Socialist Republic of Vietnam

(This article appeared in The Hill, Nov, 2010)

The World Bank’s annual ranking of countries’ business climate has Vietnam among the top reformers in the past 12 months, climbing 10 ranks. Even more impressive, in Doing Business 2011, Vietnam beats out not only foreign investment magnet China, but also Italy, one of the world’s seven most industrialized nations.

Vietnam climbed 10 ranks to 78, just ahead of China (79) and Italy (80), but also far ahead of the emerging economies of Indonesia (121), Brazil (127) and India (134). Singapore leads the ranking, ahead of Hong Kong, New Zealand, the UK and the United States.

The Doing Business report ranks countries according to nine factors that affect businesses throughout their life cycle: starting and closing a business, construction permits, registering property, getting credit, protecting investors, paying taxes, trading across borders and enforcing contracts. For decision makers, the ranking is an indicator for ease of doing business and the security of their investment.

Developed nations dominate the ranking, but Vietnam has been a constant climber and was among the 10 most improved economies since the last report. Vietnam was cited for marked reforms in three of the nine categories: starting a business, dealing with construction permits and getting credit.

Amid the improvements, Vietnam continues to rank low in some areas. Tax rates remain high at 33% of total profits, and the amount of time spent with the tax bureaucracy remains a problem for many companies. Closing a business also needs improvement, according to the World Bank.

The Vietnamese government has made economic stability and an investor-friendly environment the hallmark of its economic reform efforts, starting with the transition from planned to market-based economy in 1986. During the global economic crisis that started, the government provided stimulus early on and avoided the economic collapse some other regional economies have experienced. Economic growth slowed to approximately 5%, but is already expected to grow to around 6% or more in 2010. Now the government is addressing inflation. Simon Andrews of the International Finance Corporation, the World Bank group’s subdivision in charge of the Doing Business reports, praised the reform efforts. “The Vietnamese government’s efforts on regulatory and administrative reforms are reflected in Doing Business 2011 and in the improvement of Vietnam’s overall ranking,” he said. Since the reforms in 1986, reforms were implemented steadily, culminating in admission to the World Trade Organization in January of 2007. Investment has flowed rapidly into Vietnam and the United States held its former battlefield enemy up as a role-model reformer in trade talks with other countries.

SOEs: Obstacle or opportunity?
The private sector has benefited from reforms, and some 6,000 state-owned enterprises (SOEs) have been privatized under the market reform push. But Vietnam has taken a dual path – privatizing some SOEs while building up others in an attempt to create internationally competitive national champions. This strategy has helped other East Asian nations, like Japan and South Korea, but has been criticized in Vietnam as reducing overall economic efficiency.
 
Critics like the Hanoi Young Business Association say SOEs obtain preferential treatment in their access to land and credit, crowding out some of their private competitors. The former chief economist of the United Nations Development Program, Jonathan Pincus, called for greater transparency. A recent scandal at giant conglomerate Vinashin in which billions USD were lost during the global economic downturn underlines his point.

Pincus said all companies, private and public, should be forced to compete on commercial terms for land, labor and capital. The U.S. government has criticized Vietnam for its market-distorting support for SOEs as well. The government says it is committed to continued privatization, and criticism after the Vinashin losses could provide additional impetus to move ahead on that front. Given these large firms’ mar- ket penetration and local experience, their privatization could well represent the next frontier for investment in Vietnam.