estimated at 15,21%, that is, down respectively by 2,34% and 3,42% as compared with 2002 The reported interest rate on state

business efficiency of state corporations have become matter of deep concern

There has been no active implementation of the policy of establishing a number of strong economic groups based on the state corporations and having the participation of other economic components; further, there is a tendency to establish them by administrative measures; many long-standing SOEs with a relatively big size are not able to do business outside the national borders (except for oil and gas and a few other enterprises)

Many state corporations rapidly welcomed the policy of experimenting the model of Parent Company and subsidiaries (or affiliated company) and applied for the implementation thereof (at

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first, it was decided to conduct experiments in 10 units, yet subsequently the number increased to 36) The main reason was that thanks to the new model, the state corporation (Parent company) would receive an additional amount of capital and would continue to dominate the subsidiaries in many respects, and therefore there was little change in the situation of the subsidiaries as compared with the past

Turning SOEs associated with political organizations and sociopolitical organizations into limited liability companies subject to the Law on Enterprises has yielded little result because these SOEs still enjoyed many preferential policies and there is no clear legal framework as yet for their transition and change

the question of redundant labour, to reduce subsidies and compensations by the Government Yet,

by 2000, only 130 SOEs adopted the above solution According to the 2002-2005 itinerary, only 209 SOEs would do the same, that is, accounting for 2,9% of the total of state enterprises Many rigid regulations made this solution difficult to achieve

State-owned public utility enterprises: Do to poor grasp of the criteria about public utility goods, services and enterprises, the authorities concerned produced an excessively long list of 30 groups

of such goods and services As a result, the number of public utility enterprises, which enjoyed

total of SOEs The list included enterprises such as publishing houses, television which were not public utility enterprises There was no clear distinction between supplying public utility goods and services and classifying enterprises as engaged in public utility services Further, it was easy under existing regulations to establish new public utility enterprises or to include the SOEs and administrative agencies into the list of such enterprises As state-owned public utility enterprises enjoy more subsidies than the other state enterprises (financial preferences; no worry about outlets for their goods and services), many SOEs try to be classified as public utility enterprises in order to gain such preferences Further, the law has not yet provided for other economic components to engage in public utility business and there is no arrangement as yet about bidding public utility activities, and therefore the present public utility enterprises do not have real incentives to enhance

the quality of their goods and services, to reduce the production cost and the prices of goods and services, and to create favourable conditions for the customers Therefore, a reasonable alternative

is to refrain from giving SOEs the monopoly in public utility services, and regulations must be worked out to allow enterprises from other

Equitisation: The policy on equitisation was implemented in 1992 on a trial basis and was further expanded in 1998 Yet, by 2002, only 828 SOEs and parts there of were equitised, accounting for 3% of the total capital of SOEs In 2001, the number of equitised enterprises reached 250, up by two times as compared with 2000, but by 2002 only 150 could be equitised The loss of momentum was due to a body of opinion opposing equitisation in many provinces and, as a result, the authorities concerned were reluctant to promote equitisation lest they would be criticized as deviating from socialism Added to this was a number of other objective and subjective reasons

In accordance with the approved itinerary relating to 104 plans (October 2003), by 2005, equitised enterprises would rise to 2.043, accounting for 44% of SOEs but only 18% of state capital This means that equitised SOEs have a too small amount of capital But equitised SOE enterprises wherein the Government holds a decisive proportion of shares would still number 1.038

The transfer, sale, contracting out and lease of SOEs was designed to diversify the ownership of SOEs, strengthen their motive force and solve difficulties faced by small - size SOEs and help them

to avoid disbandment and/or bankruptcy, to overcome

to request to declare an enterprises bankrupt: the director, the creditor and the labourers; one more party should have been added: the agency that took the decision to allow the enterprise to be set

up But that agency has also an interest in not causing the enterprise in question to be declared bankrupt Further, the procedural work on bankruptcy is too complicated, too onerous Things drag

on also because it is difficult to identify the debts and assess the assets If an enterprise wishes to declare itself bankrupt, it must hire auditors, something it is not willing or/and able to do because it

is heavily indebted And as the superior authorities are reluctant to use budget allocations for that purpose, the enterprise must go on living The Law on Bankruptcy should have been amended, but

so far nothing has been done in this regard It has been forecast that by 2005 about 139 SOEs would be declared bankrupt, accounting for 3% of the total of SOEs That is a too small figure which does not reflect correctly thE3 weaknesses of SOEs and their losses and indebtedness

3 Foot-dragging in the reorganization of SOEs is also due to failure to have a -good grasp of the

following:

There is confusion about the necessity of SOEs No one can deny the role and position of SOEs

in the national economy

SOEs are most necessary in key branches of fundamental importance which require big amounts of capital that the private sector cannot provide and such investments take a long time to be recouped, and give little profit These key branches are mainly associated with infrastrucure (roads, ports, railways, air transports etc ) Developed economies used to gradually privatize a part of these key branches The Government has made many efforts so that genuinely necessary business state enterprises and public utility enterprises could become viable in terms of efficiency and competitiveness But in general, many SOEs still remain too weak, cannot really take the leading role in applying science, techniques and technology, set an example in productivity, quality, socio-economic efficiency and abidance by the law

There is still in Vietnam viewpoints which advocate the maintenance of SOEs in all branches of the economy for the purpose of ensuring the leading role of the state sector, and to guarantee the socialist orientations It is true SOEs were the gains of a period of economic development we may take pride in, the results of strenuous efforts of the whole nation and the assistance from fraternal countries, but we should realize that continued retention of inefficient State-owned enterprises would mean continued subsidies for compensating their losses, and this would negatively affect the whole economy

Further, some people want to maintain SOEs at any cost, to provide subsidies to those SOEs that are incurring losses, to save them at any cost, "not to bury them even if they are dead"; they oppose measures designed to diversify the ownership of these enterprises or try to delay such a process To this end, they try to bolster their position with the following proposals: an equitised enterprise in which the State still holds 51 % of shares would remain a SOE; in the case of a SOE, which is still operating and making profits with a capital of 5 billion VND and more, as and when it sells its shares for the first time the State must hold at least 51 % of the shares; a SOE which is the subsidiary of a state corporation would remain so even after equitisation This means that these enterprisps must operate in accordance with two Laws: the Law on State-owned Enterprises, and the Law on Enterprises Some are of the view that the weaknesses of SOEs are due to failure by the present economic system to create conditions for them to be autonomous in their production and business activities To some extent, this

is true But giving autonomy SOEs means that they must be exposed to the market, must compete in full equality with private enterprises by enhancing the quality of their products and improving their business efficiency, which means they must be turned into genuine business companies which are subject to laws and regulations being applied to private enterprises But that is something that is not acceptable to persons who still hold on to old ideas

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What is more serious, some hold that it is necessary to maintain SOEs in all branches of the economy because to do otherwise would mean to allow private enterprises to become prominent, while the State cannot playa leading in the economy, as it has no tool that is strong enough for

regulating the economy, and the country would not be able to build an independent economy, and

to promote industrialization, modernization, and in fact would deviate from socialist orientations It is important to realize that the leading economic role of the state does not depend solely on SOEs but

on all the branches and fields that pertain to the state economic sector Further, the leading role of the state economic sector is inseparable from the political system As we have a strong political system, all economic components are tools of the state If the state economic sector controls branches that are of decisive importance to the economy and if the private sector has a big ratio, that would be mean that the country can successfully bring into full play all potentials of the private sector and mobilize all the strength of the nation for the economic front

It should be the policy of the state to encourage the private entrepreneurs to invest even in distant and secluded areas, in areas where live minority ethnic groups, which are marked by difficult communications and high transports costs

Another important cause of the slow space of SOEs reforms is the continued preference policies given to them by the Government, such as: they can contract loans without submitting collaterals (as and when they incurr losses, they are saved thanks to debts freezing, debts reduction, debts rescheduling and other measures); they do not have to rent land, instead land is allocated to them; they are entrusted with the execution of major State projects which promise big profits etc In four years, from 1997 to 2000, the State budget invested nearly 8.200 billion VND in SOEs with the following break-down: 2.216 billion VND for supplementing the working capital, 1.464 billion VND for compensating their losses and reducing their financial difficulties, 1.351 billion VND for tax exemption and reduction, 1.088 billion VND for debts cancellation, 3.392 billion VND for debts freezing, 540 billion VND for debts scheduling; and 200 billion VND for deduction of assets depreciation At present, many billion of VND are being pumped into SOEs so that they would have enough funds by the end of the 2001-2005 period The question is: if the unviable SOEs continue to operate and are not subject to change in ownership, how long can we go on financing them? In fact,

no SOE would refuse such favours; and when the funds available are limited, the question of some SOEs begging and bribing for additional funds inevitably arises, with the result that those who are empowered authorized to provide such grants have a vested interest in the continuance of such

"request and grant" practice for the sake of illicit gains for their agencies and for themselves

As a result, very few are eager to reorganize the SOEs: the line ministries and the line local authorities want to maintain SOEs in their branches or localities, and consider them as their

"backyards"; the directors of SOEs do not want to lose their powers and privileges; the labourers do not know about the future of their enterprises because the same faces continue to remain in leading positions in the enterprises; the banks are afraid of losing their capital etc

At the very time when efforts were made to reform the existing SOEs, new SOEs were set up, which were irrational acts, that were not in keeping with CPV and government policy According to preliminary statistics, from 1998 to 2001, 290 SOEs were established with capital granted by the State amounting to 6.123 billion VND, with SOEs under various ministries and state corporations accounting for 43,8% of the above total and those under local authorities accounting for 56,2% of the same, with SOEs having each a capital amounting to less than 5 billion VND accounting for 52% of the above total, SOEs having each a capital of less than 1 billion VND accounting for 10,8%

of the same, and some even have each only a capital of 300-400 million VND One can SOE that the new SOEs do not have the required conditions in capital, management staff, technology and many of them do not pertain to important and essential branches where the State should hold 100%

of capital Many of these newly set up SOEs are engaged in tourism (tourist enterprises accounted for 15% of the new SOEs), hotel, entertainments, markets, construction materials and these are fields that should be best left to the private sector

