Building institutions for a market economy with socialist orientation in Viet Nam

.VEMR. Economic policy debate BUILDING INSTITUTIONS FOR A MARKET ECONOMY... Vietnam economic management review Number 1 Winter 2006 10 Building Institutions for a Market Economy with Socialist Orientation in Vietnam Dinh Van An* ABSTRACT Establishing institutions for a market economy with socialist orientation is an important task set by the Tenth Congress of the Vietnamese Communist Party. To achieve set targets, this paper suggests policies and other measures to build and improve institutions, focusing on integral markets, enterprises of all ownership forms, and economic governance. Introduction The Tenth Congress of the Vietnamese Communist Party in 2006 put forward the task of establishing institutions for a market economy with socialist orientation (MESO) in Vietnam. In a broad sense, formal economic institutions consist of three components: formal rules (laws and regulations), implementing organizations, and an enforcement mechanism. Building institutions for the development of MESO from a centrally-planned economy has never been a simple task; indeed it is difficult and complicated. For Vietnam it is crucial to have a correct concept of a market economy and MESO. While there are various understandings of a market economy, it is generally accepted to be an economy where the market plays a decisive role in allocating resources and established economic relationships are operated on the basis of market rules, including those of value, supply and demand, competition, etc. In recent years, although research institutions of the Communist Party and the government have conducted various studies on MESO, there has not been an informed and generally accepted definition of this notion. As such, as a starting point for discussion of policy implications and directions to continue the development and improvement of institutions of MESO in Vietnam, the following definition is suggested: A market economy with socialist orientation is a market economy where the socialist state performs macroeconomic policies and uses the State economy to influence indirectly and drive economic development towards achieving the objectives of successfully building socialism on the basis of recognizing and fully applying market rules, principles, and mechanisms. * Dr. Dinh Van An is President of the Central Institute for Economic Management. .VEMR. Economic policy debate BUILDING INSTITUTIONS FOR A MARKET ECONOMY... Number 1 Winter 2006 Vietnam economic management review In light of this proposed definition, this paper will focus on policies and measures to develop integral markets and enterprises and renovate economic governance. 1. Development of integral markets The synchronized development of different types of markets, including goods and services and factor markets, is a prerequisite of the process of establishing and improving MESO in Vietnam. For the purpose of developing each type of market, appropriate policies and measures are required in order to foster the synchronized development of factor markets towards the promotion of both market demand and supply, the acceleration of the liberalization of prices and market entry, and institutional improvements to secure order in purchasing and sales transactions. 1.1. Goods and services market Over the years, the goods and services market in Vietnam has developed vigorously, increasingly in accordance with market rules and the provisions of the World Trade Organization (WTO). Domestic trade volume has risen sharply with a variety of commodities, better meeting the needs of production and consumption. Export and import turnover has also increased robustly, at a much higher rate than gross domestic product (GDP) growth. The market has, in principle, been opened both domestically and internationally. The number of goods and services with prices subject to state control has gradually fallen, and the price of almost all commodities is now determined by supply and demand. There are, however, several weaknesses and constraints in the market mechanism that need to be further improved. While the list of goods and services subject to state control via such tools as quotas or licenses has been shortened, it is still far longer than in many other countries. Moreover, there are a few cases where a state monopoly has become a state-owned enterprise monopoly. While the Enterprise Law stipulates that businesspeople and enterprises under all ownership forms are entitled to conduct business freely in industries and sectors not prohibited by law, a few constraints remain due to the persistence of the “ask-give” mechanism and other old-fashioned ways of thinking among some public servants and officials. Although the practice of market fragmentation by localities, industries, and economic sectors has been curtailed it has not been eliminated entirely. Trade fraud and unfair competition have increased in a more sophisticated and intricate manner due to the fact that the legal framework is still inadequate, inconsistent, and unspecific, while law enforcement is not sufficiently stringent and market monitoring and supervision is unsatisfactory. To carry on the development of the goods and services market it is suggested to continue improving and implementing better laws regarding trade and business over the next five years, while establishing and consolidating the organization of market monitoring and supervision. Business types and forms should be diversified, and business associations and professional