Despite recent progress, Vietnam needs to quickly reform its economic system and further develop its domestic private sector to ensure long-term stability, a World Bank official has said.
“We are beginning to see the early signs of recovering growth across several sectors of the economy,” World Bank Country Director Victoria Kwakwa said at the Vietnam Development Partnership Forum 2014 held in Hanoi Friday.
While Vietnam has enjoyed good macroeconomic stability over the last three years, its gains continue to be fragile; more must be done to provide a basis for robust long-term macro stability, she said.
She stressed the need for institutional reform, citing the case of South Korea and Taiwan, which continued to reform and advance their institutions as their per capita incomes rose.
“So the increased attention to institutional reform in Vietnam is wise and timely,” she said.
Victoria Kwakwa also urged Vietnam to help out its domestic private sector, which has struggled over the last few years.
“No country has developed by predominantly relying on foreign private sector,” she said.
Average firm size has shrunk in the past few years. Domestic firms have not benefited adequately from the positive spill-over effects of FDI enterprises and their integration into global value chains has remained fragmented and limited.
Between 2007 and 2012, the average staff size at domestic firms declined from 47 to 32, equivalent to the designated size of small enterprises, according to a report presented by the Vietnam Chamber of Commerce and Industry (VCCI) at the forum.
In addition, continued reform of state-owned enterprises (SOEs) will be important, she said. But the ongoing SOE reforms need to focus less on the numbers of equitizations and more on their quality.
The government must be able to offer investors attractive levels of private ownership in those entities and also enhance the chances of improvements in corporate governance. At the same time, she said, the government must strengthen transparency at state-owned enterprises (SOEs) through regular and credible financial disclosures and cut off their preferential access to land and capital.
All of those measures together will create an efficient public sector and provide room for the private sector to grow, she said.
Sanjay Kalra, the International Monetary Fund's resident representative also stressed the importance of public disclosure. Restructuring plans for SOEs can be made public to assess their ability to deliver better governance, financial viability and efficiency he said.
“Delays in reform undermine confidence, contribute to higher public and publicly-guaranteed debt, prolong the productivity stagnation of the past several years, and keep growth at levels insufficient to create jobs for a growing labor force,” he said.
Addressing the forum, Prime Minister Nguyen Tan Dung said Vietnam will focus on reforming administrative procedures, creating a more favorable business environment, and encouraging the development of the domestic private sector, especially for small and medium-sized enterprises (SMEs). The government will accelerate the equitization of 432 SOEs between 2014 and 2015.
The prime minister affirmed that Vietnam and its improving business environment, will strengthen anti-corruption, ensure greater transparency in the management and usage of public assets, and deal strictly with corruption.
Lack of medium-sized businesses
Chairman of the Vietnam Chamber of Commerce and Industry Vu Tien Loc said Vietnam has focused too much on increasing the number of new business registrations and ignored its existing firms. As a result, he argues, the country now lacks medium and large enterprises with the capacity to link the domestic private sector to global value chains and increase the country's ability to add value.
Large companies only represent about two percent those operating in Vietnam; medium-sized enterprises also represent a sliver of the larger whole. The remaining 95-96 percent of the country's companies are small and micro businesses, according to the VCCI report presented at the forum.
“Amid the deep international integration, only large and medium-sized enterprises can effectively participate in the global value chain. Meanwhile, our firms are too small,” he said.
The risk here is that potential investors will be dissuaded from coming to Vietnam. The issue will become more important when labor costs rise. Unlike larger countries such as China and India, Vietnam’s domestic market is not big enough to be of interest to many investors. Vietnam should focus on attracting foreign companies seeking a manufacturing hub for the ASEAN region.
To be competitive, Vietnam needs domestic companies that can support investors who otherwise see rising costs and risk created by vague import and export regulations and currency movements, Loc said.