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Thursday, 30 July 2020 14:51
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State-market relation in Vietnam’s socio-economic development

(LLCT) - The State and market have a close and dialectical relation. A nation’s economy will operate effectively if the relationship between these two elements is appropriate and well established. In contrast, the incapability of resolving this relation will lead to deviations in development, as well as create a hurdle for each other. This article analyzes the State-market relation in Vietnam, along with the orientations to enhance it in the upcoming period.

Keywords: State-market relation.

1. The State-market relation

The State and market are two components of an economy. There are various approaches to the State-market relation, which are generalized as follows:

The first approach is through management relations. The State plays a role as a managing entity, while the market is the subject for State’s management. In this relationship, the State is above the market, managing activities of its entities. The market performs the functions of mobilizing, allocating and using resources in accordance with market rules, based on compliance with the legal framework and State regulations. Though the State plays a crucial role in managing the market economy, it does not mean that the State does everything or is able to do it all on its own. The main function of the State is to create favorable conditions for economic entities to operate; encourage businesses and people to develop production; orient, inspect and control activities of economic entities; and secure major economic balances, among other things.

The second approach concerns the relation between the economic sectors, in which the State and the market are two equal sectors of the economy. Accordingly, the market plays a major role in mobilizing, allocating and using resources, while the State plays a supporting role in mobilizing, allocating and using the resources. In cases where the market meets with economic failures, which it is unable to solve, the State will mobilize, allocate and invest resources in areas that the market cannot or does not want to work with, or does not work effectively.

The third approach is through social perspective. Basically, the market has the ability to mobilize, allocate and effectively utilize resources through its operational mechanism. It has a decisive role in the distribution of economic resources to different industries and sectors of the economy. The resources that are invested in efficient economic sectors will create profit. In the meantime, income is distributed according to the market mechanism, based on the contribution of entities to economic performance. If the market is allowed to be self-regulated, disadvantaged groups in society are more likely to fail to ensure income and access to resources, learning and employment opportunities. In this relationship, the State uses its power to intervene in mobilizing, allocating and utilizing resources according to the State’s set goals.

No matter which approach is used, the State and the market are influent, interactive and dependent on each other. This relation determines the socio-economic development of a country. The relationship between the State and the market is dialectical, which means every step of the market development is a condition for improving the management efficiency of the State and vice versa. Once the State fulfills its role of supplementing and supporting the market’s development, the economy will operate effectively, contribute to the implementation of goals and promote economic growth.

In Vietnam, the relationship between the State and the market has changed over each stage of the country’s development process, especially in the past 35 years of Renovation. In the coming period, well resolving this relationship will be one of the decisive factors to contribute to the development of Vietnam in a new context.

2. Accomplishments in resolving Vietnam’s State-market relation in recent years

First, the State of Vietnam has gradually promoted its role of management over the market, contributed to the orientation, construction, and improvement of laws and economic institutions, and created a fair, transparent and healthy environment for competition.

As the controlling entity of the economy, the State has created favorable economic conditions for the market by promulgating and improving legal documents to form a complete and synchronous legal framework as a basic foundation suitable for market activities and meeting certain market development and international integration requirements. The economic law has created a common framework to regulate the operation of different types of businesses in the economy and ensure a fair investment and business environment for enterprises of all economic sectors, as well as between domestic and foreign-invested enterprises. The legal system has formed the necessary basis to organize, operate and manage the market economy with a system of legal regulations on ownership, free business-doing, competition, antitrust legislation, market types, and equality among firms. For example, there is the Law on Support for Small-and Medium-sized Enterprises passed in 2017, the Competition Law in 2018, the Law on amendments and supplements of the Law on Credit Institutions, the Resolution on the Handling of Non-performing loans, the 2014 Investment Law, and the 2014 Corporate Law which are applied to all economic sectors.

Besides, the Government has issued many resolutions and important decisions to improve the investment and business environment, such as Resolution No.139/NQ-CP dated November 9th 2018, promulgating the program of action to cut costs for enterprises. The Prime Minister issued Directive No. 07/CT-TTg dated March 5th 2018, and Directive No. 26/CT-TTg dated June 6th 2017 on continuing effective implementation of the Resolution. No. 35/NQ-CP to support and develop enterprises till 2020; Directive No. 20/CT-TTg on reorganizing inspection and supervision activities for enterprises; and Decision No. 225/QD-TTg dated February 4th 2016 approving the State administrative reformation plan for the period of 2016-2020. The formulation of Decrees on business conditions has been completed. In particular, several unnecessary, unreasonable and unclear conditions have been removed, resulting in time saving, and simpler business conditions and requirements concerning business locations and facilities.

