Vietnam needs radical solutions to revive growth

Vietnam needs extremely radical and long-term solutions to once again revive the entire process of growth within the economy.

This will not happen by just setting targets for this year but will require the creation of an innovative new base that will set the tone and foundation for strong economic growth in the medium and long term.

Imbibe new methods

Vietnam’s economy is based mostly on outsourcing in almost all fields from industry to agriculture. For industry, Vietnam must import raw materials and components for the assembly of products for export as well as for domestic consumption. For agriculture also Vietnam has to import seeds, fertilizers, pesticides, and animal feed. Vietnamese laborers also account for a small portion, hence in such an economy there can hardly be any breakthrough development. Vietnam is therefore falling into an inevitable middle-income trap.

To break out of this, Vietnam must build a vibrant and creative economy by learning from the experiences of some countries and imbibing development methods. Vietnam must learn how to import patents, innovations, and applications, and then move towards strong commercialization. The problem may lie in how the State responds with policies to support and encourage this move.

Experiences from across the world show that the commonly used policy direction is that the state provides financial support to private companies to import patents for new ideas and applications. According to the experience of South Korea and Japan, this support level is 70 percent of the import cost at first, then gradually becomes lower. The state also facilitates investors to set up Research and Development (R&D) companies, both at home and abroad.

In the coming time, Vietnam’s existing high-tech parks must develop in the direction of building R&D centers and not modern industrial enterprises like today. Vietnam must build a global innovation research center, and this must be a special zone with all modern technology capable of attracting global investors and innovators.

Revising enterprise system

The Vietnamese enterprise system currently includes SOEs, Foreign Direct Investment (FDI), and private enterprises. Currently, SOEs have the largest market base and share, accounting for about 28 percent of GDP. Vietnam is an economy with a large portion of SOEs that are holding most of the country’s main resources, and having the largest fixed capital, the largest bank loans, and holding the right to do business in exclusive fields.

But it is an area with many problems such as the largest bad debts, lowest-efficiency ratio, waste, and corruption. On the other hand, the private sector only accounts for about 10 percent of GDP, FDI enterprises hold about 18 percent, and the remainder are individual household businesses.

Looking at the above structure for all enterprises, it can be seen that the Vietnamese economy is difficult to develop in an effective manner. If Vietnam implements all the commitments of Free Trade Agreements (FTAs), domestic enterprises will have to face competition not only in the region but also globally, which means competing with the world’s powerful private multinational corporations. The possibility of Vietnamese enterprises losing at home is a reality. In recent years, the number of domestic enterprises shutting down has increased in number, with only 40 percent of enterprises operating at a profit.

The SOE restructuring program has been implemented but in the direction of consolidation and development. Equitization is limited to less than 50 percent of enterprise capital, which means that SOE owners still retain the right to corporate governance, and at the same time expand enterprises by increasing social capital. The FDI sector now accounts for 70 percent of the export value, and more than 50 percent of the industrial production value of Vietnam. FDI enterprises in Vietnam are mainly in the form of 100 percent foreign capital, so they are not under pressure to transfer technology and are almost not under any outside control. They enjoy many incentives such as tax exemption and reduction, land rent, and easy site clearance procedures.

On the other hand, the private enterprise sector is under much pressure such as facing difficulty in obtaining loans even with high-interest rates, difficulty finding business premises and being compelled to have crony relations with government officials at all levels, which often leads to incurring extra costs. A national enterprise system in which private enterprises are inferior in many aspects cannot be said to be an efficiently developed economy.

In the above situation, revising of the Vietnamese enterprise system is an urgent need. Therefore, SOEs should be equitized in the direction of reducing the portion of SOEs holding controlling shares to the regional average of 10 percent to about 15 percent of GDP. Priority must be given to Vietnamese private enterprises participating in the equitization of SOEs.

Revising the Law on Foreign Investment in the direction of only giving incentives to FDI enterprises to invest in modern and high-tech fields with a commitment to transfer technology to the Vietnamese side will restrict FDI enterprises with 100 percent foreign capital in some fields and encourage joint ventures. Amending the Law on Bidding in the direction of quality and efficiency is the most important criterion, besides reducing troublesome procedures and harassing protocols.

Updating transport infrastructure

Vietnam’s infrastructure in construction in recent years has made remarkable progress such as the building of hundreds of kilometers of highways; improving inter-provincial roads and rural traffic; and airports being modernized. Many seaports also have been built for better trade and movement of goods. However, the construction of the transport infrastructure has some limitations. This is to say that we pay too much attention to the construction of highways but do not pay enough attention to waterways and railways, especially high-speed railways.

It is time to focus on investing in two development routes from Hanoi to Hai Phong and Ho Chi Minh City to Ba Ria-Vung Tau with a high-speed railway of 250 km per hour. More modern waterways to reduce transport costs for businesses in these two development routes may account for a large portion of the total industrial production value of the country, estimated at 70 percent to about 80 percent.