ISEAS-Yusof Ishak Institute

Summary

Introduction

Vietnam began the first steps of its reform of state-owned enterprises (SOEs) in the early 1980s. This subsequently evolved into a massive and fundamental reform of SOEs, towards a greater degree of market orientation in the late 1980s and early 1990s. At first, the reform of Vietnam's SOEs was primarily in the area of management and planning, thereby providing more autonomy for SOEs within the framework of a centrally planned economy and the gradual reduction of state subsidies and allowances. Until the implementation of the doi moi (economic reform) programme in 1986, whilst there had been some renovation of the state sector, SOEs were still operating within an environment without market competition. At that time the economy simply consisted of the state and collective sectors, with no private sector. Under such conditions, the management of SOEs was a purely administrative exercise. Without the pressure of competition, SOEs found no motive for the revision and improvement of regulations intended to make them more operationally efficient. Instead, SOE managers tended to concentrate all their efforts on fulfilling mandatory targets assigned to them, and dutifully obeying directives or orders stemming from the resolutions and decrees of the ruling party and government.

To implement the economic renovation process, and develop a multisectoral economy, is to develop a wide range of production factors, including: SOEs, family and collective enterprises, individuals’ businesses, private limited companies, shareholding companies, joint ventures with foreign firms, and so on. Economic reform, therefore, is to change from a centrally planned economy into a market-oriented, multi-sectoral economy, operating under a market mechanism. Enterprises with different forms of ownership structure are encouraged to develop and compete in this market environment. In such a context, a demand arises for a better defined and more appropriate legislative framework, in order to ensure the equality of all enterprises before the law, and the concretization of the legal provisions needed to regulate the economy and the various enterprises (including SOEs).

Summary

Introduction

In the rapid economic growth and significant improvement in living standards achieved by each of the ASEAN countries over the last three decades, the government has played an important role. This role, however, has not been static, and the mix between the public and private sectors has undergone significant changes over time. In some countries such as Indonesia, the state's relative role in the economy has varied positively with resource mobilization possibilities by the state, and inversely with the need to attract foreign investment. ASEAN countries have over time shown a strong tendency towards co-operative relationships between the public and the private sectors. The demarcation line between the two, however, has not always been clear in ASEAN because of the importance of government-linked companies (GLCs) and the close connections between the ruling parties and certain business groups. As a result, collusive behaviour is regarded as a normal state of affairs. This has resulted in the absence of an active competition in key sectors in ASEAN.

The main objective of this chapter is to examine the role of government in ASEAN, particularly as it concerns the mix between the public and private sectors. It is, however, useful to begin with the examination of the recent developments in the literature concerning the role of government in the economy (section two), and the privatization phenomenon which has gathered momentum since the mid-1980s (section three). Section four provides the main features of the role of government and privatization efforts in ASEAN. It should be stressed that the government can influence the economy not only through its budgetary activities but also through state-owned enterprises (SOEs), rules and regulations in both economic and other spheres, credit policies, and the like. Seen in this broader context, the role of government has been most pervasive and extensive in Singapore, followed by Indonesia, Malaysia, post-Marcos Philippines, and Thailand.

Summary

Vietnam became the newest member of the Association of Southeast Asian Nations (ASEAN) on 1 July 1995. Its membership marks the beginning of a new chapter in the rapidly developing Southeast Asian region. Barely three decades ago, in the 1960s, the region was classified as one of the most turbulent in the world, and ASEAN was established in 1967 in an attempt to help change that view. Today, Southeast Asia is regarded as one of the most economically dynamic regions in the world. Undoubtedly, the upheavals in the socialist bloc during the late 1980s, leading to the crumbling of many planned economies, have proven that the command system is not sustainable. These economies simply did not deliver the goods, material and immaterial, which had been anticipated. Consequently, there has been a recent trend of command economies changing towards market-oriented principles.

The performance of the market economies of the ASEAN member countries and Japan, amongst others, has undoubtedly impressed Vietnam, to the extent that it is now trying to learn from their experiences. An added motive is the relatively handicapped position of Vietnam's integration with the other ASEAN economies; a substantial number of its state-owned enterprises (SOEs) are just too inefficient to compete in the international market-place. However, should Vietnam have refrained from joining ASEAN, and side-stepped the economic transformation that is now taking place, the prospect of an ever-widening gap with the ASEAN economies and the risk of being left in the backwaters of development would have been real. Vietnam has little alternative but to change its economic system to a more market driven one, and at the very centre of this change is the reform of its SOEs. But the successful transition from a command to a market-oriented economy is no easy task. The path is wrought with pitfalls and problems that can at times seem intractable. Whilst Vietnam has done much to reduce drastically the cumulative number of SOEs — undertaken by various means since 1986 — the arguably harder task of transforming their operating structures has still to be done.

