Wider reform needed in private economy

Most developed and successful countries have created favorable conditions for the development of the private sector. The market mechanism application in such countries is improving day by day. The essential public policies on one hand help the market mechanism to operate more effectively, while on the other hand also support government to manage market weaknesses. The balance of three key sectors of market-government-society plays an important role in this process.

Some people say that Vietnam was not lucky in joining WTO as it had to carry the impact of the global crisis. However, Vietnam’s current problems are internal issues, not impacted from the outside. One key problem is that the public sector has been moving from core business operations to assets speculation. This has created a significant impact in the competitive ability of the manufacturing sector.
Over expectation and behavioral change
Before joining WTO, and after the effectiveness of a free trade agreement between Vietnam and US in 2001, Vietnam’s economy showed several victories. Exports had grown strongly, especially labor intensive products like agriculture and textiles. The easing of business law in 2000 had encouraged many private companies to push up manufacturing and service businesses which later posted a strong growth and a high profit return (some tens of percent). This was the foundation for the recent 7-8% growth in Vietnam.
 Vietnam’s economy is very fragile and troubles within some big enterprises can impact the whole economy. Hence, macro policies should manage this risk and create a better business environment.
When Vietnam decided to join WTO, most people expected that there would be more opportunities and Vietnam would likely see better economic growth. A big saving amount in domestic sector had been bringing in investments and a huge cash flow had been pouring into Vietnam. VN-Index increased fourfold in just one month, and in one year the land prices enjoyed the same growth. This meant that Vietnam’s economy was foreseeably expected to expand quickly.
If, at that time, enterprises had focused more on manufacturing activities, the expectations would have come true. If the economic growth had been higher, the bubble in prices of stock and real estate market would have been reasonable.
However, it was unfortunate that investors behavior has changed.  Concentration on manufacturing and business activities only bring the owners a return of some tens of percent, while investment in assets like stocks and real estate delivered a return of several hundred percent, or even several thousand percent. Hence, even as they continued doing their various businesses, most people usually speculated in stocks and real estate market.
The recurring changes had created a huge demand in asset investment. The easy money that had existed everywhere, consequently created ease in paying labor salaries or in over spending. From a so-so level of wages, many people had received a dream income. At that time most people liked to trade, buy and sell, and totally did not like to work hard or concentrate on their core businesses as before. As a result, opportunities from WTO and favorable business conditions were not taken, while problems became more and more serious, creating the significant impact until now.

Pouring oil into fire
The huge pouring of cash flow from foreign investors into Vietnam had made the domestic currency stronger, the prices of domestic products had become more expensive compared to product costs in neighboring countries. This also had made the domestic manufacturing sector less competitive. Further, unreasonable macro policies made this issue more significant. Vietnam had passively responded to the huge cash flow from outside. At that time, all that the State Bank did was take out VND to buy USD and forgot to do other things to balance the cash flow. As a result, the economy was now flooded with VND, inflation has sky rocketed from 2007 and had reached 30% at the end Q1/2008.
 With room for available growth no longer available and internal force has not been promoted, so the challenge ahead for Vietnam economy is huge. Therefore, the government should focus on macro stability, improve the business environment and create an equal playing field instead of active participation as in the past.
The money tightening policy had been only applied for a short period. To respond to global crisis and the domestic manufacturing recession, the State Bank continued to implement the money-easing policy. The effort to stabilize foreign exchange rate and high inflation rate was the second hit to the domestic business sector.  
From 2006-2012, the market price had doubled, while foreign exchange rate only depreciated 30%. These two factors had made the imported products, like computers and phones cheaper, while domestic products became more expensive. As a result, there were many enterprises posting losses and even bankruptcy, although they did not speculate in assets.
Wider reform needed in private economy ảnh 1 The easy money in assets market ten years ago made the public sector to move from core business operations to assets speculation, creating a significant impact in the competitive ability of the manufacturing sector. 
Other enterprises fell in the decision-making trap. If they stopped speculating and focused more on their core businesses they had to book big losses in speculating activities, this loss was even bigger than the profit from their core businesses. This would lead the owner to go bankrupt. Hence, at that time, many enterprises decided to keep their speculating activities with a hope that one-day asset prices would go up again. As a result, banks could not collect their loans, the social capital was not used in business operations, and the economy continued to face difficulties.
One more problem occurred, it was hard for people who had gotten used to high income from asset trading activities, to come back to low-salary jobs. A highly reputable person in the financial sector said, “it may take a generation of entrepreneurship to turn back the economy”. 
Hence, money tightening and business restructuring could be a solution. The real estate speculators should be replaced by higher-ability people to manage better the social resources and Vietnam now should create wider economic reforms. 

Dr. Huynh The Du, Fulbright University, Vietnam

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