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Remedy of the state

Asia / 05-06-15 / by
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Vietnam’s economy may be growing, but power must be wrenched away from state-owned enterprises. Jax Jacobsen reports.

 

Despite steady GDP growth since the economic crisis, concerns are growing over a stark imbalance between Vietnam’s imports and exports.

The numbers speak for themselves: in the first four months of 2015, Vietnam posted a US$3bn trade deficit. This is in drastic comparison to figures from the same period in 2014, when the country posted a US$2bn trade surplus.

The marked upturn in the import of machinery and electronics helps account for the gross divergence of imports and exports. Vietnam’s imports of these goods grew by 36.6% in this four-month spell, totalling US$17.08bn. This is in spite of overseas sales jumping 8.2% from January to April 2015.

Another important factor has been a commitment to diversification, according to the World Bank’s lead economist in Vietnam, Sandeep Mahajan. Though oil amounted to 25% of exports in 2000, it now only accounts for 5% of total exports, he says.
“Light manufacturing – garments, footwear, luggage, furniture – and technology exports, such as phones, computers, other electronics, have grown rapidly, accounting for nearly half of total exports in 2014,” he tells GTR.

The precipitous fall of exports has particularly worried deputy prime minister Hoang Trung Hai, who in May pushed ministries responsible for agriculture, forestry and fisheries to do more in helping these industries improve their export strategies.
But Vietnam’s weak competitiveness may be due to a particular cocktail of factors – ranging from structural to market-related ones – which is making export-oriented industries fall behind their competitors in the region.
SOE dominance

The dominance of state-owned enterprises (SOEs) in Vietnam remains one of the largest challenges to improving the efficiency and competitiveness of goods produced in the country, Dan Rathbun, senior director for economic growth in Asia at DAI, an international development consultancy, tells GTR.

“The public sector is still very big in Vietnam, with so many jobs at stake, and so many people who benefit from the system,” Rathbun says. “They [the government] are letting the private sector grow and letting SOEs get smaller and smaller to compete more with the private sector. But SOEs still account for 40% of GDP.”

SOEs are by nature less efficient in manufacturing products than private companies, and are subject to bloated workforces propelled by nepotism. A joint report from the National University of Singapore and the Chartered Institute of Management Accounts found in April that SOEs required nearly double the capital required by domestic private firms to achieve the same levels of output – dramatically affecting the amount of goods available for export.

These state-backed conglomerate firms prevail in the sectors in which Vietnam is strongest, such as garments, Duke University professor and Southeast Asia expert Edmund Malesky explains to GTR. But export growth in these sectors remains unimpressive.
“This is the place where you would have expected them to glow,” he says. “That just hasn’t materialised.”

Most of the difficulties of the banking sector are tied to SOEs. Nina Pavcnik, Dartmouth College

The dominance of SOEs in this sector goes back to Vietnam’s accession to the World Trade Organisation in 2007.

“Sectors where reduction in tariffs were lower were those dominated by the SOEs, and the phase-in periods were longer. This gave [SOEs] a protected sector to operate out of,” Malesky says, explaining why these state firms have lagged behind.

SOEs also now have more difficulty gaining access to credit, after years of their creditors posting lower than anticipated returns, Dartmouth College international trade professor Nina Pavcnik says. These resulted in non-performing loans (NPLs), which by some estimates accounted for 15% of all loans in 2014.

“Credit has been in short supply, which of course has pretty big repercussions for the rest of the economy, because they don’t have sources to lend to potentially productive firms,” she says. “Most of the difficulties of the banking sector are tied to SOEs.”

Challenging the development of export-oriented industries further are continual logistics problems in the actual transport of goods to ports and airports. Vietnam’s transport infrastructure is terrible, Mayer Brown’s Washington DC-based trade lawyer Matthew McConkey tells GTR.

Shrimp farmers in the Mekong delta, for example, have to cross two ferries and drive for miles on a pothole-filled two-lane highway to access a port to ship their product. There are only two major ports in the country, both of which need substantial upgrades. Once at the port, getting through Vietnamese custom points is another hassle.