In early 1994 the Institute of Southeast Asian Studies (ISEAS), an institution devoted to the generation, enhancement, and dissemination of research on the region and beyond, proposed a study on the reforms of SOEs in Vietnam, to help better facilitate the country's integration with the ASEAN economies.

Summary

Introduction

Both in the immediate future and in the long term, Vietnam's state-owned enterprises (SOEs) will still play an extremely important role — and hold key positions — in various sectors of the national economy. However, the recent shift of the centrally planned economic system, towards a market-oriented economy under state control, has exerted a marked impact on the need to restructure the state sector, and there is an urgent need to improve the efficiency of these SOEs. Therefore, the main topic of this chapter is a study of the present status of SOE restructuring, as part of Vietnam's aim of advancing towards industrialization and modernization, and will address two key issues. First, an analysis of the present state of Vietnam's SOEs: by size, sectoral profile, and management and ownership structures. Based on this analysis, an evaluation of SOE efficiency can be made, from which we can have a sound basis to understand the process of restructuring Vietnam's SOEs. Secondly, the chapter will advance views on the orientations needed to restructure the SOEs, to achieve the aim of industrializing and modernizing Vietnam.

Current State of SOEs in Vietnam

The current system of SOEs in Vietnam was formulated both through a process of industrialization and through the establishment of new SOEs, of which the latter was more important. A series of SOEs, spanning various sectors — run either by national ministries and general departments, or by provincial authorities — was set up in North Vietnam between 1960 and 1970, and this policy was initiated across the entire country after 1975. Since the late 1980s, however, a process of reforming and reducing the cumulative number of SOEs has been under way. By the end of 1989, there were 12,297 SOEs in operation in Vietnam, with a total capital value of 34,216 billion dong. Over the last three years, under the market mechanism, the country's SOEs have been revamped and re-registered under government decree No. 388/CP. And by June 1993, the total number of SOEs had dropped to 7,060, with a total capital value of 44,965 billion dong. Between June 1993 and April 1994, SOEs continued to be reformed, and the cumulative number of SOEs reduced further, to 6,264, with a total capital of 53,150 billion dong (approximately US$5 billion).

Summary

Introduction

State-owned enterprises (SOEs) have been operating in Vietnam for a long time. SOEs, together with non-corporate economic institutions — such as the State Bank of Vietnam, the national reserves, and the country's infrastructural system — constitute the state-managed economic system in Vietnam. They comprise all the capital, assets, and natural resources of the country, owned by the nation. The Government of the Socialist Republic of Vietnam is the sole representative of that ownership.

The existing SOE system came into being with the founding of the Democratic Republic of Vietnam, in 1945. Since then, the country and its SOEs have passed through a series of wars and peace-time construction periods. Most notably, since 1975, the SOE system has consisted of enterprises from the north, enterprises taken over from the pre-1975 Saigon administration (in the south), and a number of nationalized private enterprises. Until now, SOEs have had a dominant share of the Vietnamese economy. According to the statistical review of 1 January 1990, Vietnam at that time had 12,297 SOEs in operation. However, as a result of economic reforms — including the crucial restructuring of SOEs — the number of SOEs was reduced to 6,264 by April 1994.

The reform and restructuring of these SOEs towards market forces, albeit with continued state control, has not only reduced the total number of enterprises, but also considerably strengthened every aspect of the SOEs' performance. At the same time it should be noted that the contribution of the state enterprise sector to Vietnam's gross domestic product (GDP) has increased at a faster rate than the growth of the national economy's GDP growth rate in the five consecutive years between 1990 and 1994. As a result, the share of total GDP contributed by SOEs has increased considerably. Recently, SOEs have been the main driving force for high economic growth. Vietnam's SOEs have been developed primarily in the industrial, construction, trade, and service sectors of the economy.