organizations standardized and promoted. Market openness should be expanded both domestically and internationally, enabling market access for businesses and enterprises of all ownership forms, and price marketization accelerated together with the renovation of 11 .VEMR. Economic policy debate BUILDING INSTITUTIONS FOR A MARKET ECONOMY... Vietnam economic management review Number 1 Winter 2006 12 management mechanisms and the control of prices of some essential goods over which the State is still required to maintain control through macro-regulation policies. The Competition Law plays a crucial role in the market economy, ensuring fair competition in the market. As this Law was passed by the National Assembly in its Sixth Session and came into effect recently, its implementation has encountered numerous shortcomings. It is therefore necessary to quicken the process of drafting and promulgating provisions in a transparent manner, conforming to market economy principles, while at the same time promoting fair competition and strengthening the fight against monopolies, which cause damage for customers, the State, and the economy at large. In Vietnam’s process of economic integration and implementing regional and international commitments, due attention is required to protecting domestic production and markets, adopting measures that conform to international trade provisions and practice. As far as development is concerned, the relationship between openness and industry protection needs to be addressed in a constructive way. This is indeed a new and difficult issue that requires awareness of all stakeholders at different levels. 1.2. Policies to develop factor markets Although being less developed compared to the goods and services market, factor markets have been formed and are in different stages of development, following a common trend of shifting from being informal to formal. For the purpose of developing the money market, apart from policies and measures to improve the effectiveness and efficiency of the State Bank of Vietnam (SBVN), it is necessary to increase demand towards the diversification of goods for open market operations (for example, certificates of deposit, promissory notes, bills of exchange, and due securities, etc.); extend valuable papers subject to discount and re-discount at SBVN; review the legal system for monetary markets to ensure fair market access and competition among credit institutions; remove limitations on joint-venture banks and branches of foreign banks with regards to the mobilization of domestic currency in order to promote market dynamics; revise and amend some provisions of the monetary legal framework that have a negative impact on the development of the monetary market, such as zero interest being applicable to compulsory reserves; reducing interest on overnight loans to the rate of rollover loans (if the SBVN considers the latter as the ceiling interest rate in the inter-bank market); and diversifying transaction methods in the market, gradually applying derivatives. The foreign exchange market, particularly the inter-bank exchange market, must develop further based on the liberalization of current accounts transactions at market rates, with appropriate regulation by SBVN and state owned commercial banks. For the bond market, development necessitates expanding participation in the bidding for government bonds; providing more freedom in purchasing and selling, mortgaging, and discounting government bonds; and encouraging large enterprises, especially state corporations, to issue and list corporate and project bonds. In addition to policies for stimulating market .VEMR. Economic policy debate BUILDING INSTITUTIONS FOR A MARKET ECONOMY... Number 1 Winter 2006 Vietnam economic management review demand and supply, it is necessary to improve the legal framework and provide incentives to promote the development of the bond market through the establishment and development of credit rating agencies in the form of independent joint-stock companies, and the endorsing of underwriters. As far as development of the stock market is concerned, it is necessary to improve transparency and disclosure disciplines in corporate financial statements; accelerate the equitization of state-owned enterprises (SOEs) and foreign-invested enterprises (FIEs) and encourage equitized enterprises to list on the stock market; extend the participation of foreign investors in the stock market; and support and improve the capabilities of securities companies, securities exchanges (including the over-the-counter center), and the State Securities Commission. For the credit market, development policies are required to be supplemented and improved towards loosening market entry requirements and facilitating the credit business; strengthening inspection, supervision, and management capacity at commercial banks; improving the effectiveness of credit policy execution by the SBVN; and improving the legal framework and strengthening cooperation among administrative bodies. In order to develop real estate market, it is firstly recommended to effectively implement the Land Law, the Construction Law, and the Law on Real Estate. Law and policy for the development of the real estate market are essential to enable an increase of goods in both primary and secondary markets, promoting competitiveness and transparency in real estate transactions; and develop real estate information systems, brokerages, consultancies, and purchase and sale services while improving awareness among and the capacity