The SOEs set up over recent years also included a series of cement, sugar refining and hollow bricks factories which, soon after they went into business, showed serious weaknesses and inefficiency, which are not remedied until now

Another way of evading SOE reforms is to transfer a number of locally-managed $OEs to the state corporations Many of these newly transferred SOEs are of small size, have incurred losses

on a continual basis and should have been declared bankrupt or subject to change in ownership It was argued, however, that in spite of their financial difficulties, these enterprises have advantages

in geographical location and land usage rights The state corporations gladly accepted them as this met the wishes of the local authorities concerned on the retention of the enterprises in question, and also satisfied the corporations' own desire for agrandizement in size, which would make them eligible to additional grants of capital This burden "passing off' was accepted by the state corporations which knew that they would not be held accountable for the inevitable lack of efficiency

of their new subsidiaries, and that the losses would be borne by the state budget

Thus, it can be affirmed that foot-dragging in SOE reforms is due to the constraints imposed by

obsolete views, by less than thorough understanding of the market economy with socialist orientations, resulting in the desire to maintain as many SOEs as possible in spite of their undeniable poor business efficiency Unless the constraints of these obsolete and dogmatic views

are done away with, the SOE reform cannot proceed favourably

4 The constraints of obsolete and dogmatic views gave rise to great confusion over a number of specific issues that arose in the process of diversification of ownership, which until now still defies solutions

One, to assess the value of the enterprise So far, pricing has been done in accordance with

administrative methods, involving the setting up of a council comprising many responsible officials but few professional experts As a result, the council is inevitably in confusion particularly concerning the application of two different methods of pricing with respect to enterprises engaged in production and business, and enterprises engaged in services, consultancy, tourism Therefore, pricing of enterprises usually drags on for a long time, even several years Even in the equitisation

of small enterprises such as a hotel pricing took two years to be completed because of the necessity of making sure that the State would retain 51 % of the capital The assessment of the value of the enterprise becomes even much more complicated in case the SOE in question has such business advantages as land, premises and housing located in places of special value or products which have a certain prestige in the market or a valuable trade mark There is no agreement as yet among responsible officials about incorporating the land usage right in the value

of the enterprises, and the matter is still under experimentation In recent years, the market method, that is, directly comparing two enterprises, has been experimented with good success, but regrettably this method has not been applied on a widespread basis

A contentious issue in the assessment of the value of the enterprises, which for many years has not been solved adequately: the machinery and equipment which the enterprise has bought over the years by using production development funds or bank loans has been referred to as "self-acquired" capital The depreciation period of some of these machines has ended Yet, the agency in charge of pricing the enterprise still regards them as state assets, while the labourers insist that they were the fruit of their labor, of the bonuses and rewards that were not used up, of their capital

accumulation for the sake of production This contentious issue is one of the reasons behind the apathy of workers toward equitisation as they find that their legitimate interest is not guaranteed But the agency in charge of assessing the value of enterprise argues that the fact of being a SOE has given to the enterprise the possibility to borrow from the banks or accumulating capital, and therefore these assets originate in the State

Shares pertaining to state capital can only be sold to officials and workers of the SOE concerned, or only a small number of shares could be sold to outsiders This has restricted the possibility to attract capital from the society at large This situation can be compared with the practice of marriage within the same family clan, and in this way equitised enterprises would have little possibility for rapid and sustainable development

Two, sanitization of the financial situation of SOEs Most stateowned enterprises have an

unhealthy financial situation, with various kinds of debts and bad debts going on from one year to the next, without attempts to clarify things, to ensure transparency, let alone solving them adequately In each SOE, the Directors who succeeded one another, did not SOE to it that statistical data and accounting books are well kept and put in order, and this has made the task of analyzing the situation ever more difficult; furthermore, the Directors are afraid lest their poor business records and their accumulated debts should be detected and exposed, with resulting accusations against themselves In many cases, the superior institutions also have the same mentality: they do not have enough courage to lay bare their own mistakes or those of their predecessors in poorly managing the SOEs under their jurisdiction On the other hand, the bank and financial agencies require documents relating to specific debts and purchases in previous years, which the SOEs cannot provide, and therefore things continue to drag on Even if certain issues could be made clear, it is impossible to solve them because in many cases both creditors and debtors have vanished In such circumstances, it would have been appropriate to use State budget allocations to repay the debts to the banks, as a necessary "tuition fee" for the period of infancy in economic management Due to the lack of such determination, the officials concerned tend to shift the old debts to persons/agencies that take over the enterprise in question, and this has added to the existing difficulties In fact, following equitisation, many enterprises could not solve adequately their old financial problems

Three, redundant labour Reforming SOEs involves changes in products, changes in the

organization of production, redeployment of the labour force, and as a result, redundant labour is inevitable Many labourers, including members of the management staff and workers directly engaged in production, are no longer suitable to the new requirements in production and business According to the Ministry of Labour, War Invalids and Social Affairs, redundant labour is estimated

at 250.000 persons and about 5.900 billion VND would be required for solving this issue (moving them to other jobs or into retirement) Obviously, it is not warranted to leave the redundant labourers to their fate in the process of changing the ownership of enterprises It is necessary to classify the existing labourers, and work out specific policies toward specific groups The State must assume the task of re-training the workers that are able to work (either in the existing enterprise or

in other places), while applying a policy of providing relief to those who must be shifted to other jobs

or should go into early retirement Assistance, on a priority basis, must be given to persons who start their own business In the recent past, due to the absence of a clear-cut policy, and reluctance

to use budget allocations, the question of redundant labour has been left unsettled for a long time Further, some officials compell the agency/person that take over the enterprises in question to accept all the workers thereof, a wrong policy which ignores the fact that the State has the

responsibility to provide jobs to labourers, and therefore using budget allocations to deal with redundant labour is appropriate, as tuition fees we have to pay for the massive establishment of SOEs in the past

Fourth, enterprise management mechanism following equitisation Because of the lingering

desire to preserve the status of SOEs, no clear-cut decision has been taken to allow the equitised state enterprises to operate in accordance with the Law on Enterprises As mentioned above, if the state still holds 51 % of the share in an equitised state enterprises, the enterprise in question is still considered as a state-owned enterprise The same applies to an equitised subsidiary of a state corporation This means that the equitised enterprise must operate in accordance with two Laws,

been achieved The newly equitised enterprise will take advantage of provisions in each Law that are beneficial to it, and naturally would not let go the favourable treatment enjoyed by a SOE

On the other hand, in accordance with present regulations, the newly equitised enterprise is subject to certain discriminations, for example, in contracting bank loans, in debts freezing and rescheduling, in tax exemption and reduction, in land allocation, in exit and entry procedure etc In the past, as a SOE, it was given assistance by the line organization (Ministry, local authorities) in solving various difficulties, but now it is left to its own fate when it is subject to harassment and pressure by regulatory agencies Thus, the present situation of the newly equitised enterprises constitute a discentive to many SOEs that are in the process of being reformed The most urgent issue now is to overcome discrimination against the private sector, both in terms of psychology and policies, and to create an equality-based playground for all economic components

5 Conclusion

Reforming the state-owned enterprises (SOEs) is an inevitable requirement for Vietnam's economy as it switches to the market economy with socialist orientations The SOEs are less business efficient and less competitive, but they have big assets and hold the monopoly in many branches of the economy and produce inputs for many other enterprises Therefore, the lack of a breakthrough in SOEs reforms would impede both the development of the potentials of SOEs and the development of the whole economy

Facts show that it is impossible to release and develop the forces of production if we retain two institutional systems, that is, two different play-grounds, one for state-owned enterprises, and one for private enterprises; retaining these two different playingfields would impede the development of the private sector and would continue to maintain the monopoly of state-owned enterprises In the present-day conditions of regional and global economic integration, there is no alternative to the abolition of subsidies, and to the participation of SOEs in healthy competition in the market; if the retention of two playing-fields continues, the SOEs will remain business inefficient, and are prone to collapse when Vietnam must implement international commitments Therefore, it is necessary to amend the Law on SOEs along the line of causing SOEs to operate in accordance with the Law on Enterprises, while the Government will only make readjustments concerning the establishment of new SOEs and the relationship between the state as owner of SOEs and its representative in each SOE

The prerequisite for preventing breakdowns in the reforms of SOEs and for ensuring their success

is a change in thinking which should involve the recognition of the necessary role of all economic components, including the private sector, in the market economy with socialist orientations SOEs are necessary in a number of key branches and fields, and are of basic importance SOEs engaged

in various branches of business must enhance their competitiveness, must take part in

equality-based competition with other economic components An end must soon be put to the misuse of State monopoly for promoting the monopoly of state enterprises, which impedes the process of reducing input expenditures for various economic components

To this end, it is essential to basically reorganize the machinery that is assisting the Government, various ministries and local authorities in directing the reforms of SOEs from the top down to the grassroot level, so that the staff thereof would comprise dedicated and c.apable officials that can handle their work successfully

This change in thinking was the result of a series of

experimental changes by "non-state factors" which testified to the usefulness and necessity of the market mechanism, of initiatives that are entirely not in keeping with the old thinking, the traditional policies and ideological system: "contract 100" in agriculture, "the three-part plan" of industrial state enterprises, "fence breaking", "outside leg longer than inside leg", "private traders are more dynamic and more efficient than state trading organizations" The change in thinking was still quite limited as reflected in such statements as the following: the non-socialist economy remains the object of transformation, but the period of transformation is long and involves economic and educational methods rather than compulsion

The second breakthrough took place in 1990-1991 with the enactment of the Law on Companies and the Law on Private Enterprises (1990) and the 10-year Socio-economic Development Strategy (1991-2000) These two laws laid the first legal foundations for the emergence and development of formal, modern and legal types of private enterprises such as the limited liability company, the joint stock company, and the private enterprises In addition, the individual business households received a clearer definition concerning their legal standing and methods of organization and operation