Summary

Introduction

Notwithstanding the flurry of divestment activity around the world over the last ten to fifteen years, state-owned enterprises (SOEs) continue to occupy a prominent place in many societies. Indeed, while numerous enterprises have been divested in part or in full, others have been relatively untouched by divestment decisions. New ones have also been established in areas of considerable public concern, including health and education. In these and other cases, governments have recognized a definite need, on the one hand, to remain in the business of producing or providing selected goods and services in the public interest but, on the other, to enhance by various means the capacity of the relevant enterprises to cope with the demands that are inevitably made on them. One such means, in circumstances in which it has not already been adopted, is to transform the enterprises into legally, freestanding corporate entities through a process of corporatization. It is this means which is addressed here by drawing, in large part, on material published elsewhere over the last two years (Thynne 1994a, 1995).

Modes of Corporatization

In practice, there are two main modes of corporatization which need to be examined with reference to the four broad types of organizations whose basic characteristics are outlined in Table 8.1. Both modes seek to increase an enterprise's operational flexibility and viability by giving it an existence as an established legal entity which is legally separate from that of a government. This separate status as a recognized ‘legal person’ enables the enterprise to enter into contracts, to buy and sell property, and to sue and be sued in its own corporate name (Birkinshaw, Harden, and Lewis 1990; Boo 1989; Coates 1990; Taggart 1990, 1993; Wettenhall 1990, 19936, 1995; Thynne 1991, 19946). In other important respects the two modes are different from each other. This applies especially to their legal bases and the extent to which the resulting enterprises are subject or open to some form of legislative control and judicial review.

Summary

Introduction

Japan implemented a far-reaching privatization policy of public enterprises in the mid-1980s. Nippon Telegraph and Telephone Public Corporation (NTTPC) was privatized in 1985 and Japan National Railways (JNR) was reorganized as a private company in 1987. Since these public enterprises provide the basic infrastructure for economic and social development, privatization of these giant public entities symbolizes a drastic alteration in the traditional thinking of how to deal with monopolies. The Japanese experiment of privatization is an acid test to determine whether these public services could be supplied efficiently by private organizations. The Japanese privatization policy indicates that privatization is essentially a political issue. Since privatization and deregulation may destroy the vested interests, how to create a favourable political climate for change and who takes the initiatives are the key elements which ensure that the difficult regulatory reforms proceed smoothly.

Japan's privatization policy has not been successful in all respects. Many unresolved questions remain. Moreover, Japan's privatization policy reflects the peculiar economic and social characteristics of the Japanese traditional setting. Japan's experience could not be directly transferable to other countries because of the differences in the development stage and traditional economic system. However, it is also true that there are various economic rationales behind the Japanese privatization policy that are common in any economy. Although Japan's privatization has not been completed, the experience of privatizing Japanese public enterprises could provide many interesting lessons to Vietnam in its attempt to reform its state-owned enterprises (SOEs).

This chapter is organized as follows. Section II explains the major reasons why Japan's public enterprises were privatized. The next sections focus on two case studies of Japan's privatization policy. Section III examines a case study of NTTPC — it discusses the main characteristics of the NTTPC privatization policy and assesses the results of privatization. Section IV considers a case study of JNR — it discusses the major features of JNR privatization practices and evaluates the economic effects on its performance after privatization. Section V outlines some of the political and economic implications of the Japanese experience and applicability for Vietnam.

Summary

Introduction

Reforming state-owned enterprises (SOEs) to improve the socio-economic efficiency of this important sector in the national economy was initiated some time ago in Vietnam, ranging from the reform of management in SOEs to the current renovation of policies and mechanism on a comprehensive and macro level. Yet, the reform only gained full momentum over the last ten years.

The most salient feature of SOEs in Vietnam is that they used to operate in a highly centrally planned and subsidized environment. The state assigned to SOEs plans which had been approved by higher government levels, which included a system of targets, such as gross output, total value of production, main products, total payroll, profits, and transfers to the government budget. The government supplied the main materials, provided the markets for the products, and set their selling prices.

In the late 1970s and early 1980s SOEs found themselves in difficulty because the operation plans assigned by the government prevented them from operating efficiently and also because of the drastic cut in foreign aid and shortage of material supplies. This situation compelled the government to formulate appropriate policies to involve SOEs in joining the efforts of the government to ensure employment for the workers. On 21 January 1981 the government enacted Decision 25/CP with an aim of providing guide-lines and measures to develop the initiatives and financial autonomy of SOEs in business operations. This can be seen as the first breakthrough against the centrally planned mechanism which had controlled the management and operations of SOEs until that point in time. The reform of planning and economic accounting systems in SOEs aims at the following targets:

Summary

Introduction

The rise of the global market economy has been marked by an increasing recognition of the role of the private sector in making the economy more efficient and competitive. One of the available approaches for promoting private sector development is the privatization of state-owned enterprises (SOEs). More than eighty countries have launched ambitious efforts to privatize their SOEs. Since 1980 more than 2,000 SOEs have been privatized in developing countries and 6,800 world-wide. Although the privatization process began with small and medium-sized companies, in the past few years privatization has included large SOEs as well. In fact, the number of countries involved in privatization and the pace of privatization have dramatically increased.

