SOE Equitization in Vietnam: Experiences, Achievements, and Challenges

Southeast Asian Affairs 2003, pp. 327-38 SOE EQUITIZATION IN VIETNAM Experiences, Achievements, and Challenges Vu Quoc Ngu Overview of the SOE Reform in Vietnam The first state-owned enterprises (SOEs) in Vietnam were established by nationalization of privately owned enterprises and development of new SOEs from the 1950s. Given the backward state of its agrarian economy, these SOEs were constructed according to the Soviet model as this model, at that time, was perceived to be the quickest way to develop the economy. Generous investment in the SOE sector during this period brought about impressive economic results. The high rate of growth of industrial production, however, had masked the underlying defects of the SOEs: inefficiency and dependence on foreign aid. In spite of these defects, this model was again applied to the SOEs in the south of Vietnam after the unification of the country in 1975. As a result, despite a large amount of investment and the rapid expansion of the SOE sector, the economy experienced a crisis in the second half of the 1970s.1 The threat of economic collapse forced the Vietnamese Government to review the economic strategy it was pursuing. Consequently, different policies were introduced from the early 1980s, which relaxed the rigidity of compulsory state plans.2 The SOEs were allowed to produce some non-planned products, sell them in the free market and enjoy a share of the realized profits. The changes had a strong impact on the behavior of SOEs towards production efficiency. However, the positive impact was short-lived as reform measures were partial in nature and were carried out within the frame of a centrally planned economy with the ultimate aim of strengthening that mechanism. These partial reform measures contributed to inflation during this period. The failure of the subsequent price, wage, and money reform in September 1985 directly caused hyperinflation with prices increasing by nearly 800 per cent in 1986 alone. The negative macroeconomic impact of this hyperinflation induced the next wave of reform in the second half of the 1980s. In December 1986, the Sixth National Congress of the Communist Party ofVietnam decided to abandon the centrally planned mechanism and replace it with a market mechanism to develop a market-oriented economy in Vietnam. Vu Quoc Ngu is a researcher at the Academy of Finance, Vietnam. 328Vu Quoc Ngu With this reorientation, several new policies were introduced, especially from the late 1980s, which gradually eliminated elements of the centrally planned economy and developed new institutions of a market-based economy. SOEs were given more autonomy in their operation. They could still share in the realized profits, which were now calculated based on true costs. Nevertheless, while economic activities were strongly stimulated in many SOEs, the high turnover of management also caused a large number of SOEs to experience difficulties and incur losses.3 In the context of tight budgets, following the cut-off of aid from the Soviet Union and Eastern European countries, the government decided to downsize the SOE sector by closing down and merging inefficient SOEs. As a result, the number of SOEs was halved to around 6,000 by April 1994.4 In 1994, certain SOEs were further reorganized into much bigger entities — the so-called General Corporation 90 and 91. The divestiture of SOE ownership which was initiated in 1992 has also been carried out in the forms of equitization, transferring, contracting, leasing, and outright selling. The decisive reform measures during this period brought about impressive growth in the SOE sector.5 However, from the mid-1990s, the SOEs have been facing more competition from domestic and foreign private firms in Vietnam, especially after the Asian financial crisis in 1997, which caused several of them to operate with chronic losses.6 The reform of SOEs during this period was somewhat slowing down until recently, when a number of strong measures were initiated and implemented.7 The equitization process has also picked up momentum during this period of time. The SOE Equitization Process and Its Initial Achievements The SOE equitization in Vietnam was first initiated in 1992 following Directive 202 on 8 June 1992 from the Prime Minister. By definition, the equitization is intended to mobilize capital...