With regard to freedom and equality in business, the Vllth CPV Congress (June 1991) pointed out: "All persons are free to engage in business activities in accordance with the law, and their property rights and legitimate income are protected" "All economic units, irrespective of their ownership relationship are operating in business autonomy, are cooperating and competing with one another in equality before the law" "The private capitalist economy is developing without hindrance in terms of size and location, in branches and trades which are not prohibited by the law"

"The State consistently enforces the policy on a multisectoral economy, free from discrimination, free from misappropriation of legitimate property, free from compulsion on cooperativisation of means of production, free from imposition of various forms of business, encouraging activities that are beneficial to national welfare and people's livelihood"

The above turning point is a part of the quite comprehensive reforms involving shock-therapy measures implemented during the 1988-1992 period These were reforms that took place in the context of a deep socio-economic crisis: the Government coulGl no longer continue to provide

subsidies, it was no longer possible to maintain a two-tier price system and to continue the system

of administrative distribution of essential goods to state officials and employees, and all traditional measures designed to cope with the socio-economic crisis had failed etc As assessed by the Vllth CPV Congress, "from 1988, renovation policies started to bring about obvious results " and gradually took the country out of the socio-economic crisis; the economy had spectacular growth rates and the living conditions of the people distinctly improved; the economy started to have internal savings, and was less passively dependent on th_ outside Meanwhile, the USSR and East European Socialist countries failed in their reforms, collapsed and were sinking deep in a comprehensive depression Some optimists thought that Vietnam could become a new "dragon" in Asia

Yet, thereafter, the motive force for the development of the private sector SOEmed to slacken The SOE reforms came to a standstill Equitisation which started in 1992 was almost forgotten; while efforts focussed

on the establishment of hundreds of state corporations which created an administrative-type monopoly, protecting sectarian interests, and impeding competition

From 1992, policies and laws made almost no mention of the development of the private sector, except for the 1994 Law on encouraging domestic investments1 During this period, almost no attention was given to the question of development of the private sector by dismantling barriers, solving difficulties, creating favourable conditions for it to have access to the market, providing it with business floor space, credits and training for its labour etc On the contrary, legal documents, and in particular decrees, circulars and decisions of various Ministries during this period, enforced various types of certificates (most of the certificates which later on were abolished had dated from this period) The widespread pattern of state enterprises begging for additional capital - the so-called "request and grant practice" - was also a salient feature of this period

The regional economic crisis suddenly erupted in the middle of 1997, leading to a serious downturn in various countries of the region and considerable negative impact on Vietnam's economy: strongly declining economic growth rate in 1998 and 1999, declining foreign investments with no indications of future recovery, danger of non-fulfilment of socio-economic targets as laid down by the Vilith CPV Congress As a result, the demand for further and stronger reforms, including the reforms and development of the Private sector, became an item in the agenda of the CPV and Government Its rights to engage in exports and imports business were expanded by

directly conduct exports and imports were basically abolished Resolution No.38/CP dated May 4, 1994 of the Government on "reforming administrative procedure concerning the settlement of requests of citizens and organizations" regarded "the establishment and registration of enterprises" as a priority subject of reforms By

1998, a number of simple reforms on simplification of procedural work concerning the establishment and registration were implemented2 Thus, private enterprises, whose rich potentials had not been tapped, were given additional encouragement

The third milestone of change began to take shape First, the Resolution of the 4th CC Plenum (Vlllth Congress) laid down the policy of giving full play and using efficiently the domestic resources, dismantling the difficulties facing the private sector and creating favourable conditions for its development Thereafter, the 6th

CC Plenum (first stage) emphasized the necessity to improve the business environment and the legal system,

to develop a common legal framework applicable to all business actors irrespective of the economic components

In 2000, the Law on Enterprises came into being and went into operation It basically institutionalized and translated into reality the freedom to choose the type of enterprise, the freedom to establish enterprises, the freedom of organization and management, the freedom to choose the scale, location and trades, except for

those that are prohibited by the law What is remarkable is that the above freedoms were institutionalized, and mechanisms were framed so that the citizens can really enjoy and put into effect these rights Thanks to the above changes, the resources and creativity were aroused and mobilized more rapidly and vigorously for the development of production, for recovering economic growth and improving the living conditions of the people Renovating the thinking on the economic components, and particularly on the significance, role and position of private enterprises in Vietnam is no easy matter, because it runs counter to the traditional ideology and thinking that is still heavily impacting on the designing and shaping of the trend on developing and regulating the society It is difficult because renovation takes place in a context where "accepting this would mean the other thing is no longer correct", and this would be followed by the "transfer" of power from one group of persons to another group Changing the thinking and translating it into actual actions would influence the whole mechanism as it now exists, or a considerable part thereof, and would bring about the loss or reduction of power and interest and even employment of a considerable of persons therein Therefore, no one

is consciously promoting the change in thinking, although it is clear to all that such a change is beneficial to the development of the country and the society That is why measures to promote renovation, to encourage the development of private enterprises always come up against difficulties and obstacles

Probably, the present situation is basically different from what obtained in the 1990s Due to economic regionalization and globalization, economic growth depends to a great extent on efficiency and competitiveness at the level of the nation, the enterprises and the products, while the scope and extent of marketization become increasingly ever greater In this context, it is no longer possible to rely solely on state investments and on state-owned enterprises to develop the economy Thus, there is a real opportunity for promoting market-oriented economic renovation on an ever greater scale and with greater intensity, including the promotion of an official and modern private sector and the creation of favourable conditions for its development.

The IXth CPV Congress affirmed that all economic components, including the private sector that does business in accordance with the law, are integral and important parts of the market economy with socialist orientations However, private enterprises cannot be the most important component, because the state economic sector must play the leading role and must along with the cooperatives gradually become the solid cornerstones of the national economy The whole legal system, all the policies and the whole state apparatus must be built and operated in accordance with the above orthodox orientations

Private entrepreneurs are aware that their business activities are necessary, useful and are only supported in so far as the scope and scale of these activities do not negatively impact on the

"leading role" of state enterprises Therefore, a part of them have mixed feelings, and try not to allow their business activities to appear as big, and if the size of their business becomes big they tried to disperse it, or to conceal their capital and turnover etc

Meanwhile, policy makers and law makers try to provide maximum support to SOEs and, next to them, the cooperatives, and find additional "locks" and "bolts" for curbing the growth of private enterprises As a result, the policies and laws usually lack consistency: a clause that opens the way for growth usually goes in tandem with another restricting clause; if a document favours the development of private enterprise, another document would restrict it The same thing is reflected in the amended 1992 Constitution3 At the same time, officials in charge of implementing policies and laws adopted an attitude of dislike, or coolness toward private businessmen, or dealt with them at arm's length, while giving them additional difficulties

Persons or groups which, in terms of thinking or concrete actions, tried to e:ncourage and

support the rapid and unrestricted development of the private sector were accused of "bias" or

"deviation"

In short, the "respect for one party, contempt for another", as explained above, created an environment wherein all citizens and officials at every level felt reluctant to bring into full play their creativity in order to achieve the highest results for the sake of the development of the society Such

an economy can hardly realize its full development potentials In other words, it can only develop below its potentials Further, it created the opportunity and leeway for some people to hinder the creative thinking and activities of others for mercenary purposes In particular, the growth of private enterprises was constantly hindered and restricted

The informal, "underground" character is a quite common feature of Vietnam's economy in general, and private enterprises in particular It is estimated that the underground economy

There are many different kinds of informal and underground economic activities One, they involve low-income small business households, which are not required by the law to register their business Two, individual business households that do not register their business in accordance with the requirements of the law The number of such businesses is quite big, accounting for half of the individual business households Non-registered taxi cars, passenger cars are typical examples Three, registered private businesses which do not observe the regulations They comprise the following types: (i) those engaged in trades and lines that are not included in their registration certificates; (ii) those which do not keep written records and do not submit reports on their business activities, and conceal their real turnover and profits; (iii) those which hire labourers but do not conclude labour contracts, do not get their workers registered and (iv) those which are engaged in trades and branches that require permits, but they do not have permits as required by the law etc Four, those which engage in trades and branches which are prohibited to private entrepreneurs The existence of informal and underground business activities on a widespread basis and on a large scale involves a lot of disadvantages to these businesses and to the economy in general, as it restricts the opportunities and scale of business, capital contribution is mainly confined to family members, relatives and friends and therefore they cannot develop to a large-scale and take advantage of economies of scale They create big leeways and opportunities for government officials to engage in molestation, bribes-SOEking and abuse of power for the sake of personal advantages

The informal and underground business activities also negatively affect the business environment They create a business environment that is not equality-based, that is unreliable, that

is disadvantageous to honest business people and to the formal business sector, gives rise to factors of instability that make it difficult to predict investment risks, and as a result they do not encourage creativity, do not encourage long-term and large-scale investment, and investment for the development of human resources etc Persons who are engaged in large-scale underground business dare not criticize or expose government officials who break the law, dare not criticize and oppose irrational policies, and irresponsible and even illegal acts of the officials, which in their turn encourage and nurture the practice of taking liberties with, or even having contempt for the law on the part of government agencies and enterprises

Large-scale underground economies do not provide adequate and precise information that are necessary for working out rational macro policies; further, they restrict and/or neutralize the efficiency of laws, government policies and management, and even cause the distortions of laws and regulations

These economies are not competitive at the level of the nation and enterprises, and it is difficult for their products to integrate into world trade for taking advantage of the opportunities and, instead, can easily be pushed to the periphery of world trade mainstream They will cause Vietnam to lag further behind other countries, including those in the region