Privatization, when correctly conceived and implemented, fosters efficiency, encourages investment (and thus new growth and employment), and frees public resources for investment in infrastructure and social programmes. In developed countries such as Japan and France, where the role of state enterprises has been previously dominant, privatization and deregulation are considered key instruments to economic restructuring and growth promotion. Even in former socialist economies like China and Russia, policy makers have seriously considered possibilities for privatization in their efforts to develop the private sector. Similarly, ASEAN countries have also realized the necessity of privatization in the greater deregulation process. In fact, privatization and, in broader term, deregulation can be considered as a key factor behind the robust growth of the world's fastest growing region.

In Indonesia for many years the issue of SOE reform, especially privatization, has been politically sensitive and purposefully avoided in public discussions. In particular, the word ‘privatization’ has been thought to be contrary to the spirit of nationalism and socialism that is strongly embedded in the Indonesian values. It is therefore understandable that although much research has covered the deregulation of the Indonesian economy, there have not been many studies discussing the privatization issues in Indonesia. The progress of the Indonesian SOE reform is relatively slow, especially if compared to reform in other sectors. This chapter attempts to give an overview on the role of SOEs in Indonesia and the results of the efforts to reform SOEs that have been undertaken since the late 1980s.

Summary

The State as Development Agent

Although Vietnam now recognizes the utility of a state-regulated market economy, and the desirability of a multi-sectoral economy (that is both private and state enterprises), the complete abandonment of state-owned enterprises (SOEs) is not deemed acceptable. Indeed, Vietnam wishes to see the state sector maintain its position at the forefront of the economy. One general conviction prevailing, and categorically stated in two of the chapters on Vietnam (Tiem and Thanh, Tuan et al.), is the view that the state plays a pivotal role as a development agent; and that the provision of certain goods and services shall remain in the exclusive domain of the state. The areas listed range from public utilities, infrastructure, defence, security, transport, postal services, and telecommunications to fertilizers, pesticides, veterinary products, and geological prospecting.

Three basic reasons have been given for an active state role: (1) low or non-profitability in the provision of (often capital-intensive) public utilities and infrastructure; (2) the need to help develop remote and mountainous areas; and (3) the need for industries necessary for Vietnam's industrialization and modernization, which the private sector is unable, at present, to play an important role in promoting. The literature on the establishment of SOEs, however, cites many more reasons, pertaining to factors such as macroeconomic stabilization, just and fair distribution of income and wealth, market failures and imperfections, monopolistic market structures, and externalities (see for example, C.Y. Ng and N. Wagner, Marketization in ASEAN. Singapore: ISEAS, 1991).

Indeed, the ASEAN experience has shown a strong case for the state to play a pivotal role in development, through the establishment of SOEs. It should, however, be noted that all ASEAN countries are currently undergoing dramatic transformation, through divestment of SOEs, having experienced a serious drain on their budgets in the recent past. The one possible exception where SOEs have been (in general) profitably and efficiently run is Singapore, and yet this state too has a comprehensive programme of privatization.

Summary

Rebuilding the economy and strengthening the democratic process are the prime concerns of the post-Marcos era, starting with the Aquino administration. In understanding the dynamics of this period, the following major concerns and developments need to be stressed. First, the passage from an authoritarian to a democratic regime has opened up new possibilities for the various players of civil society in contesting and negotiating the political and economic terms of engagement of the post-Marcos order. At the same time, this greater vibrancy of civil society necessitates a state and a political leadership that is far more politically skilled in cultivating broad political consensus for reform projects. If this synergy is lacking, there is danger that the renewed vibrancy of civil society could simply be dismissed as intractable behaviour that needs to be subjugated by the state; or that the decisiveness of political leaders be mistaken for authoritarian practice.

Secondly, reflecting the increased globalization of the economic and social life of the country and its impact on local decision-makers, there has developed a more competitive economic environment leading to a vastly expanded role of international economic forces in the local economy.

Thirdly, among both policy-makers and the people, there has emerged a heightened sense of awareness of the importance of Asia, particularly of Southeast and East Asia to the economic and political future of the country. This has been brought about not only by the increasing economic activity among members of the region but also by the significant numbers of overseas contract workers in the neighbouring countries.

