Ownership bias and economic transition : evidence from the manufacturing sector in Vietnam

Abstract

Vietnam, unlike most former centrally planned economies in Eastern Europe but similar to the People's Republic of China, has been following a gradualist approach to its transition from 'plan to market'. This process involves gradual opening up the economy to private sector operations while permitting state-owned enterprises (SOEs) to continue playing a leading role in the economy. A central issue in the contemporary debate on the outcome of this dualistic approach to economic transition is whether it results in a policy bias in favour of SOEs, at the expense of achieving the key objective of promoting indigenous private enterprises (IPEs). The purpose of this thesis is to inform this debate through a case study of policy reforms, structural change and performance of the manufacturing sector in Vietnam. By reviewing the historical background to the launching of the 'reform process' (Doi moi) in 1986, this thesis argues that in order to sustain its authority, the Communist Party of Vietnam (CPV) was forced to embark on the transition to prevent the economy from collapsing. Therefore, the CPV started the renovation process by only temporarily accepting the participation of the private economic sector in the economy, then gradually formed a unique model of a socialism-oriented market economy. Although there is no clear definition of a socialism-oriented market economy, the CPV congresses have maintained that SOEs have to be the pillars of the economy, with the indigenous private economic sector playing a secondary role. Consequently, SOEs have continued to enjoy favoured treatment by the government compared to IPEs in accessing both factor and product markets. Combining analytical narrative with econometric analysis, the remainder of the thesis shows that 'ownership' does indeed matter in explaining the differences in enterprise performance. Apart from SOEs and IPEs, other comparative groups of enterprises are shareholding enterprises in which the state capital accounts for less than 50 per cent of the charter capital (so-called hybrid enterprises-HBEs) and foreign-invested enterprises (FIEs). The government's policies favouring SOEs and the enterprises which are expected to support the development of SOEs seem to hinder productivity, output growth and employment generation capacity of IPEs. There is no evidence to suggest that the second round of enterprise reforms and trade liberalisation since 2005 have contributed to redressing the ownership bias against IPEs. On the contrary, these reforms and trade liberalisation have made the performance of IPEs more vulnerable to external shocks compared to the enterprises of other ownership types. Notwithstanding the continuing ownership bias, overall, IPEs have maintained a relatively more impressive performance record compared to SOEs. IPEs are more efficient in using their invested capital with higher TFP growth rates and generate more employment for a given rate of output growth. They mostly rely on internal sources of finance for their expansion, in sharp contrast to SOEs which rely heavily on bank loans and budgetary support. Show more