Apart from the low level of the economy, its autarky pattern and the legacy of the former based centralized bureaucratic planning system of the past, many other noteworthy reasons account for the emergence of such economies, which are as follows:

subsidy-One, in terms of psychology the society is in general not sympathetic toward rich people, and as

a result, there is a widespread tendency to conceal one's wealth, one's income

Two, rapid growth in wealth can be easily, officially or unofficially, viewed as resulting from

illegal actions such as misappropriation of state assets, smuggling or tax evasion etc This is one

of the reasons that caused many persons who grew rich quickly to conceal their incomes The principle that "what is not illegal is legal" is not yet accepted widely, particularly in agencies in charge of protecting the law

Three, too high taxes and arbitrary collection of taxes The tax system is not yet built and

operated in accordance with the law, but with customary practices, in accordance with official notes, administrative guidance, and is therefore unpredictable Vietnam's tax rates are not higher than many other countries, but the actual tax level that must be paid is usually very high, and the payers cannot predict it In fact, it is the tax collector who takes the decision to assess the expenditures - how reasonable and how lawful they are - and the tax amount to be deducted from the taxable income In a considerable number of cases, the tax collectors laid down the various tax amounts to

be paid right at the beginning of the quarter and at the end of the quarter only completed the paper work in order to legalize the tax amounts already paid Therefore, the actual tax paid is often not based on the business results Thus, the taxation system is not equitable both in the written laws and regulations and also in their implementation A number of persons, including government officials, scientists, artists etc have incomes that are higher than the usual taxable income but do not have to pay taxes, while labourers in FDI enterprises, in household businesses who have low incomes must pay taxes

Four, lack of transparency in state management and social management There are too many

laws, which are too complex and lack clarity and the explanations given by Government agencies about them lack unity and consistency That is an important reason which has given rise to the widespread and large-scale informal economy which, in turn, make it unnecessary to have transparent management, particularly in the financial field

The problems, as analyzed above, relating to the renovation process of the private sector show that if the development of private enterprises is to be truly promoted, it is necessary to bring about changes in many respects - thinking and concepts, laws, policies, attitude, capacity, and working methods of the State machinery The demand that should permeate policy making, law making and implementation of policies and laws is to open the door for the people to engage in business and to SOE to it that this right to do business is duly guaranteed We must have faith in the people, and must ensure the safety of their legitimate and lawful rights, and overSOE the officials and restrict to the maximum their abuse of power But, the core and most important factor is a change in thinking and concepts Specifically:

One, we must change the thinking and concept on "respect for one party, and contempt for

another" Different economic components have different strong points and weak points, and do supplement

each other The higher the level of development of the market and its diversity, the more efficient and lively the rotation of resources and goods A SOE today can become to-morrow a privately owned one, while another factory or mine which is privately owned can be shifted to state ownership From the point of view of the whole nation, these enterprises, factories or mines have not undergone any change, and therefore in general their role and significance for the development of the economy have not changed In short, it is necessary to view enterprises with different ownerships systems as components of the whole economy, with equal legal and social standing, equal rights and obligations

Consequently, it is necessary to review and reconsider the use of the concept of "economic components"

in working out policies and laws This might be only a question of terminologies, but there might be more than that, that is, such terminologies would lead to discrimination in terms of policies and laws, and in particular to psychology and working methods of the state apparatus In this way, such concepts as "equity", "equality",

"non-discrimination" would lose their actual vitality

Two, to expand to the maximum, encourage and support the right of the citizens to do business A unified

system of laws should be worked out and applied to all types of enterprises, without discrimination with respect to state-owned, privatelyowned, domestic and foreign enterprises To implement the principle of equity and equality in business rights: to correctly reduce the areas and fields where only state-owned enterprises have the right to do business, to abolish the restrictions and to create favourable conditions so that private enterprises can carry out their business rights which so far they have not been able to (for example, the right to enter into joint ventures with foreign investors) To implement the principle of equity and equality in property rights, and to abolish the restrictions imposed on private enterprises with regard to property rights which so far are enjoyed only by state enterprises To implement the principle of equity and equality in policies and preferences; to reconsider and abolish all the "subsidies" being given to "state-owned enterprises" (while, targeted subsidies should be given to all enterprises irrespective of the ownership system)

Three, right at the stage of law making, we must have confidence in the people, in the owners and

managers of private enterprises In other words, the formulation of laws must be based on the principle of giving protection to the interest of the people and on the confidence in the integrity, self-consciousness and readiness to correctly implement the law by the people, the owners and managers of enterprises, including the owners and managers of private enterprises The laws must be built on the principle that law-abiding enterprises should be given better legal protection and their interests must be ensured better than those enterprises that do not abide by the law

As the people's cultural standards and understanding of the law is still not high, the laws must be simply and clearly worded, must be easy to understand and to implement In case certain legal provisions are ignored or circumvented, it is necessary to review the situation and thereafter make the new wording more in keeping with psychology and daily behaviour of the people on that specific question, and refrain from strengthening further the old regulations with a new one to coerce the people or prevent the circumvention of the old regulations concerned, which would make the legal system more complicated, less friendly to the people, more divorced from actual life, more expensive and less efficient

Four, while the government has an important role, it is important to implement the principle "small

government, big society" in state management, to reduce the powers of the government agencies and officials from the central to the local level, and particularly the right to "appraise", "approve" and "sanction", and the right to provide permission and business permits etc In more developed market economies, the government also has an "invaluable role", which is quite correct as it involves new functions on bringing into full play the potentials of the market and efficiently overcoming the defects of the market At the same time, it

is necessary to "individualize" the responsibility of officials as they carry out their official duty With respect to government agencies and officials, the Law must not only specify what they can do, where they can perform their duty, as also how they can perform it, while there must be institutions which unremittingly constantly supervise them and assess their performance

COOPERATIVE

Following 1975, the efforts at cooperativisation, collectivisation have not brought about the desired results The "Contract 10" has basically changed the principles of the old-type agricultural cooperatives; rather, they have been abolished With land allocations coupled with five long-term usage rights, the households and first of all the peasant family households have been recognized

as confirmed as and have in fact become economic units that are autonomous and separate from the traditional cooperatives From 1988, peasant households decide on their own what should be produced, how much and how, what is to be sold, to whom and at which prices The above position

of the peasant households is not only the results of changes in the cooperatives and land management system, but also of macro measures dealing with prices, markets etc The results achieved were most spectacular and beyond all expectations, particularly in the field of food production From then on, the question of food which so much preoccupied the state machinery, including the top most CPV and Government leaders over the past several decades of centralized planning, has been solved

In 1996, with a view to renovating cooperatives, the National Assembly adopted a new Law on the Cooperatives In addition to provisions on the establishment, organization and management and activities of the new cooperatives, the Law laid down a series of preferences to cooperatives of various types This law is the legal framework for governing the establishment of new cooperatives and for switching the old cooperatives to the new cooperative model in terms of organization, management and activities As scheduled, all farming cooperatives must have switched to the new model by the end of 1998 (the deadline for such a switch was the end of 1998), but so far, thousands of former farming cooperatives have not yet done so

After five years of implementation of the Law on Cooperatives, the total number of cooperatives

in the country has decreased from 11.330 to 10.311, that is, not much The new number includes nearly 2.700 newly established cooperatives But there is a noteworthy change in structure in the newly established cooperatives: farming cooperatives account for 31 % of the total, industrial

cooperatives 23,6%; aquaculture cooperatives, 12,7%; cooperatives dealing with transports and communications, 11 %; construction, 9%; trading, less than 3%

The size of cooperatives is very small Each cooperative has on an average about 758 million VND of capital, 787 members and 197 hired labourers Thus, each member contributes less than 1

The cooperatives have not yet performed well efficiently their services function in terms of input and output, as desired by policy makers Indeed, it is the private traders, small traders (and not the cooperatives) who have bought and consumed the bulk of the products of peasant households In other words, the cooperation between cooperative members and private traders is closer and more efficient than their relations with the cooperatives

The development of the economy in general and of the cooperatives in particular over recent years shows that the Law on Cooperatives and the policies on developing cooperatives have not realized the results desired While the number of cooperatives, and particularly agricultural services cooperatives has decreased, the agricultural farms have rapidly increased in number and size

(capital, labour) in many areas of the country, although there has been almost no policy giving direct support to them In spite of onerous and costly procedural work regarding establishment of private enterprises, and unequal treatment given to them in many respects (from 1991-1999), each year the number of newly established private enterprises surpassed by 10 times the number of newly setup cooperatives (At present, the number of newly established private enterprises is bigger

by 30-40 times as compared with the number of cooperatives, while their average capital is bigger than that of cooperatives by 3-4 times)

The cooperatives are not a genuine way for eradicating hunger and alleviating poverty and for solving other social issues The per capita income of a labourer (both cooperative member and hired labour) is about 2-2,8 million VND/year, that is, about 20% of the average per capita income

of a labourer working in a private enterprise

With several decades of the subsidy-based bureaucratic centralized mechanism, the cooperatives have been turned into an "administrative machine", a "backyard" and a "prolongation"

of the executive power and are no longer "attractive" to their members and to the people There has been a widespread social psychology which regards common property as a Godsend gift, and instead of promoting and developing common property, people are only intent to turn it into their private property

The cooperative, like any other form of business organization, has its advantages and disadvantages The cooperatives emphasize "equality" of all members irrespective of their actual

contribution, and pays little attention to the direct ratio between contribution and earnings Therefore, the cooperative is not an appropriate model for encouraging personal interest, for turning personal interest into a most direct motive force for development The cooperatives may be in keeping with low-risk, standardized economic activities The present level of economic development can hardly create adequate social needs for the cooperatives to operate efficiently and in keeping with its own principles

Over the past 17 years, the cooperatives have been moving, along with the whole economy, to the market mechanism In order to provide orientations to the continued change, it is necessary to consider the following points:

One, it is necessary to have a clear and unified view on the role and legal standing of the cooperatives in

the economy First of all, the cooperatives must be SOEn as one of the forms of enterprises, of business organizations in the market economy, with its own advantages and disadvantages It is a common view in the world that cooperatives pertain to private property and belong to their members, with each cooperative member having a clear share, big or small In Vietnam, what is in substance a cooperative depends on the concept about cooperatives, the model of organization and the method of working of cooperatives, and particularly the extent of cooperativisation of the means of production That is an issue which must be made clear After all, the cooperative, like any other form of enterprises, must exist in separation not only from other juridical persons but also from the authorities at all levels