of real estate administrative agencies. In addition to the abolition of the “ask-give” mechanism and moving towards land leasing and sale at market prices, the State and real estate entities are required to stabilize real estate demand and supply and price, not just to satisfy social needs, especially for production and business, but also to contribute to fostering the economy, ensuring social equity, and strengthening the fight against corruption. The State should actively formulate and publicize a land use master plan; grant land use rights and real estate related certificates, and local authorities (instead of investors) should recover land, transform land use purposes, and perform land and real estate related procedures according to the law. To develop the labor market, the first step is to improve family planning, migration, labor movements, and training policies for the purpose of increasing the quantity and quality of labor supply. To increase labor demand, it is crucial to consistently implement policies on developing a multi-sectoral economy and promoting labor exports, etc. While improving the legal framework on the labor market, it is important to create the necessary conditions for the operation of service centers that supply information on the labor market and jobs, and provide vocational training, etc. For the purpose of creating jobs for rural workers, the State is required to plan labor migration from rural to urban areas, industrial zones, and to different regions in such a way that it does not only enable but also supports farmers in registering for temporary residency and finding accommodation in new working areas. In addition, the legal framework on labor contracts, wages and conditions, recruitment, resignations, and dismissals, etc., also need to be 13 .VEMR. Economic policy debate BUILDING INSTITUTIONS FOR A MARKET ECONOMY... Vietnam economic management review Number 1 Winter 2006 14 revised towards being more market-based and respecting the self-determination, responsibility, and agreement of concerned parties. To foster the technology market, it is important to improve the legal framework on intellectual property rights, to regulate not only these rights but also rights regarding technology products and the purchase, sale and transfer of technologies, and bolster the state management and settlement of disputes over intellectual property rights, ensuring that domestic regulations conform to international commitments. Policies to increase domestic supply are crucial, which encourage and enable the establishment and development of scientific and technological organizations and brings them closer to the market, improves the rights and responsibilities of state technological organizations, and provides appropriate incentives on the basis of research and invention output. Demand for technological products is the key to the development of this market. Demand stimulus policy, therefore, is required to create a fair competitive environment for all types of enterprises and removing subsidies for SOEs. It is also important to introduce policies on the development of technological product information and brokerage services systems; organize exhibitions to introduce, purchase and sell technological products; encourage investment in innovating technologies and applying high technologies; set up venture capital funds; support infrastructure for technological development; and reform policies on training, fostering, and using technological talent. The recently promulgated Law on Intellectual Property Rights will hopefully promote Vietnam’s technology market in the years to come1. 2. Development of enterprises of all ownership forms In addition to developing MESO with multi-sectoral co-existence and development, which were set in Party Congress X, the Party and the State have also put forward and implemented many programs, policies, and measures to develop enterprise types. 2.1. State-owned enterprises Resolutions from the Third and Ninth Sessions of the Party Central Standing Committee, Ninth Tenure, and Party Congress X received a high level of consensus within the Party itself and from society with regard to the role and strengths and weaknesses of SOEs and policies and measures to restructure, reform, develop, and improve the efficiency of SOEs. It is important to note that despite initial progress in implementing the State-Owned Enterprise Law 2003, and government action plans, proposals from ministries, sectors, and localities on restructuring, reforming, developing, and improving the efficiency of SOEs, several issues have arisen and need to be addressed. In this process, the following points should be understood thoroughly: Firstly, SOEs have held and will continue to hold a significant role in the process of developing key sectors and industries in the national economy, including infrastructure, public services, and new and high technologies that cannot be imported or provided by the private sector. For other industries and sectors, it is vital to consider feasibility and efficiency in deciding whether SOEs will be involved based on fair competition with enterprises with other forms of ownership. .VEMR. Economic policy debate BUILDING INSTITUTIONS FOR A MARKET ECONOMY... Number 1 Winter 2006 Vietnam economic management review Secondly, despite their importance, SOEs are just one of many tools through which the State influences and regulates the economy, and are only one component of the State economy. The State economy also comprises assets owned by the