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Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

Vietnam’s Economy, Preparing for a Recovery

Vietnam’s Economy, Preparing for a Recovery

KIM Kyung-Hoon

Apr. 18, 2013

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From 1990 to 2010, the Vietnamese economy achieved stunning annual average growth of 7.2%. Yet, due to a slow recovery from the global financial crisis, Vietnam’s status has come under increasing question. The main problems that have come to light are Vietnam’s fragile and overgrown state run enterprise (SOEs). In 2011, when monetary tightening resulted in a reduction in liquidity, SOEs suffered a crisis, while their non-performing loans ballooned. Addressing the vulnerabilities of Vietnam’s SOEs will be critical going forward, as capital formation and labor force contributions in the Vietnamese economy are likely to dwindle without reform of the state sector.

The weakness of Vietnam’s SOEs has been known for some time. In the run up to joining the WTO in 2007, Vietnam’s government actually proposed reform of its public sector. The ensuing downturn in the late 2000s however, caused the government to increase investment via state-run companies to boost the economy. Plans to sell government stakes were delayed, and reform was put off until later.

Vietnam’s state sector thus continues to be burdened by poor investments and low productivity. In the early 2000s, when the economy was growing rapidly, state-owned enterprises expanded into non-core businesses on sudden inflows of cash, as well as implicit government backing. SOEs’ performance however, was not closely monitored, and by the 2000s SOEs lagged well behind their private sector counterparts in productivity and funding. When reports arose about mismanagement at SOEs, Vietnam’s credibility as a nation became tarnished. The Vietnamese government has thus recently begun enforcing plans to streamline the financial sector, improve corporate governance and restructure SOEs. With the plan receiving positive response in early 2013, Vietnam’s financial market has been showing signs of recovery.

Nevertheless, several factors still threaten the success performance of the plan, including weakening motivation for enforcement due to conflicts in parliament and within the Communist Party, as well as a delay in sales of equity due to a slowdown in the financial market. Foreign businesses operating in Vietnam thus need to consider the purchase of equity in state-run corporations, while utilizing incentives from the government to stimulate the private sector. The Korean government is also advised to share its experience in public sector restructuring and to strengthen bilateral economic relations through free trade agreements.

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