“They try to do it legitimately,” he says, meaning without paying bribes. “But it’s very difficult for them.”

Compounding the problem, personnel at these border checkpoints has not been adequately trained, which creates bottlenecks, DAI’s Rathbun says.

“Instead of people who can sift through suitcases, they need people with more forensic skills and knowledge,” he explains. “Officials have introduced e-customs systems in Ho Chi Minh City, which has eliminated a lot of the paperwork. But there are some issues with the software and personnel not really understanding how to use it.”

When the e-customs system was first introduced, the port was shut down for three days before the system was running smoothly.
The World Bank echoed these findings in a 2014 report that found the lack of automation in trade clearance and fragmented modal planning in transportation were key causes of Vietnam’s supply chain unpredictability.

In order to get goods shipped out or shipped in, there are a lot of people whose palms have to be greased. Dan Rathbun, DAI

The other aspect spoiling the theoretical export-oriented soup is the pervasive blight of corruption.

“In order to get goods shipped out or shipped in, there are a lot of people whose palms have to be greased,” Rathbun says.
Vietnam has scored periodically low on Transparency International’s Corruption Perceptions Index, ranking 119th of 175 countries surveyed in 2014. TI described Vietnam’s business openness as “scant or none”.

Corruption has also weighed down Vietnam’s ranking in the World Bank’s Doing Business 2015 report, sinking eight notches to 78th of 189 countries surveyed, landing behind regional competitors Malaysia (16) and Thailand (26) on business environment, but ahead of China, the Philippines and Indonesia.

Vietnam was rocked by an enormous scandal in its shipbuilding industry in 2012, which saw nine senior executives of the state-owned Vietnam Shipbuilding Industrial Group (Vinashin) go on trial for extortion and causing US$43mn in losses.

Unlike other countries, Vietnam uses capital punishment to keep wayward executives in line: of the 10 officials convicted of extortion and other crimes, two received the death penalty.

But these measures have done little to limit corruption at every level, with bribes still being sought for permits and government still being wary of those firms which fare well financially, sources tell GTR.
Fire sale

To improve competitiveness, the Vietnamese government is attempting to reform state-owned industries. It set a target for 2015 for the number of SOEs it aimed to privatise. However, only 9.3% of the total number targeted was privatised in the first quarter of the year. Moreover, those state enterprises which were privatised tended to be smaller firms.

Investor reluctance may be a key reason. Vietnam’s preferred method of privatisation is to bring private investors on board, rather than full-out launch the state enterprise as a private business. But finding the investors who are willing to invest in SOEs has been tricky, since the government is only willing to offer minority stakes to private shareholders. According to Rathbun, few are interested in investing in inefficient firms with no power to impose changes in governance or in the company’s structure.

Recent privatisations saw only 44% of shares being sold, The Wall Street Journal found in April. Those pushing for substantial economic reform are looking outside the country, hoping that major trade deals such as those signed with Russia and South Korea in May could inspire much-needed changes to improve the country’s competitiveness.

The biggest hopes have been placed on the Trans-Pacific Partnership (TPP), currently in negotiations. If realised, the TPP will include the US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, China and Peru in one of the largest trade and investment deals ever recorded.

Though negotiations have been held in secret, and no one outside the negotiating parties has seen the details of the proposed deal, analysts and investors believe the deal could thrust changes in how SOEs operate – from disclosure of operating practices, to access to land, and access of finance.

“It’s not going to lead to privatisation,” Malesky says. “But it will lead to the reduction of these internal biases.” As daunting as these challenges might appear, it’s important to keep in mind the context of Vietnam’s economic development, Dartmouth economist Pavcnik says. “Who do you compare it to – South Korea? Indonesia? Vietnam was so much poorer than those countries in 1990.”

Keeping this mind, “Vietnam has actually done quite well” as it transitions from a command economy to a free-market state.

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