Power and economic transition

Vietnam Vietnam faces challenges as it tries to slowly reform its economy

State-owned companies dominate some 60% of bank lending and account for more than half of the country's bad debt.

After about three decades, the country is still transitioning from central planning to a "socialist market economy" with the Communist Party remaining in charge.

This isn't China, but Vietnam. And the country that was viewed as the "next China" due to its stable transition has started to generate concerns about a looming debt crisis.

For Vietnam, the dominance of state-owned enterprises remains a problem nearly three decades after the 1986 market-oriented reforms known as "doi moi".

It shares a problem with China in that state-owned enterprises are a source of bad debt that can sink the banking system. Vietnam created "bad banks" known as asset management companies to take the bad debts off the books of the state-owned banks earlier this year.

China model

This is similar to what China did in 1999 when it created four such companies to try to clean the balance sheets of its four big state-owned banks prior to opening up the sector with World Trade Organization (WTO) entry in 2001.

But, the problem with bad debt is not just the stock, but the flow. In other words, the continued accumulation of debts from inefficient state-owned enterprises is the issue.

China in the mid-1990s took a huge step in getting rid of many of its state-owned firms. The number of large state-owned enterprises dropped from about 10 million to less than 300,000 by the end of the decade.

It still has a large state-owned sector, but a notable attempt was made to try to cut the flow of bad debt by increasing the efficiency of the remaining state-backed companies.

This was done by partially privatising or selling shares in even the largest state-owned firms, including banks.

Of course, China created other problems for itself when it used the banking system to largely finance its large fiscal stimulus to boost the economy during the 2008 global financial crisis.

Vietnam has pledged to reform state-owned enterprises, but how much progress there has been is another matter. For instance, the World Bank found that against a target of selling shares in 93 state-owned firms last year, sales have occurred in only 12.

Slow progress

The question is why have reforms progressed so slowly.

As I mentioned earlier, Vietnam was viewed as the next China given its similar slow dismantling of the command economy.

It is also a sizeable country, not quite China's 1.3 billion but nevertheless it has nearly 90 million people, which ranks it as the 13th biggest country in the world, just two shy of the 11 countries with 100 million-plus populations.

And like China, Vietnam decided not to go down the "shock therapy" route. This is what the former Soviet Union did when it transitioned from a centrally planned economy during the early 1990s.

Instead, these Asian nations gradually introduced market forces, including allowing non-state firms to operate, so that the Communist governments could slowly reform the state-owned sector.

Looking at the decade-long recession that Russia and the central/eastern European nations experienced after their rapid transition, it probably isn't surprising that China and Vietnam looked like they were doing the smart thing. However, there is an important impediment to both of their reforms.

It actually comes back to the argument that, for a country to undertake a rapid transition to become a market economy, it must remove the inefficient hand of the state.

Vested interests

That would also prevent the build-up of vested interests and the creation of new power bases arising from those who benefit most from the reforms. They can forestall further reform.

Of course, there were numerous problems with the transition of Russia and others, including the unrealistic expectation that a private economy could just take hold if the old state one was dismantled.

For China, it undertook what has been called an 'easy-to-hard' reform sequence. What it means is that politically easier reforms like incentivising agricultural output were done first, while leaving the harder reforms of the state-owned sector for later.

And those new power bases have begun to make it more difficult to implement further reform.

For Vietnam, its reforms seem to be mired in the inability of those who run the state-owned firms to allow them to become at least partly, if not wholly, privatised.

In other words, those who benefitted from the marketisation of the economy are now hanging on to their inefficient firms, which are a drag on the banking system.

Vietnam's government debt is around 50% of GDP, and crucially, some 37% is externally owed.

Plus, when the debts of state-owned enterprises are added in, the debt doubles to a staggering 100%. These are the sorts of statistics that would raise warning bells about a potential crisis.

To avert it would require cutting off the flow from state-owned firms, along with pushing ahead with some degree of privatisation.

To achieve it requires dealing with vested interests.

The lesson for countries tackling reforms is that power as well as efficiency must be considered to be effective. For Vietnam, it may be a hard lesson to learn.

Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this

    Comment number 72.


    What you continually fail to comprehend is that we are in a time of EXTRAORDINARY Economics - that right OUT OF THE ORDINARY.

    The Ordinary has equity the cheapest source of finance by far, bank loans the most expensive. Only real buffoons, like those we have the the BoE could think of destroying the whole basis of finance just to bail out their friends.

    The EXTRA O will END!

  • rate this

    Comment number 71.


    Sonny, I've been actually DOING this for more than 40 years.


  • Comment number 70.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 69.

    Charles Jurcich

    "... it must remove the inefficient hand of the state."

    As opposed to the "efficient hand of the markets" where 7 out of 10 companies fail, and that's seen as necessary and good.

    Totally agree, plus how many hide behind the laws of limited liabilty wait a few years and let the state foot the bill all in the name of entrepreunership, what a joke company law is !!!