Two, in substance the cooperatives emphasize the objective of directly serving the needs of their

members, mutual assistance and democratic management in accordance with voting, but they take no account of the specific contribution of each member But this should not mean that the cooperatives must necessarily be a form of enterprise that is better than other forms of enterprise, or that the management regime of cooperatives is more progressive than the management regime based on the ratio of capital contribution etc Viewed in terms of general economic development, various types of enterprises are all useful, each one having its proper role and impact

Three, in making and implementing law, the policy on cooperatives must ensure equality, that is, no

particular preference (political, moral, economic and social) should be given to cooperatives, their members and their staff At the same time, the cooperatives, like other forms of enterprises, should not be turned into tools of the authorities at various levels In case it is necessary to provide assistance to cooperatives, the assistance must be part of a programme of assistance to medium- and smallsize enterprises In short, cooperatives must be given fair treatment, equality in rights and must compete to survive and develop in the market economy Efficiency and competitiveness must continue to be the factors that decide the success or failure of cooperatives

Four, in working out laws and regulations on cooperatives, it is necessary to diversify

cooperatives into various types At the same time, it is necessary to apply in a flexible and selective manner the basic principles of cooperatives while taking into account the specific economic, political, social and historical conditions of Vietnam In most other countries, the basic principles on cooperatives need not be applied in to, without any change "Democracy" in the management of cooperatives does not necessarily mean "one cooperative member, one vote" without taking into account the specific contribution of the members; "equity" does not mean imposing a maximum limit

on the capital contributed by each member and equal distribution of benefits without taking into account capital contributions and other contributions of members Like other types of enterprises, the cooperatives need not be confined to a specific human settlement or territory Experiences in other countries show that a flexible application of the principles on cooperatives are instrumental in

diversifying the cooperatives into various types, creating more leeway and motive force for them to develop and compete with other types of enterprises In fact, a good number of cooperatives in Vietnam have somewhat departed from the traditional principles of cooperatives by changing their organizational principles, their management and activities, and have achieved good results whi.ch are attractive to their members and the outsiders These are indeed bright spots which should be reviewed and summed up and multiplied

INTERPRISES WITH FOREIGN INVESTED CAPITAL

In order to induce foreign direct investment, the National Assembly adopted the Law on Foreign Investment in Vietnam in December 1987 and thereafter amended it in November 1996 and June 2000, while many byelaws were promulgated to provide guidance for the implementation of the above Law

1 Important contributions

From 1987 to the end of 2002, Vietnam had over 4,500 licensed FDI projects with registered capital totalling 42 billion USD, and realized capital accounting for 60% of total registered capital So far, 4,178 are active FDI projects with registered capital amounting to 40.02 billion USD, of which 2,163 have gone into production and business with a registered capital amounting to over 25.4 billion USD and 757 projects which are still in the stage of capital construction with registered capital amounting to over 9.5 billion USD In 2003, new FDI registered capital is estimated to reach 2.6 billion USD

The enterprises with foreign invested capital have developed quite rapidly, embracing many fields and making important contributions to Vietnam's socio-economic development: providing an additional important source of capital for development, contributing to restructuring along the line of

human resources, access to and expansion of foreign markets, enhancing the country's exports capacity etc Major groups, major transnationals such Mitsubishi, Misui, Sumitomo (Japan), Mercedes-Benz, Siemens

(Germany), Mobil, Caterrpila (USA), BP (Great Britain) have'invested in Vietnam

The enterprises with foreign invested capital account for an important part of Vietnam's GDP (real prices): 6,30% (1995), 13,28% (2000), 13,76% (2001) and 13,91% (2002); their ratio to total development investment (actual prices) is: 30% (1995), 18,7% (2000), 18,4% (2001), and 18,5% (2002) In 2003, if oil and gas are included, the exports of FDI enterprises would reach 7,5 billion USD, accounting for over 50% of total exports

of Vietnam

2 The need for greater consensus

For the sake of greater inducement and efficiency of foreign capital, it is necessary to improve the investment environment and, for that purpose, it is first of all necessary to have greater consensus on the need to strongly reduce and thereafter do away with discrimination in terms of policies and legal formulation between domestic and foreign investments Lack of consensus among government agencies and authorities at various levels has led to different ways of dealing with specific issues, and this has caused unease among foreign investors

Enterprises with foreign invested capital are regarded as an important component part of the market economy with socialist orientations The Government has promulgated many policies which make clear the standing of the FDI enterprises and encourage them to produce, sell and export high-tech goods and services, to engage in socio-economic infrastructural development for attracting high technology, and to create substantial employment, in keeping with the needs of economic restructuring and international economic integration There still remain, however, worries and apprehensions on the part of investors and a discriminative attitude toward FDI enterprises which are regarded as a form of exploitation of the recipient country by foreign capital Such people fail to SOE that in the present conditions of economic globalization, attracting foreign capital means attracting the necessary resources for industrialization, modernization, and FDI investments are a matter of mutual benefit, and the investors are entitled to proper profits Less developed countries induce foreign investments in order to increase capital for investment, to attract new technology (particularly from developed countries) and advanced methods of management As foreign investments are becoming the mainstream in present-day global economic association, not only the less developed countries but also developed ones are encouraging the inflow of foreign capital The lack of a consensus on foreign direct investments has led to various discriminations: for example, in the field of investment, it was suggested that the country should not allow foreigners to invest in fields which we can develop on our own, even if our products have high costs and low quality; foreign investors can purchase shares of Vietnamese enterprises but only up to 30% of the registered capital; FDI enterprises must rent land at higher prices for building shop floors, must buy some types of goods and services at higher prices including tourist services; FDI enterprises in exports-processing zones are not eligible to CEPT (AFT A) treatment etc

3 Planning

In connection with the inducement of FDI capital, a task of first importance is to work out a strategy and to enhance the quality of plans designed to attract foreign capital These plans should combine foreign and domestic capital into an efficient and sustainable structure It is most essential

to improve the master plan and plans for various branches and economic regions in order to vigorously attract FDI capital into export industries, processing industries, high-tech industries, new materials producing industries, electronics industries, socio-economic infrastructural development, development of industries where Vietnam has comparative advantages, with due linkage with modern industries and employment creation Many master plans take a long time to finalize, are

poor in quality, and lack specifics For example, we have had 11 car projects which could only mobilize 20% of the designed capacity

Planning still underestimates FDI For example, planning with respect to iron and steel, cement, telecommunications, seaports, beverages only involves the development of a number of state corporations and the use of domestic capital; some branches, like the universities and professional schools, have no master plan, and this creates difficulties for the inducement of foreign capital, for the licensing of FDI projects in higher education Projects on mineral exploitation face difficulties due to a lack of clarity in the regulations, while procedural work on permits for the exploration and assessment of mineral deposits, and their exploitation is still onerous and complicated

There is still a big imbalance, in terms of FDI geographic distribution, among the provinces From

2001 till now, 86,7% of FDI projects and capital are focussed on two key economic regions in the North and South Vietnam, the latter alone accounting for about 69% of total projects and 71 % of total registered capital The 10 leading provinces and cities are Ba RiaVung Tau, Ho Chi Minh City, Dong Nai, Binh Duong, Long An, Hanoi, Vinh Phuc, Hai Phong, Phu Yen and Quang Ninh which account for 80% of FDI projects and over 85% of registered capital Many provinces of the Mekong River Delta, Nam Dinh, Thai Binh, Ha Nam, Ninh Binh provinces could attract only an insignificant amount of FDI capital Therefore, local authorities must make greater efforts to induce foreign capital

In terms of branches, industry now accounts for a big part of FDI capital At present enerprises with foreign invested capital account for 100% of crude oil production, cars, washing machines, air conditioning equipment, 60% of laminated steel, 28% of cement, 30% of electric equipments, electronics goods, 50% of leather and footwear, 25% of foodstuffs and beverages The ratio of FDI enterprises in the industrial output value of some provinces is as follows: Ba Ria-Vung Tau, 85,2%; Dong Nai, 68,3%; Binh Duong, 68,3%; Vinh Phuc, 86,2%; Hai Phong City, 43,9% But there is too little FDI investment in agriculture and rural economy, in agriproducts and aquaproducts processing, in the exploitation and processing of mineral products in the highlands and coastal region

In order to ensure planning stability and create favourable conditions for investors in terms of workshop floor and necessary infrastructure, about 80 industrial zones and exports-processing zones have been set up and have gone into operation These industrial zones have contributed to the emergence of nice urban centres with clean environment, giving a new face to many economic regions However, there are still many problems about the management of these zones as also the exchange of goods between them and the outside enterprises, which must be settled in order to bring about more liberal relations It should added that

in the planning and construction of industrial and exportsprocessing zones, attention was only given to production and business floor, while no attention was given to facilities that serve the living conditions of the labourers Some industrial zones in Dong Nai, Binh Duong do not have enough accommodation for the labourers, an inadequacy which negatively affects their living conditions, material and spiritual

In tandem with planning, it is most necessary to review the list of projects that require investments, including both state projects and projects of local authorities In fact, key projects in the published list of state projects requiring FDI capital for the 20012005 have not succeeded in attracting the attention of investors, and therefore the list must be re-examined, amended, re-adjusted and in particular must be provided with good feasibility studies containing the necessary technico- economic parameters for the sake of advertisement and investment promotion Many projects put forth by local authorities only reflect the aspirations and desire of their localities, but do not take in account the demands of the market, and particularly the regional market, the changes in the market and the measures taken by regional countries to compete with us for investment inflows in every field and trade, and specific types of enterprises These facts show that first of all we must take measures for enhancing the

competitiveness of our investment environment and our business environment While the countries in the region are actively improving their investment environment with breakthrough measures for inducing foreign capital, we should not idle away our time if we want foreign investments to flow into our country