Fourthly, the emergence of economic growth centres outside of Metro Manila, such as in the Calabarzon area, Subic, Cebu, Davao, and General Santos, and the institutionalization of a Local Government Code have introduced a new dimension into the democratic transition process. With these forces at work, the degree and quality of decentralization of both political and economic activities become important indicators for the democratization process.

Summary

A key feature of Philippine political life lies in a vibrant civil society animated by forces and institutions enjoying a significant degree of autonomy from the state. This is one aspect of the country's socio-political landscape that differentiates it radically from its neighbours in the region. A complex product of the country's colonial past and the history of political struggles before and after World War II, this extraordinary state of civil society has both constrained and enhanced the terms of engagement in the political arena.

Constituting the most powerful sector of civil society is the traditionally land-based agro-exporting oligarchy, whose most aggressive members would later diversify into the country's highly protected and oligopolized manufacturing sector. By the end of the American colonial era, this oligarchy had succeeded in entrenching itself and legitimizing its economic and political clout through the formal electoral process. What emerged by the end of formal colonial rule in 1946 was a state that was largely a captive of this powerful class of big landlords and what would later develop as the highly protected business sector engaged in import-substituting manufacturing.

Furthermore, the historically weak central government had to share and negotiate power with durable political clans ensconced in various provinces and regions of the archipelago. Unlike in other Asian countries where the local oligarchy was wiped out by the vicissitudes of war, revolution, or the modernizing projects of authoritarian governments, the local oligarchy showed extraordinary resilience and flexibility. They have survived the tumult of post-war revolutionary challenges, the political realignments under martial rule, and the restoration of formal democratic processes.

The churches, with the Catholic Church as preeminent, constitute another enduring layer of civil society. As shown by public opinion surveys, the Philippines counts as among the most religious and devout countries in the world; moreover, the churches in the country generally have received much higher levels of confidence ratings by the public compared with those of the different branches of government and the business sector.

Summary

Two of the most resilient and intractable armed political movements in the region continue to challenge the political authority and legitimacy of the Philippine state. The first, a communist-led revolutionary movement is rooted in several decades of peasant-based struggle for agrarian reform and committed to a strategy of protracted war by building bases in the countryside as a primary condition for seizing political power. In the mid-sixties, a resurgent nationalist movement led by young intellectuals and college-educated student activists reinvigorated the mass movement and founded a new communist party in 1968 and a new guerrilla army in 1969. Under the leadership of the new party, the mass movement gained its peak political and military strength during the last five years of the struggle against the authoritarian rule of Marcos.

The ouster of the dictatorship in 1986 created an opening for political negotiations between the Aquino administration and the National Democratic Front (NDF), the political coalition representing the revolutionary movement. From the start, however, the two parties approached the negotiations with fundamentally different perspectives, leading to the failure of the talks. For the NDF, any discussion of ending the armed conflict including the question of a ceasefire must be pursued within the context of a “comprehensive political settlement” that commits the government to implementing fundamental social and political reforms. For its part, the government was primarily interested in concluding an immediate cessation of armed hostilities without being tied down to the details of any comprehensive political settlement leading to wide-ranging reforms in society. Since much of the discussion got bogged down by questions about implementing and monitoring the preliminary ceasefire, the military also commanded an inordinately dominant role in the negotiations.

By the time the new administration under Ramos decided to resume negotiations with the NDF in 1992, a new conjuncture of events was in place.

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4 - Legal Consequences of State-Owned Enterprise Reform

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7 - Role of Government and the Public-Private Sector Mix: The ASEAN Experience

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Preface

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Contents

Section II - Asian Experience

2 - Restructuring of State-Owned Enterprises towards Industrialization and Modernization in Vietnam

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Section III - Conclusion

1 - Problems and Prospects of State Enterprise Reform, 1996-2000

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8 - Corporatization as a Strategy of State-Owned Enterprise Reform

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5 - State-Owned Enterprise Reform: Lessons from Japan

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Section I - Reforms of SOEs in Vietnam

Frontmatter

Index

3 - Government Policies and State-Owned Enterprise Reform

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6 - State-Owned Enterprise Reform in Indonesia: An Overview

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9 - Concluding Remarks

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six - The Post-Marcos Era: Signs of the Times

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two - The Intractable Civil Society

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About the Author

nine - Political Stability and the Armed Movements

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