Rage Against the State: Discontent Grows in Vietnam

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Private-Sector Business
Workers arrange pieces of fabric under embroidery machines inside the Esquel Group garment factory at the Vietnam-Singapore Industrial Park in Thuan An, Binh Duong province, Vietnam. Photographer: Brent Lewin/Bloomberg

Vietnam’s state-owned enterprises were once its biggest employers, the largest revenue earners, the main growth drivers. Now, in criticism rarely seen since Ho Chi Minh’s Communists unified the nation 40 years ago, their dominance in the economy is being debated.

Dissatisfaction with state companies has been simmering in recent years, particularly after the global financial crisis when they were blamed for amassing piles of bad debt that crimped lending. As the government tries to spur economic growth, lawmakers are pressing for a rethink of these firms and greater support for private-sector businesses, instead.

“We need to change our mindset on the concept of state enterprises,” said Tran Du Lich, a member of the National Assembly economic committee and a lawmaker. “The government needs to stop giving preference to state companies and create a more balanced policy for all sectors in the economy.”

The view that the state sector should be taken down in influence is gaining currency decades after the “Doi Moi” reforms of 1986 brought market-oriented change to Vietnam. While Prime Minister Nguyen Tan Dung is aiming for record share sales this year, a leadership transition in 2016 limits the possibility of a complete overhaul of the inefficient and sometimes corrupt state companies that have held back an economy forecast to be among the fastest growing in the region.

State companies’ contribution to Vietnam’s gross domestic product fell to less than a third last year from about 56 percent before the reforms, while the private sector contributed 43 percent to GDP, data from the statistics department showed. SOEs also had only about 10 percent of the total workforce in 2014, while the private sector had 86 percent.

Leading Role

The government has come under increasing pressure to overhaul the system after state-owned Vietnam Shipbuilding Industry Group, now renamed Shipbuilding Industry Corp., defaulted on a $600 million offshore loan in 2010, prompting concern the country’s banking system may collapse. Two former executives at Vietnam National Shipping Lines were sentenced to death in 2013 for embezzlement.

The parliament in 2013 considered a revision to the constitution to remove language stipulating that the state sector will have the “leading role” in the economy. Lawmakers eventually adopted a watered down version that affirmed their dominant position to protect workers’ welfare, they said then.

While the number of state companies has more than halved to about 5,600 now from 12,000 in 1990, they still take up almost half of public investment, tie up 60 percent of bank lending and make up more than half the nation’s bad debt.

“State enterprises are no longer competent enough to play the key role in the economy,” said Le Dang Doanh, an economist and former government adviser in Hanoi. “They use up a lot of resources, but their contribution is not in proportion. The government must encourage private enterprises more for the sake of the economy.”

Limited Resources

Efforts to boost the private sector have yielded mixed results: while foreign investment into Vietnam has surged in recent years, it is directed primarily at export-focused makers of apparel, shoes and electronics. Success elsewhere has been limited, in contrast to the global ascent of Chinese companies including mobile phone maker Xiaomi Corp. and e-commerce firm Alibaba Group Holding Ltd. that also circumvented a system favoring state enterprises.

In Vietnam, government support for private companies is “negligible and inconsistent,” and they face many challenges including limited financial resources as most banks favor state firms, said Hoang Van Dung, vice chairman of the Vietnam Chamber of Commerce and Industry in Hanoi.

Very Reluctant

Despite the growing resentment of SOEs, there may be little political will to alter the landscape significantly, with a leadership transition looming next year, said Christian Lewis, Asia analyst at Eurasia Group in New York.

“Politicians will be very reluctant to challenge the wealthy and powerful vested interests in the state-owned sector at a time when they need financial backers and backroom influence,” Lewis said. While more companies are being partially privatized, the volume of state ownership is not seeing a precipitous drop, “indicating that the government is not willing to give much ground on ownership and management questions,” he said.

Six of the top 10 companies by market capitalization on the benchmark VN Index are still partly state-owned, compared with four out of five in 2000 when the index was established with five stocks.

Their continued dominance “is evidence that the government doesn’t want to loosen its grip on SOEs,” said Nguyen Dinh Cung, head of the planning and investment ministry’s Central Institute for Economic Management in Hanoi. The government must change its policies and regulations, including tax incentives, to support private companies, he said.

“The state sector is still considered as key for the economy,” Cung said. “That view must be changed since this has affected policy making and left the private sector at a huge disadvantage.”

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