Investments promotion must be vigorously streamlined, not through administrative measures but mainly through enterprises that directly carry out investments promotion Experiences show that direct explanations given by FDI enterprises engaged in business in Vietnam to their friends on the investment potentials and the door-opening policies of the host country, their specific and practical experiences etc Would be most impressive and convincing to potential would-be investors This also shows that instead of rhetorical flourishes and empty promises, we should solve timely and efficiently the specific difficulties of the investors that are doing business in Vietnam and create favourable conditions for them That is the most productive way to promote investments

4 Continued renovation of policies and regulations

In recent years, the Government of Vietnam has continued to amend its major policies for the sake of giving fair and adequate treatment to and creating favourable conditions for the enterprises with foreign invested capital: avoidance of double taxattion, assurances about no nationalization and no confiscation of their capital and assets by administrative means, freedom for them to choose the scale, location, form of investment and partners; freedom to take out of Vietnam their profits, capital and lawful assets; all disputes will be settled through arbitration organizations, or the Vietnamese court, or international organizations; exemption of imports tax with respect to material, machinery, equipments, spare parts for setting up the company etc

Foreign investors welcome the open policies of the CPV and Government, take note of the distinct changes in many fields but observe that Vietnam is still a destination involving high risks due to often changing policies and regulations, and too onerous and costly procedural work Assessments have changed

with respect to advantages for the inducement of investments Such advantages no longer lie in cheap labour,

a large domestic market, available raw materials or low land rents, but they lie precisely in consistent policies

which are implemented in a businesslike manner from the top to the grassroot level Vietnam's investment

environment has been improved but is still less attractive than that of some ASEAN countries and China, and therefore, the inflow of foreign investments into Vietnam is still too small Obviously, we must focus our strength on overcoming these difficulties, by first of all improving the set of policies and regulations The organization and activities of FDI enterprises still involve many differences with domestic enterprises and international practice Therefore, we must soon implement a policy designed to build up a legal plane for all types of enterprises, and first of all, implement the commitments in the Vietnam-US trade agreement

In keeping with the 2001-2010 socio-economic development strategy, during five years (2001-2005) Vietnam requires about 910 billion USD for licensed projects which had not been executed, for newly licensed projects and for providing additional capital to projects that are being executed But during the first 2 years and 8 months of the five year plan (2001-2005), Vietnam could only attract FDI capital worth 4,58 billion USD with 1.512 projects, Le., on an average 143,2 million USD per month, that is, less than the average monthly figure of 200 million USD as planned for the 2001-2005 period, and much less than the average figure of 242 million USD during the 1995-1997 period For various reasons, some FDI projects, with registered capital amounting to several billion USD, could not be executed and had to be dissolved before term or transferred to the Vietnamese side for execution with domestic resources This situation will affect considerably the quality and economic growth rate in the forthcoming years Therefore, improving and renovating policies and regulations, carrying out vigorously the administrative reforms and implementing efficiently the existing

policies are of decisive significance for inducing foreign investments at the planned level

It is necessary to improve further the foreign investment policy, overcome the lack of clarity, transparency and predictability due to frequent policy changes which cause apprehension among foreign investors about

an unstable and risky investment environment The Law on Foreign Investment still does not allow foreiqn investments in such fields as imports, domestic transports, finances and banking, insurance, telecommunications, advertisements etc If we could open up to an appropriate extent the above fields, the investment environment of the country would become more attractive The List of fields where enterprises with 100% foreign capital is allowed and the list of fields where FDI investment is restricted should be worked out clearly and made public It is necessary to diversify foreign investments, and allow enterprises with foreign invested capital to become joint stock companies listed in the securities market if they meet the required conditions

We must re-examine and amend some other provisions such as the compulsory demand of "local content" for the car, motorcycle and electronic industries, and permits for planned imports of components, spare parts, materials and raw materials The local content ratio is designed to encourage and support the local engineering industry thanks to the use of locally-produced components, equipment and spare parts But the advocates of this policy do not take into account the higher quality and lower production cost of similar goods that would be imported at lower tariff rates, do not understand that such a policy is tantamount to providing protection to certain domestic industries which thus have little interest in enhancing their competitiveness, and do not SOE that enhancing competitiveness is now a most pressing issue for the country It is also necessary to do away with the regulations that prohibits foreigners to invest in fields where Vietnam can produce on its own, because such a policy

is only beneficial to enterprises that are evading competition, is harmful to consumers and is not in keeping with the demands of international economic integration

On labour issues: The enterprises with foreign invested capital are directly employing over

450.000 labourers with nearly 10.000 management officials and 50.000 technicians, and are indirectly providing employment to hundreds of thousands of labourers in construction and service industries That is a good contingent of high-tech workers, and the FDI enterprises have indeed contributed to the enhancement of the quality of Vietnam's work force What is now a matter of concern is that there is a shortage of highly skilled workers and we cannot timely meet the demand

in labour of the FDI enterprises labour wages in Vietnam are relatively low, but that is only true if comparison is made with ASEAN countries at this stage; in the long term, as and when there are higher demands in sciences and technology, the above advantage would disappear if no timely efforts are made to provide good training to the work force In fact, low labour expenses have led to high production cost due to poor labour productivity and poor labour discipline Because of high income tax, the foreign investors have to spend more for Vietnamese technicians and managers or will have to replace them with foreign staff

We should enhance the quality of training for Vietnamese officials working as members of the Board of Directors or Council of Administration of joint ventures as we must soon overcome the fact that all these officials lack knowledge and experience, have a poor grasp of the law and of their own functions, tasks and powers, are not fluent in foreign languages and cannot play their role efficiently

We should study measures designed to create more favourable conditions for FDI enterprises to enrol labour and select capable persons For example, it is necessary to consider changes in the regulations which provide that if a labourer prolongs his contract for a second time, the employer must conclude a permanent labour contract with him; In that case, it is better to allow the employer

and the labourer in question to conclude a contract that is agreeable to both of them, as in the case

of a permanent contract the employer must receive the assent of the labourer concerned if he wants to cancel the contract It is not reasonable to provide, as we have done, that payment for overtimes must be higher than the basic wages by 2-3 times It is also not reasonable to give labourers the right to simultaneously conclude contracts with many employers, because with respect to some industries and positions, preserving technological and business secrets of the enterprises is a "must" and therefore allowing labourers occupying such positions to simultaneously conclude contracts with many employers is not warranted

A number of differences and disputes between employers and labourers have led to strikes in a number of enterprises with foreign invested capital That is due to many specific causes There may

be differences in culture between Vietnam and the countries of the employers, something we do not always understand well In some cases, the employers have not correctly implemented the contracts In some other cases, it is the labourers who fail to observe labour discipline etc What is important is to work out concrete labour contracts and collective labour agreements, which should serve as a basis for dealing with individual or collective labour disputes It is important to bring into full play the role of trade unions in the enterprises We should SOE to it that the trade unions are genuinely and legal representatives of the labourers and protect their interest, but we should also ensure the legitimate interest of the employers The disputes must be settled in accordance with the process of law

Construction site: The development of industrial zones and exports processing zones has

greatly facilitated the work of FDI enterprises Yet, land rents in Vietnam are much higher than in other countries of the region, and would become higher still if compensations and site clearing expenditures are included, and that is a discentive to foreign investors Some provinces have reduced land rents, and have built adequate infrastrucure outside the industrial zones There remain certain policy matters that ought to be examined and addressed For example, foreign investors can usually rent land for 50 years, and in some special cases the lease can be prolonged

to 70 years Yet, it usually takes 5 to 10 years for enterprises engaged in infrastructural development of industrial and exports-processing zones to complete their work, and therefore their real business time is reduced Foreign investors are not yet allowed to transfer, re-rent or use the rented land as collateral or as capital contribution to joint ventures These are inadequacies that ought to be studied and overcome

Taxation: Tax is not given first priority by investors (tax ranks 19th among 20 problems related to

investment environment) because if taxes are to be collected one must create conditions that make

it possible for investors to earn profits Yet, it is hardly possible to make profits in the present investment environment marked by high prices in power and water supply, high telecommunications charges, high port loading and unloading charges, high administrative fees etc The tax rate of corporate income tax is usually 5%, but in remitting abroad their profits the investors must pay tax

at the rate of 3-5 and even 7% At present, the Law on Corporate Income Tax has eliminated tax on profits remittance abroad, and the corporate income tax rate has been readjusted upward to 25-28%

Thus, some changes have taken place in the taxation law and the tax rate But what still gives apprehension to FDI enterprises is the implementation of the taxation law, and in particular the administrative procedures connected with tax collection and imports tax collection by the customs authorities Thus, it is necessary to improve the procedures and make them open, transparent, simple and convenient for the FDI enterprises, and overcome arbitrariness, harassment and molestation

5 Conclusions

modernization In fact, the enterprises with foreign invested capital have become an important component of the economy, and have been brought into full play in many socio-economic fields At present, many regional countries have implemented many highly competitive policies for inducing foreign investments, while foreign investors usually compare the investment environment of various countries before taking the investment decision Therefore, for the sake of continued inducement of foreign investments and enhancement of their efficiency, re-examining policies and regulations, and in particular comparing Vietnam's

investment environment with that of regional countries is a "must", in order to work out

attractive policies and build up a highly competitive investment environment Only by so doing, can we continue to induce foreign investment for the purpose of meeting our demands

in socio-economic development

contribution to our economic growth and economic restructuring Yet, in areas where FDI enterprises are located, that has been no clear association, linkage between them and the local socio-economic conditions with concomitant spreading impact Many FDI enterprises continue to import raw materials and other materials for processing although the local area can produce and supply an adequate quantity thereof They continue to import many components, spare parts which are of higher quality and of reasonable prices As many support industries have not been built, many exports goods have no high added value, and only have sub-contracting value Similarly, advanced management and high technology have not been disseminated to and applied by the local areas where are located FDI enterprises The socio-cultural conditions in these areas have not improved as compared with other areas, If the above weaknesses could be overcome, the FDI enterprises will be really linked

to the local areas where they are located, and will help promote more effectively the economy

in each region and in the whole country

responsible agencies did not supervise closely the activities of FDI enterprises, they intervened too deeply into their business activities Added to this, were onerous and complicated administrative procedures, and many bureaucratic rules etc Therefore, it is most necessary to improve the regulations on management of FDI enterprises, which should

be in keeping with the market economy with socialist orientations while building up a management machinery and a contingent of officials that are capable to meet the demand on inducing foreign investments