  • rate this

    Comment number 68.

    Wasn't India going to be the next China?

    Vietnam was just there to do the work that was too cheap for even China to handle. They sewed the garments together after China had made the textiles and cut the patterns. As China eases back on its own activity other countries like Vietnam who took in China's washing are going to fall flat.

    Bad news all round!

  • rate this

    Comment number 67.

    Charles Jurcich @66
    "macro level"
    Indeed, perspective of intelligent circulation, domestic & global

    Point made within 'tax-payer' rhetoric: discounting of immense social debt, complex infrastructure, a multitude of insurances, and mixed credit for the 'earning' of foreign currency

    Confidence in optimisation will come only with trust, conflict of material interest being ended by equal partnership

  • rate this

    Comment number 66.

    64 All for All
    The problem comes from people assuming that their taxes are "paying" for public goods in a similar way to households and businesses "paying" for things from their revenues. At the macro level taxes only serve to create a demand for the currency and to tame inflationary pressures, not to "pay" for things.

  • rate this

    Comment number 65.

    The prevailing wisdom is that rates are rising due to expectations of FED tapering in September.
    I have heard that a much greater fear is that Larry Summers gets Bernanke's job and then executes a much tighter macro-economic policy.

  • rate this

    Comment number 64.

    Charles Jurcich @62
    "necessary & good"

    Interesting, private sector as whole vs public as whole, then to consider dimensions of 'efficiency', in production of fulfilment, security, hope, goods, services, choice, as against tax bills

    Public can emulate 'private dynamic', but 'truly' selfish can never think of 'public good' bar cosmetic (even with Blunkett's 'half-nationalised' consumer-pressure)

  • rate this

    Comment number 63.

    year end 31/12/12
    total consolidated net sales $61.093 billion
    total operating expenses $60.417 billion
    they lost $2.8 billion in shipping costs
    As of December 31, 2012, federal net operating loss carryforward was
    approximately $89 million. They also have approximately $136 million of federal tax credits potentially available to offset future tax liabilities.
    3.7 billion of debt

  • rate this

    Comment number 62.

    "... it must remove the inefficient hand of the state."

    As opposed to the "efficient hand of the markets" where 7 out of 10 companies fail, and that's seen as necessary and good.

  • rate this

    Comment number 61.

    "same old"
    Of fifty-six previous comments
    So why couldn't we have said that?

    We may honestly 'have an idea' that we live beneath controlling geniuses of doubtful representativeness if not sanity, but truly to know we have to look in the mirror, to see ourselves all blocks in the great pyramid, variably corrupted by fear & greed, missing our friends the (10bn -1) set against us

  • rate this

    Comment number 60.

    "State-owned companies dominate some 60% of bank lending and account for more than half of the country's bad debt."

    In other words, state-owned companies have been no worse than private companies for bad debt!!!!

  • rate this

    Comment number 59.


    The bottom four are running costs. They lose shed loads on shipping, as they do those special offers.

    If oyu really want to dig deep, then


    and have a look at the 2012 annual report.

  • rate this

    Comment number 58.

    @56 treacle_01
    Thanks for the exact figures. It always enhances the debate.

    I wonder whether there is some creative accounting going on here.
    These bottom four figures are claimed to be reinvestments into the business.
    What if they were actually needed for the running of the business. They would then have to be added to the cost of sales.
    Just a thought.

  • rate this

    Comment number 57.

    Everybody knows who has the money and who controls and manipultes the markets. This a failed system where markets are not really free and neither they are properly controlled

    Same old bug cats are sitting on the heaps of money and controlling everything from politics to wars while the vast majority of people are just suffering!

  • rate this

    Comment number 56.


    Yes but they are selling at a loss.

    No, just at low margins.

    For 2012

    Sales $61bn
    Cost of sales $46bn

    So gross margin 25%


    Warehousing and shipping $6bn
    Marketing $2bn
    Technology and content $5bn
    Other $1bn

    That tech line is interesting.

  • rate this

    Comment number 55.

    @53 All for All
    The system should be balanced in that it allows the best possible returns for all that have a stake in it.
    Rather like a closed hedge fund where all who enter benefit from the investment decisions of the best minds.

  • rate this

    Comment number 54.

    "Plus, when the debts of state-owned enterprises are added in, the debt doubles to a staggering 100%. These are the sorts of statistics that would raise warning bells about a potential crisis."

    If the debts are in their own currency then there is no potential for a crisis. Vietnam cannot runout of its own currency.

  • rate this

    Comment number 53.

    plotinus @32
    "balanced portfolio"

    Only the one, truly balanced: the Global. Held by all in equal partnership, ultimate return divided between shareholders, distributions smoothed - forward-looking - across generations, investment between generalised basic infrastructure and focal strategic purpose. A closed-system model, but instructive for today's UK, Vietnam or China: full benefit at maturity


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