Figure 1 shows a remarkable change in Vietnam’s position in the Ease of Doing Business (EODB) Rankings Index from 2011 to 2018. Vietnam’s ranking had increased by 19 ranks since 2011. This was the result of economic institutions’ reform in the direction of creating better conditions for business activities. In 2018, Vietnam ranked 69th out of the 190 countries for EODB with an average score of 68.36 points in 10 criteria.

The component scores of Vietnam’s EODB level are shown in Figure 2. From 2011 to 2016, there were changes in the regulations on protecting minority investors, getting electricity, dealing with construction permits, and resolving insolvency that created more favorable conditions for business operation. From 2017 to 2018, the scores of starting a business, getting electricity, and enforcing contracts categories improved significantly. Since then, the ranking of regulations on protecting minority investors increased from 166th in 2011 to 87th in 2016 and access to electricity’s rank increased from 135th to 96th in 2016, to 64th in 2017 and 27th in 2018. The rank of regulations in dealing with construction permits also increased from 67th in 2011 to 24th in 2016 and 21st in 2018.

Second, the market plays an increasing and decisive role in mobilizing and utilizing national resources.

Currently, enterprises in the State economic sector, the private sector, and the foreign-invested sector are freely operating within permitted business sectors. The number of newly established enterprises participating in the market has escalated year by year. According to the General Statistics Office, in 2016 the number of enterprises increased 5 times compared to 2010, of which private enterprises accounted for more than 90% and State-owned enterprises accounted for a decreasing share from 3.83% per year in 2010 to 0.52% in 2016(1). According to the Ministry of Planning and Investment, as of December 31st 2018, there were 714,755 active businesses in the whole country, a 9.2% increase compared to the same period in 2017, which showed a clear sign of divesting State capital in the business sectors. The process of equitization of State-owned enterprises and the divestment of State capital from the private sectors in the economy are firmly promoted and implemented. The scope of State-owned enterprises is narrowing and only focusing on critical as well as essential areas that the private sector is incapable of doing or participating in.

To assess the role and effectiveness of the market, an indicator of economic freedom is used which are measured by the following aspects: (1) The law of property rights; (2) Level of government intervention; (3) Business freedom; (4) Freedom of labor; (5) Freedom of money; (6) Free trade; (7) Free investment; and (8) Financial freedom. Scores of these indicators range from 0 to 100, in which a score of 100 represents maximum freedom, while a score of 0 implies that there is no freedom in the economy. In 2019, Vietnam’s economic freedom scored 55, nearly double the score of 35 in 1997, proving that the market, as an entity in the market economy institution, is operating more effectively.

Third, the State plays an essential role in allocating and redistributing resources to disadvantaged groups in order to ensure social security.

To make sure of social equality, the State issues policies to regulate and redistribute incomes among different society’s strata and regulate investment among regions. At the same time, the government uses the budget to support priority groups through financial aid for access to education, health care, and subsistence allowances to ensure a minimum standard of living for disadvantaged groups in society.

Figure 4 shows the government expenditure for implementing social security policies in Vietnam from 2012 to 2018. In particular, besides the pension payment before 1995 – which was the largest expense valued at VND311,438 billion – spending on health insurance, social assistance, poverty reduction, loans, and scholarship subsidies are also high. In particular, spending on health insurance has received great support from the State.

Moreover, Figure 5 shows that the State budget provides full and partial support to over 60% of the insurance policyholders. Thanks to active policies, Vietnam has achieved many important results in ensuring social security.

Figure 6 shows the increasing number of people participating in health insurance. In 2012, there were only 59,310 thousand participants (equivalent to 66.81% of the population); by 2019, it had increased to 83,514 thousand people, accounting for 88.5% of the population.

3. Limitations in resolving State-market relation

First, even playing the role of a managing entity in the economy, the State is still slow to finalize the institutional system and not yet greatly supporting the development of markets. The legal system is still overlapping and contradictory. Moreover, despite the improvement in Vietnam’s EODB level, we only ranked 5th out of 10 countries in ASEAN, quite far from other leading countries in the region (such as Singapore as 2nd and Malaysia as 3rd). This means that Vietnam’s economy has relatively low competitiveness. There are still bottlenecks hindering the ease of doing business in Vietnam like tax regulations, bankruptcy settlements, and regulations on starting a business. These are the key areas that need to be perfected in the coming period to support the market. Also, the customs procedures and specialized inspection at the checkpoint have been enhanced but are still slow and making Vietnam’s ranking decrease. Barriers in specialized management, especially animal quarantine procedures, and quality control are the main causes leading to prolonged custom clearance time.