people, for example land, natural resources, taxes, public finance, and other assets that are derived from other macro-economic activities. For this reason, it is inappropriate to use figures and the proportion of assets held by SOEs or contributed by SOEs to GDP to evaluate their role in the State economy. Thirdly, restructuring, reforming, and improving efficiency in SOEs is an urgent task, which will not only determine the competitiveness of the economy but also contribute significantly to the fight against the national evil of corruption. As such, in addition to general orientation, specific policies and measures are required for each SOE in order to improve both state and corporate governance. Fourthly, for the purpose of the efficient operation of SOEs it is crucial to remove the “life buoy” given them and creating fair competition among enterprises under all forms of ownership in light of the Enterprise Law 2005, the target of which is to complete transformation by 1 July 2010. Fifthly, state administration of SOEs must be performed in accordance with the general provisions applicable to all types of enterprises. For the purpose of effectively and efficiently managing SOEs, through its representatives the State makes decisions relating to development orientation, operational charter, and key management positions in SOEs, while providing autonomy for SOEs and their directors. 2.2. Private enterprises The Enterprise Laws (1999 and 2005) are considered breakthroughs in economic thinking and legal formulation and implementation. Resolutions from Party Congresses IX and X, the Fifth Session of the Central Standing Committee, Ninth Tenure, with regard to the development of the private sector, and the Enterprise Laws have brought a breath of fresh air to the establishment and development of private enterprises. As a result, people and enterprises are allowed to conduct business freely in all sectors and industries not prohibited by law. To date, about 250,000 new private enterprises have been registered, contributing to increasing private investment in socio-economic development. The private sector has always achieved higher growth rates compared to that of other sectors, while creating a similar number of new jobs. The development of private enterprises, however, has exposed several weaknesses and constraints. The scale of investment capital is rather small and management and technological capabilities, product quality, competitiveness, and legal awareness remain generally low. Although supported by Party advocacies and directions and State policies and laws on a non- discriminatory basis, social attitudes towards the private sector have to a certain extent been negative. In fact, private enterprises have encountered greater difficulties in acquiring land for business and production and accessing bank credit due to continued discrimination from public servants and administrative authorities at all levels. For this reason, to develop private enterprise further it is necessary to: 15 .VEMR. Economic policy debate BUILDING INSTITUTIONS FOR A MARKET ECONOMY... Vietnam economic management review Number 1 Winter 2006 16 - Clarify and further comprehend the Party’s view on the development of the private sector, recognizing it as an integral part of MESO in Vietnam. When possible, it is important to constitutionalize this view and recognize and protect private ownership of production materials. - Ensure actual equity in both legal provisions and legal enforcement of the rights and responsibilities of private enterprises compared with enterprises with other forms of ownership, particularly SOEs. - Accelerate the implementation of policies and measures to support small- and medium-sized enterprises (SMEs), as stipulated in Decree 90/CP from the government. 2.3. Cooperatives In light of Resolutions from Party Congress X and the Fifth Session of the Ninth Party Tenure on the collective economy, there were many new provisions in the Law on Cooperatives 2003, especially the clarification of the collectivity features of cooperatives and provisions on the operation of cooperatives as an enterprise type. Previously, small-scale industrial, services, and credit cooperatives in cities and towns operated as an enterprise, with differences in terms of capital contribution, voting rules, and non-divided assets. In rural areas, however, the development of cooperatives has distinctive features that are much more complex and difficult. Previous agricultural cooperatives have been transformed into agricultural services cooperatives or shifted gradually to other areas. Truly cooperative models have been established with diversified forms of economic activities, which have fostered the industrialization of agriculture and rural areas in recent years. Contract farming and the abovementioned transformation into new cooperative models have given new vitality to agriculture and rural areas. Household cultivation in small, scattered land plots, however, makes it difficult to develop the production of agriculture products for commercial and export purposes. Therefore, it is necessary to assist farmers to understand clearly and implement the Law on Cooperatives 2003, providing incentives and measures to develop cooperatives while at the same time implementing the policy on concentrating/merging scattered cultivation areas to develop the farming economy and the agricultural and rural collective economy, including cooperatives and private enterprises. On the basis of recognizing and protecting the five rights of farmers over allocated land, it is crucial to encourage farmers to contribute land voluntarily through cooperatives and enterprises for the sake of achieving greater effectiveness. 