CHAPTER II COHERENT DEVELOPMENT OF VARIOUS MARKETS

A coherent development of various markets is an objective demand of the market economy with socialist orientation in the same way as a living organism must have a complete set of body components Yet, all the components of a living organism cannot emerge and develop at the same time, as this can happen only when the organism in question is quite mature and developed The same applies to the market economy which can only operate following gradual nurturing, formation and development of its various component parts

The thinking and policy on the coherent formation and development of various markets started with the Vlth CPV Congress which advocated the liberation of the forces of production of goods and the circulation of goods by means of three target programmes on food-foodstuffs, consumer goods and exports goods The same thinking was confirmed and further clarified by the Vllth CPV Congress: to develop a multisectoral commodities economy that operates in keeping with the market mechanism, under State management and in accordance with socialist orientations The same thinking and policy was confirmed and dev,eloped by the Vllth CPV Congress The IXth CPV Congress took a clear-cut and definite stand on the policy of developing a market economy with socialist orientations Naturally, such a market economy with socialist orientations must comprise all component markets

The formation and development of various markets in Vietnam involves a number of noteworthy points in terms of concept:

- The necessity for various markets The realities in transitional economies as also in Vietnam over the

recent period shows that the acceptance of a market economy, or an economy that operates in accordance with the market mechanism, or a market economy with socialist orientation essentially involves the existence

of markets The acceptance of markets means the presence of all types of markets The transition to the market economy of former East European and former USSR socialist economies - no matter whether it was shock therapy as was the case in Poland and Russia, or whether it was an evolutionary process as was the case in Hungary and Bulgaria - must inevitably involve the construction of a market economy with all types of markets and their components China's shift to the market economy was more evolutionary, involving substantial caution, but did not shun the construction of various types of markets In the same way, Vietnam must build a complete set of markets so that its market economy with socialist orientation can operate effectively What various countries differ on is the timing, the various steps to be taken, the way of doing and the nature of markets

- Choosing various principal markets to be built As is the case in many other market

economies, Vietnam has so far identified for its market economy with socialist orientation the following markets: market of goods and services; financial market; labour market; housing and estate market; scientific and technological market With the passage of time, will emerge some other markets which for the time being cannot be precisely envisaged

- Approach on the coherent development of various markets Coherent development of various

markets does not mean simultaneous development of all types of markets Instead, it involves a gradual development of markets, with due experimentation, drawing lessons of experience, and continuing the work; it involves developing first a number of markets on a priority basis and subsequent construction of other markets as and when all necessary conditions are available However, with respect to some specific types of markets, their component parts must be developed fully and simultaneously if they are to operate smoothly, efficiently and fruitfully The guideline for the development of Vietnam's market economy with socialist orientations and the development of its various markets is experimenting, drawing lessons of experience, and then continuing the work, developing at first the various components and then proceeding toward the development of the aggregate However, it is necessary to conceive the coherent development of various markets as a continuing, steadfast process, that requires time, that cannot tolerate haste, shilly-shellying and foot-dragging with concominant losses in many respects

- Identifying the component parts of a specific market Markets inevitably involve the following main

factors: offer and demand in goods and services; price of goods and services in the market (which prices to

be decided by the Government, which prices to be determined by the market); legal framework for the operation of the market (laws, regulations); enterprises (a term understood in a broad sense as covering all organizations and individuals engaged in business in the market); consumers; market information etc These are the most common factors of all markets, while some other specific markets may have other additional factors of their own

- Development level of various markets At present, opinions still differ on the extent or level of

development of various markets With respect to Vietnam, it is the view of a majority that the market of goods and services, and mainly the market of goods, is relatively developed, while the other

technology market, the housing and estate market It is precisely the under-development of many principal markets that make it very difficult to tackle the task of developing coherently various markets Even the coherent development of the component parts of a specific type of market is no simple matter The development of various markets, therefore, requires great efforts from the whole Party, Government and people, from theoreticians and practitioners alike In particular, theoreticians must both reflect the realities and give guidance to these realities

chapter - the author has no intention and capacity to give an exhaustive presentation of the 5 kinds

of markets as mentioned above, and will only express his views, in general terms, without going into concrete details, concerning a number of issues which he considers as important

I THE MARKET OF GOODS AND SERVICES

1 Actual development

The market of goods and services, and particularly the market of agriproducts, initially came into being during the period of central planning, when the country had no correct idea about markets and did not encourage their development This market emerged in response to the needs of social life and the economy It achieved a development breakthrough following the adoption of the contract system in agriculture and the 3-part plan of state enterprises in the 1980s It underwent a fundamental change when the Government abolished rationing, enforced the market price mechanism with respect to most goods and services, gradually monetized the wages, gradually abolished subsidization, did away with the prohibition of goods circulation and markets, gave business autonomy to state enterprises (in the mid-and at the end of the 1980s) It underwent particular growth ever since Vietnam officially enforced the market mechanism, the diversification and multilateralization of its foreign economic relations and took the initiative in integrating itself into the world economy (since the 1990s)

The market of goods and services, however, faced considerable difficulties From the viewpoint

of market access, the market of goods and services comprises three kinds of markets: relatively

to State-owned enterprises

The first market tended to develop with increasing buoyancy It could attract many investors, had

an abundant supply of goods, a big competitive pressure, and, as a result, the enterprises operating therein were more competitive than in other markets One can say that over the recent period this market made a most active contribution toward changing the physionomy of Vietnam's economy The second market was less developed than the first one as there were still 300 permits prior to the enactment of the Law on Enterprises As a result, this market involves less competition than the

first one Following the enactment of the Law on Enterprises, a number of government agencies were slow in laying down the specific conditions regarding business activities, while some conditions were laid down in the form of small permits, post-permit control was not effective (and was even inexistent in some areas) This situation made it difficult for the market access of the enterprises and made it possible for some government officials to harass the enterprises and to engage in corruption

The third market has almost no competition In general, the enterprises operating in this market had low competitiveness, while the capacity to compete of some was due to a considerable extent

to their dominating position as state enterprises

Enterprises cannot simply go out of business The Law on Bankruptcy of Enterprises was enacted in 1992 but could be applied to only a few dozen enterprises Difficulties relating to procedural work on bankruptcy has hampered the transfer of capital by investors from less efficient areas to more efficient ones

The pricing mechanism of goods and services differs among these markets The prices of goods and services in the first market and in a part of the second market were determined by the offerdemand relationship The prices of goods and services in a part of the second market and in almost the whole of the third market were determined by the Government It is worth mentioning that government pricing is usually based on the cost of production plus a certain ratio of profits, and that is completely not in keeping with the market mechanism and the law of value In the market economy, not all enterprises can make profits, and not all goods and services can be sold in the market at a price higher than the cost of production

Some goods and services in the second and third market were imported at prices that were dependent on world prices, but the price fluctuations of these goods in the local internal market were not in keeping with world price fluctuations and there was a tendency to earn profits at the expense of the consumers This was evidenced by the fact that when world prices went up, the enterprises dealing with the goods in question requested the Government to authorize them to sell at higher prices, but when the world prices went down these enterprises never requested the Government to lower the prices of the goods in question That was what happened with the price of petroleum and lubricants over many years

Similarly, many enterprises wrongly forecast the price movement in the world markets and consequently bought a big reserve of raw materials at high prices and requested the government to allow them to raise the prices of their products; and when the world prices of raw materials went down, these enterprises not only didn't readjust downward the prices of their products but also requested the Government to temporarily limit

or prohibit the import of the above-mentioned raw materials until they would have used up their stock This practice, resorted to, among others, by the steel industry in 2003, caused heavy losses to consumers, most of which were government projects

Moreover, too tight control was imposed on prices, and this was not in keeping with the situation of Vietnam nowadays For example, in some areas, the authorities on some occasions required the shops to display the allowed sale prices at a time when the prices of goods often fluctuated (probably, such regulations should only be imposed on certain services)

The legal framework designed to regulate the behaviour in the market of goods and services suffer from many inadequacies and does not meet as yet the demands of development of the market

The delay in enacting the law on competition and monopoly control in business is regrettable The question was raised since the early 1990s, yet so far only a draft law could be produced Competition always goes along with monopoly in the market economy In sensitive fields effective and efficient intervention of the Government is required, and therefore government monopoly in some instances is necessary But if

government monopoly prevails in too many areas and becomes the monopoly of state enterprises, the society

is bound to suffer So far, Vietnam has made some progress in limiting monopoly in some fields, but without a law on competition and monopoly control it would be most difficult to effectively restrict monopoly in business and eventually eliminate it

A considerable number of legal provisions still involved discrimination, which negatively affected the healthy development of the market Laws and regulations had almost no provisions dealing with unreasonable interference by government agencies and officials into the market

Market management by the Government suffers from many inadequacies Only one government agency, the Department of Market Management, Ministry of Trade, is given the function to manage the market of goods and services, but its method of working is nearly similar to the old mechanism and, moreover, it only regulates a small number of goods, mainly in the first market

Some other ministries also manage the market of some goods and services, but since their own enterprises are doing business in these markets they may be biased not only with respect to state enterprises and non-state enterprises, but also state enterprises managed by them and state enterprises not managed by them