In fact, the EODB ranking of Vietnam at 69th out of 190 was down by 1 rank compared to 2018 and only at the 5th rank among ASEAN countries (after Singapore, Malaysia, Thailand, and Brunei), and 8th out of 25 in the East Asia-Pacific region. The ranking of some component indicators also decreased or stayed at a very low position compared to many countries. For example, the category of starting a business ranked 104/190 countries with 8 procedures and 17 days to get a company running. Comparatively, Singapore and Hong Kong have only 2 procedures, Brunei and Taiwan have 3 procedures, China has 4, and Thailand 5. These procedures take Singapore and Hong Kong 1.5 days, Thailand 4.5 days, Brunei 5 days, and China 8.6 days to complete. Besides, in the paying-tax category, Vietnam ranked 131/190 countries with 10 payments and 498 hours per year to pay all taxes. By comparison, Hong Kong has 3 payments, Singapore and Brunei have 5 payments, and China has 7 payments. It takes Hong Kong 34.5 hours per year, Brunei 52.5 hours, Singapore 64 hours, China 142 hours, Malaysia 188 hours, and the Philippines 181 hours to clear the obligations.

Second, the reallocation of resources from the State budget to supplement the market is still limited.

Vietnam has not yet established specific criteria for determining priorities of public spending. Public investment is still heavily focused on the sectors that are attractive and can be invested in by the private sector. Along with the incentive mechanism to attract private investment, there has not been a strong breakthrough. It can be said that State investment is trespassing private investment in many fields. Even the proportion of State-owned investments in the total social investment has decreased compared to the previous period, it is still high. According to the General Statistics Office, in 2018, State capital investment accounted for about 30% of the total social investment capital. It limits the ability to utilize the State budget for carrying out other strategic spending tasks that must be prioritized such as spending on human development, education, health care, and wages. State investment in high-tech industries and sectors that are able to lead the economic restructuring towards modernization has not yet met the requirements.

The State-owned business sector is prioritized to use national resources and operate exclusively in important and crucial sectors of the economy. However, the sector’s performance is not equivalent to those prioritized resources. In the meantime, State-owned enterprises are also competing with private sector enterprises in many manufacturing fields where the private sector can be more effective.

Third, the government expenditure on social security using the central budget accounts for just a small proportion of GDP and the total State spending. In the 2012-2018 period, the percentage of social security spending accounted for 2.44% of the GDP and 8.66% of the total State expenditure.

The quotation of using the State budget to implement policies is low and not enough to ensure the minimum standard of living for people. Except for a few cities or provinces that can balance the budget, the number of provinces that are self-sufficient in their budget is low, hence social security spending from the local budget is surely low. Besides, the efficiency of using resources for social security is also poor due to limited resources that need to be divided among many programs and policies. Meanwhile, management and supervision activities of the allocation and use of resources are quite loose, which leads to loss and misspending and negatively affects the effectiveness of policy implementation.

Fourth, the ability to achieve important social security goals is quite modest, which is shown in the following statistics.

Fifth, despite a few enhancements, the inequality issue is still complicated. It is reflected in economic inequality, inequality between ethnic groups and gender, and inequality in opportunity, education and health care. Economic inequality in Vietnam increases in all measures. According to OXFAM research, Vietnam’s income inequality has increased over the past two decades. In particular, the super-rich class accounts for a large amount of wealth in the country. In 2014, Vietnam had 210 super-rich people (whose assets were worth US$30 million and more) with total combined assets of about 20 billion USD, equivalent to 12% of the country’s GDP, which is half of Ho Chi Minh City’s GDP(2). In 2010, the average income of 20% of the richest households was 9.2 times higher than the poorest group. This number even increased by 9.8% in 2016. In the same year, the average income of ethnic minorities was VND1.7 million/person/month, equivalent to only 51.4% of the income of Kinh and Hoa ethnic groups. In 2018, poor ethnic minority households accounted for 50% of total poor households. Meanwhile, a huge gap in education and health care accessibility reflects the inadequate and uneven distribution of public resources, which reduces access to education and health services by poor, ethnic minorities, women, and children.

4. Solutions for Vietnam’s State-market relation in the upcoming period

First, the role of the State as the managing entity must be promoted through perfecting the legal framework and favorable economic environment for the activities of entities in the market.

To start, it is necessary to improve a comprehensive and synchronous legal system, as well as reduce conflicts in regulations. The next step is renewing the process of developing legal documents, ensuring democracy in the law-making process and increasing participation of policy-affected subjects such as enterprises and business associations. It is also important to improve the accountability of the State apparatus to prevent the existence and dominance of interest groups. In the long term, the economic legal system should be reformed in detail that is easier to understand, apply, and implement, instead of the old inflexible framework.