2.4. Foreign-invested enterprises The foreign-invested sector has been described in Party Resolutions and State legal documents as being an integral part of MASO in Vietnam. Thanks to this, more than 5,000 foreign-invested enterprises (FIEs) have been established and are now operating in Vietnam, recording high levels of growth. In 2005, FIEs accounted for 16.3% of total social development investment and 15.9% of GDP. There were, however, many constraints in the organization and operation of FIEs, which were removed on 1 July 2006 when the Common Enterprise Law 2005 came into effect. For example, the establishment of an FIE previously had to be tied to individual investment projects and were limited in terms of duration and investment form (joint venture, .VEMR. Economic policy debate BUILDING INSTITUTIONS FOR A MARKET ECONOMY... Number 1 Winter 2006 Vietnam economic management review business cooperation contract, 100% foreign capital). FIEs were only allowed to be established in the form of a limited liability company with many particular provisions contrary to market economy principles, and there were other constraints relating to capital, voting principles, and other procedures, etc. As such, to develop FIEs together with further improvements in the investment environment, the effective implementation of the Unified Investment Law 2005 and Common Enterprise Law 2005 is required. Apart from the abovementioned polices and measures applicable to each type of enterprise, it is important to enhance the effectiveness of the State administration apparatus. With such efforts, Vietnam will be able to implement the policy and advocacy set out in Party Congress X, which is to move towards a common legal framework and level playing field for enterprises regardless of ownership, creating real change in the development of all types of enterprises and establishing and improving MESO in Vietnam. 3. Renovation of economic governance In the process of transforming from a centrally-planned economy into MESO, rather than being narrowed the role of the State needs to be reformed more substantially. The State acts not only as a “midwife” but also a “parent” of MESO in Vietnam. It is crucial to renovate and strengthen the role of the State with a view to not only performing simple governing functions but also being the architect of MESO and the facilitator of economic, market, and enterprise development. In recent years, the government and authorities at all levels have put enormous efforts into reforming economic governance, as well as in supporting and facilitating enterprises and businesses to conduct production and business activities. However, the government still directly intervenes in business activities, including transformed SOEs, making decisions on investment projects, the implementation of which is then handed over to SOEs. This has resulted in the dispersion and inefficacy of state investment and an increase in infrastructure construction debts in recent years. Further reform of economic governance, therefore, must be focused on addressing its scope and essence, separating administrative governance from business activities. Besides a few essential public service works and projects, which require direct bidding and implementation by the government, authorities at all levels should not be involved in production and business projects, with enterprises of all ownership types playing the key role in all investment and business activities. Central government should concentrate on establishing and improving MESO, formulating and implementing overall socio-economic development strategies, master plans, and other plans, and performing macroeconomic regulation of the national economy. It is necessary to further decentralize to local governments in terms of power over and responsibilities for implementing the economic legal framework, designing and implementing local socio- economic development strategies, master plans, and other plans, while at the same time facilitating production and business activities in local areas. Over the years, socio-economic development planning has been reformed towards a better combination between planning and markets. This, however, has not satisfactorily met the 17 .VEMR. Economic policy debate BUILDING INSTITUTIONS FOR A MARKET ECONOMY... Vietnam economic management review Number 1 Winter 2006 18 development needs of the economy, so it is necessary to accelerate the reform of both content and methodology. Greater focus is required to reform the continued formulation and implementation of socio-economic development strategies and master plans. Strategies and master plans are required to be formulated on the basis of accurate information and data with the participation of different agencies, organizations, and people, especially research institutes and scientists. As strategies and master plans are designed, it is necessary they be disclosed and disseminated to the public. Five-year and annual socio-economic development plans at national and local levels should be specific and cover only some targets of macroeconomic growth, poverty reduction, culture, healthcare, social welfare, the environment, and public investment, etc. In addition to planning reform, the State should improve and utilize effectively and efficiently macroeconomic management tools. Macroeconomic objectives and overall targets, which