Institutional Aspects of Privatization: The Case of Viet Nam

Abstract

Privatization in the sense of transfer of ownership and control rights of the state-owned enterprises (SOEs) has been either minimal or ineffective in many transition economies, including Viet Nam. One major barrier in this respect appears to be the general absence or weakness of an appropriate institutional infrastructure. Institution building, however, is extremely difficult and a painstakingly slow process. Although Viet Nam has attained some notable progress in this regard, many anomalies and shortcomings persist. For example, the laws relating to property rights, foreign investment and corporate governance are still not clearly defined and/or suffer from many inadequacies. The judiciary is also undeveloped and the enforcement of laws is extremely weak. There is no competition policy. Restructuring of enterprises has been few and far between. A stock market is yet to be established. And there is no worthwhile social safety net to protect the interests of any retrenched labor. This creates an important policy dilemma. On the one hand, privatization is urgently warranted to help the desired switch-over to a market economy. On the other hand, institutional weaknesses dictate a slower approach to avoid such serious problems as possible pilferage of state assets and replacement of SOEs by corrupt, private monopolies. This policy dilemma which does not lend itself to any easy resolution, gives rise to several major questions relating to SOE reforms, the pace and sequencing of the privatization program and any alternative mechanism to crack the institutional barriers. This paper argues that given the inherent difficulty in building up an appropriate, market oriented institutional infrastructure, a better policy option for the country may be to stimulate a robust private sector growth. This calls for “leveling the playing field” by the abolishment of special incentives to large SOEs and making them face hard budget constraints. More importantly, measures should be taken urgently to: (i) privatize the small SOEs, along with mainstreaming and strengthening the existing private sector enterprises, (ii) streamline the foreign investment laws and regulations to attract greater FDI inflows, and (iii) encourage the emergence of such other innovative entities as township and village enterprises (TVEs). These are all expected to infuse greater competition in the economy. Trade liberalization should play an important role in this frame by helping lower or break the protective walls. To offset possible economic and social disruptions in the process, it would be necessary to introduce social safety net schemes, although it must be pointed out that only a vigorous growth of the non-state enterprises can provide a more lasting solution to the problem by absorbing the surplus labor force.