The completion of the legal framework, mechanisms, and policies should also aim to implement synchronous solutions so that markets can operate smoothly and effectively. Accordingly, it is necessary to focus on improving institutions to modernize the market of goods and services; restructuring the financial market, ensuring healthy and solid macroeconomic stability; polishing laws, mechanisms and policies for the real e-State market to operate smoothly; and following the law of supply and demand.

To ensure law enforcement, the law itself should be resolute and strict in terms of law compliance and inspection, controlling and handling law violations, and protecting and improving the legal culture of each organization and citizen.

Second, improving the efficiency of allocating resources from the State budget will support the market and promote sustainable economic growth.

It is necessary to improve operational quality and identify priority investment objectives. Specifically, to allocate resources according to priority objectives, it is necessary to build a system of criteria to determine investment priority order. The priority criteria will then be applied to classify the spending of limited resources to ensure adequate funding sources for the implementation of socio-economic development targets. Before making a budget allocation decision, it is required to develop mechanisms and principles to evaluate the impact of public spending projects using State capital on the established goals. After that, a process of approval, appraisal, and consultation is developed to ensure the selection of spending programs and investment projects with the highest socio-economic efficiency.

Besides, a system of criteria to evaluate the efficiency of budget spending is also needed and must be reevaluated frequently. The procedures and techniques used to evaluate the effectiveness of policies related to expenditures from the State budget must be promulgated and implemented consistently. Meanwhile, the evaluation results need to be independently and objectively appraised, and the cost-benefit analysis of public investment projects must be published.

The process of improving the efficiency of budget allocation also includes changing traditional budgeting into output-based budgeting for a medium-term framework, considering public spending to be a part of the medium-term plan, allocating resources according to outputs, and evaluating the actual performance of public officials associated with their position and duties. This solution will strengthen the relationship between the outcome of public spending and budget decisions and ensure public spending is within the resource capacity and consistent with policy priorities, thereby ensuring annual allocation of resources oriented to medium and long-term socio-economic goals, enhancing predictability, proactivity, and systematism in resource allocation.

Third, it is inevitable to promote the central role of the State in addressing social security issues.

To do so, a social security model must be designed to cover a wide range of subjects in the society and meet the increasing social security needs of the people in each level. The social security model is designed into pillars and different levels to ensure protection for all subjects, ensuring that no one will be left behind or out of the safety system.

By expanding social security coverage, more people are guaranteed social security. To aim for the protection of the entire population, the social security model must aim to ensure that all people have access to health insurance and health care. Then the participation rate of social insurance and unemployment insurance will be improved. Not only that, the pension plan for the elderly should also be extended.

The next step is adjusting the budget allocation mechanism for social security, especially for social protection such as public healthcare and education systems. This contributes to reducing self-sufficiency costs, increasing access to health care for all strata of society, and sharing the cost with the poorest groups. The budget should be allocated more towards public services in poor and remote areas for disadvantaged groups who are not yet covered by the social security system.

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Endnotes:

(1) General Statistics Office (2018): Statistical Yearbook of Vietnam 2017, Statistical Publishing House.

(2) OXFAM (2017): Policy Papers – Even It Up: How to tackle inequality in Vietnam, Labor and Social Publishing House, https://oxfamilibrary.openrepository.com.

References:

1. Ministry of Planning and Investment, The White Book on Vietnamese businesses 2019, Statistical Publishing House, 2019.

2. Central Economic Commission, The two-year report on implementation of the 12th Central Party’s the 5th Resolution on developing private economic sector to be a driving force of the socialist-oriented market economy, Hanoi, 2019.

3. Ministry of Labour, War Invalids and Social Affairs, Summary report on the implementation of the 11th Central Plenum’s the 5th Resolution on issues of social policy in 2012 - 2020, Hanoi, 2019.

4. Hoang Van Minh and Nguyen Thi Phuong (2015), Vietnamese households’ spending on health care in the period of 1992-2014.

5. London, 2016, Improving the accessibility and quality of Education and Health Care services in Vietnam for a prosperous and equal society.

7. UNDP (2015), Growth that works for all, Vietnam Human Development Report 2015 on Inclusive Growth, Social Sciences Publishing House

8. Terry Miller, Anthony B.Kim, James M.Roberts (2019), 2019 Index of economic freedom, The Heritage Foundation.

 

Assoc Prof., Dr. Dinh Thi Nga

Institute of Economics, Ho Chi Minh National Academy of Politics

MA. Nguyen Thi Hoa

Ministry of Industry and Trade

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