have been defined in the plan, should be key sources to institutionalize financial and monetary policies. Financial policies are expected to be crucial tools in stimulating economic growth, regulating incomes, reducing poverty, and narrowing the poverty and development gap among different groups and regions. Monetary policies are expected to play a significant role in stabilizing the currency value and macroeconomic balance for the sake of development. Although administration reform has recorded initial progress with the application of one-stop shop procedures in several localities, there are many related issues that need to be addressed. It is necessary to eliminate subsidies, minimize the “ask-give” mechanism and licensing practices, and adopt principles under which people and enterprises are allowed to do what is not prohibited by law, while public servants and officials must only be allowed to do what is specified by laws, in keeping with the rule of law. Investment, the establishment of enterprises and market entry procedures must be simplified on the basis of stipulating clearly the rights and responsibilities of investors, businesses, and enterprises. The State should only approve the licensing of key investment projects as they relate to economic security, natural resources, and master plans, and whether those projects are to be invested by the government or limited by the government. Other types of investment projects should be subject to registration requirements. For those where approval and licensing are still applicable, greater decentralization should be accelerated to local authorities in line with informed responsibilities, and improved supervision and monitoring by higher authorities of lower level authorities with regard to law enforcement and the implementation of policies, strategies, and master plans. Taxation management mechanisms should also be improved further on the basis of completing laws on taxation towards simplification, broader application, lower tariffs, and stringent management. It is necessary to widely adopt the practices of self-assessment and tax payments by businesses and supervision by taxation authorities, instead of direct calculation and collection by tax officials, as at present. For the purpose of better meeting social needs in public goods/services, it is important to identify which public goods/services are to be provided by the State on a payment-free basis and .VEMR. Economic policy debate BUILDING INSTITUTIONS FOR A MARKET ECONOMY... Number 1 Winter 2006 Vietnam economic management review are unable to be commercialized, with the remainder being socialized. As far as the former is concerned, the State should consider whether to provide these through its bodies or non-business entities or through bidding. For the latter, participation must be extended to economic entities under all ownership forms. As such, in conjunction with the reform of corporate regulations, it is important to reform further the regulations on non-business entities, firstly scientific, education, training, healthcare, and culture and information organizations. In conclusion, in recent years, especially at Party Congresses IX and X, MESO has been increasingly improved in all institutional aspects. The market economy in Vietnam has taken initial shape and been developed. Nevertheless, the socialist orientation remains opaque. For this reason, by the end of the Five-year Socio-Economic Development Plan (2006-2010), the fundamental completion of MESO in Vietnam is considered a crucial and urgent task. To achieve this, it is necessary to focus all Party and State efforts on improving the legal framework, especially economic laws, in order to create a favorable investment and business environment for the business community, ensuring transparency and predictability, and consistently applying policies and measures to foster different types of enterprises and markets while at the same time renovating Party governing/intervention in economic development, reforming the role and functions of the State and state economic management based on market rules, principles, and mechanisms, and adopting macroeconomic policies and indirect intervention through the State economy to ensure socialist orientation in the economic development of the country. ‰ Notes 1. The Law on Intellectual Property Rights was promulgated on 19 December 2005 and came into effect on 1 July 2006. References ƒ Central Institute for Economic Management (2002, 2003, and 2004), Vietnam’s economy in 2001, 2002, and 2003, Political Publishing House, Hanoi. ƒ Dinh Van An et al (2002), Institutions, Institutional Reform and Development, Statistics Publishing House, Hanoi. ƒ Dinh Van An (ed.) (2004), Developing a Market Economy with Socialist Orientation in Vietnam, Political Publishing House, Hanoi. ƒ Documents from Party Congresses VI, VII, VII, IX and X. ƒ Government Report presented at the Sixth Session of the Eleventh National Assembly on the implementation of socio-economic tasks in 2004 and the socio-economic development plan in 2005. ƒ Government Report presented to the Eighth Session of the Eleventh National Assembly on the implementation of socio-economic tasks in 2005 and the socio-economic development plan in 2006. ƒ Government Report presented to the Tenth session of the Eleventh National Assembly on the mplementation of socio-economic tasks in 2006 and the socio-economic development plan in 2007. ƒ Reports presented at workshops held by the Central Theoretical Council of the Communist Party. 19