The lack of laws and regulations, and the lack of clarity, concreteness and precision of the laws and regulations have obviously encouraged corruption, graft and bribery The criminalisation of civil relations in the market has been reduced but is still a sore spot for many enterprises Because of inadequate laws and poor control and management by the Government, fake goods, imitation goods and smuggling show no sign

of decrease, and this has been negatively affecting domestic production and harming the consumers

Vietnam's market information-an important factor for the development of markets along a healthy are still inadequate, less than timely and is of poor reliability Recently, the mass media have enhanced their role, but they are still far from meeting the demand of the consumers Poor market information not only harms the consumers but also the domestic producers, as is shown by the too low prices of modern medicines produced inside the country as compared with similar imported products Therefore, enhancing the quality and volume of market information will be useful both to the consumers and producers

direction-Vietnam's Association of Consumers has been set up but its activities are still weak and it is not yet able to protect effectively the consumers

2 Orientations on continued development

In order to accelerate the healthy development of the market of goods and services, the most important thing we must and can do within not too long a period is to improve the legal framework designed to regulate it First of all, it is necessary to unify the legal framework for all enterprises from various economic components The recent renovation process was marked by the enactment

of Laws on various types of enterprises (Law on State Enterprises, Law on Enterprises, Law on Foreign Investments in Vietnam which in fact covers enterprises with foreign invested capital, Law

on Cooperatives ) The enterprises (taken in a broad sense) have been and will be the suppliers of goods and services to the economy The time has now come to work out a general law dealing with all types of enterprises, a law that would help all of them to raise further their productivity, quality and efficiency This law should be researched on, drafted and then enacted within the next few years, preferably prior to Vietnam's official entry into WTO

In parallel with the above, we must urgently enact the Law on Competition and Monopoly Control

in Business This is one of the basic laws for the development of the market economy in general, and the market of goods and services in particular In ultimate analysis, economic development is determined by efficiency which, in turn, is generated by competition In addition, it is necessary to

amend and revise a number of existing laws such as the Law on Bankruptcy of Enterprises (and even to work out a new Law on Bankruptcy), the Civil Law, the Trade Law, the Decree on Advertisement

The amendment and revision of existing laws and the enactment of new laws should be aimed at

competition, abolition of discrimination towards various types of enterprises, creation of more favourable conditions for access to and withdrawal from the market, readjustment of behaviour in the market in a civilized and modern way In other words, it is necessary to create favourable conditions for the above-mentioned first type of market to expand and develop ever more rapidly, and to strongly narrow down the second type and third type of markets

The implementation of laws already enacted is no less important (and is even, in some cases, of the greatest importance) If no adequate attention is given to the implementation of laws the laws however well worked out would merely remain on paper The successful implementation of enacted laws is contingent among other things on a correct understanding of the contents of the laws, on the capacity, integrity of the officials concerned and their concern for the national interest The enactment and implementation of the Law

on Enterprises has provided useful experience that should be built on

In a market economy, boosting up demand is particularly important for socio-economic development in general, and for the development of the market of goods and services in particular

At present, production involves difficulties, but the sale of goods is even more difficult; if demand does not increase, it would be most difficult to develop production Ultimately, increased demand (demand in production and demand in personal consumption) hinges on the increase of the inhabitants' income and on the socially-accepted consumer culture At present, Vietnam is still a poor country, the income of its inhabitants is still low, if not too low, with a prevalent culture that emphasizes thrift, "eating today's meal while thinking about the next meal", and therefore quickly raising demand is no easy matter and should be a matter of long term orientation in development Yet, during the next several years, it is necessary to continue implementing successfully the already adopted demand stimulating policies and to formulate new policies in this regard These policies are not only aimed at stimulating demand in production but also - an objective that is equally important if not more -

to stimulate demand in consumption This means that the Government should not alone engage in stimulating demand by raising budget expenditures, but policies must be worked out to make it possible for the whole people to take part in this endeavour

The development of the market of goods and services requires increased penetration into the world market and bold opening of the domestic market, and pressing the domestic enterprises to enhance their competitiveness In this connection, it is particularly important to build up a system of market information and forecast, to enhance the capacity of our trade and diplomatic representatives abroad to collect and analyze information, and to research on foreign markets as such information and analysis work would serve as a basis for organizing domestic production and step up exports

Quality control of goods and services which constitutes an important task in government market management has been poorly implemented In the future, for the purpose of appropriate quality control, goods and services should be divided into two groups: the group of goods and services which have a direct impact

on the living conditions and the health of the people, and the group of goods and services belonging to enterprises that dominate the market The first group which involves among other things food, food-stuffs, beverages, medicines must be strictly controlled in accordance with the health-care requirements With respect to the second group of goods and services which involves among other things power supply, oil and lubricants, telecommunications , control must be imposed on their technical quality as specified in the

commitments of the suppliers In addition, the government must refrain to the maximum from taking

decisions over the prices of goods and services; we must firmly abide by the principle that the overall interest of the nation, of the whole economy should rule supreme, and not the particular interest of any enterprise or industry

II THE FINANCIAL MARKET

The financial market plays a particularly important role in mobilizing savings, in efficiently allocating capital resources, in ensuring economic competitiveness and promoting socioeconomic development

The financial market has gradually emerged and developed in the process of renovation Many CPV documents have expressed the Party's view on the development of the financial market Most recently, the Resolution of the CPV IXth Congress has pointed out: "To ensure the rapid and sustainable development of the capital market, and specially the long-term and medium-term capital market To organize and operate safely and efficiently the securities market and the insurance market To ensure the emergence of a coherent currency market and to increase the convertibility

of the Vietnam Dong" (CPV IXth Congress Documents, p.101)

In order to implement these CPV policies, the Government has enacted many laws and issued many byelaws concerning the development of the financial market and is at present engaged in working out a plan on the development and improvement of the capital market and the currency market in keeping with the present level of development of the economy and the policy of taking the initiative in integrating our economy into the world economy

1 Actual development

The monetary market:

Prior to 1990, monetary, credit and banking activities were heavily marked by subsidization, administrative management measures, including decrees The Banking Decree (1990), the Law on the State Bank and the Law on Credit Organizations (1997) have exerted a positive impact on the development of the monetary market This was followed by the emergence of shortterm credit markets, the interbanking domestic currency market (1993), the inter-banking foreign currency market (1994), the Bid market of treasury bills (1995), and the open market (2000)

Along with this, a number of instruments in the monetary market has also emerged, namely, treasury bills, state bank bills, bills and commercial papers, bills of commercial banks (certifying the deposited money)

Participants in the Vietnamese monetary market have been increasing Prior to the 1990s, there were only the state bank, two state-owned commercial banks and the state treasury; recently, the credits organizations comprise six state-owned commercial banks, 50 joint-stock commercial banks,

4 joint venture banks, 24 affiliates of foreign banks, 23 joint-stock financial companies, 5 financial companies (affiliates of type 91 state corporations) and 8 finances leasing companies But there is a small number of actual and regular participants in the monetary market, comprising mainly some state-owned commercial banks and some joint-stock commercial banks, and these participants have quite loose links with one another

An underground foreign currency market is developing in parallel with the official one It is estimated that the underground market accounts for 20% of the share of the total foreign currency market, and its participants are gems and gold shops concurrently engaged in foreign currency trading, persons and organizations handling the remittances from overseas Vietnamese, persons

engaged in cross-border transfer of money, money changers active along the borders (referred to

The underground currency market exerts a positive impact by rapidly meeting the demands in foreign currency transactions of the inhabitants and the enterprises at a time when the official currency market is not yet developed Yet, since it operates beyond the control of the government, the underground currency market tends to reduce the effectiveness of the government monetary policy, creates favourable conditions for illegal economic activities such as corruption, smuggling, and may lead to foreign currency bleeding

The capital market

The medium-term and long-term credits markets have undergone positive development, with the ratio of medium-term and long-term lending by the commercial banks increasing to a considerable extent According to state-owned commercial banks, by December 31, 2001 medium-term and long-term loans of commercial banks amounted to 55.900 billion VND, accounting for 33.7% of total loans Mobilized capital of commercial banks mainly comes from short-term capital resources, while medium-term and long-term capital resources are still limited

On November 28, 1996, the Government promulgated Decree No.75/CP on the establishment

of the State Securities Commission Then, on July 11, 1998 it issued Decree No.48/1998/ND-CP on Securities and on the establishment of the securities market, and Decree No.127/1998/0D-TTg on the establishment of two securities transaction centres in Ha-Noi and Ho Chi Minh cities These documents serve as the legal basis for the emergence and activities of Vietnam's securities market After over 2 years of activities, by July 2002 about 19 types of bonds and bills were listed in the Securities Transaction Centres with a total value of authorized capital amounting to 1.016 billion VND The State Securities Commission has coordinated with the Ministry of Finances in holding 22 bid sessions and in guaranteeing the issuance of govenment bills totalling 3.088,6 billion VND There are at present in the Vietnamese securities market 9 securities companies which consist

of 3 joint-stock securities companies and 6 limited liability securities companies Out of these 9 companies, 7 have registered for all 5 business performances, i.e., brokerage, dealing on one's own account, portfolio management, underwriting, investment consultancy By July 2002, 12.000 transactions accounts had been opened at securities companies, with 91 investing organizations and 33 foreign investors

The securities companies have operated in a stable manner, with 7 out of 8 of them reporting profits, with a generally healthy financial situation and a guaranteed settlement capacity The structure of their turnover has changed in a positive direction: in the past, the bulk of the turnover came from profits on business capital (because the business capital was not fully used), but at present the bulk of the turnover comes from brokerage and dealing on one's own account

Over the recent period, the State Securities Commission has implemented many effective measures on market management in keeping with the characteristics of the situation obtaining during the initial period of the market But some of these measures are administrative in character, and therefore in many cases could not catch up with the developments and regulate the market efficiently Supervision work, designed to ensure the transparent Operation of the market, has not achieved many results, particularly supervision over the issuance and publication of information by various organizations Many legal documents of the State Securities Commission have been amended and revised, but still suffer from inadequacies and have not caught up with the realities of

"experimenting, error" and lacks a long-term vision