Some theoretical and practical issues in the development of the private sector in Vietnam

Renovation of theoretical thinking, institutions, mechanisms, and polices on the development of the private sector since the 6th National Party Congress

In an article summarizing more than 35 years of renewal titled “Some theoretical and practical issues on socialism and the path towards socialism in Vietnam,” Party General Secretary Nguyen Phu Trong emphasized that  “A socialist-oriented market economy encompasses multiple forms of ownership and multiple economic sectors. Economic sectors operating in compliance with the law are important components of the economy. They are equal under the law in the interest of long-term development, cooperation, and healthy competition. In this system, the state economy plays a key role; the collective economy is constantly consolidated and developed; the private sector is an important engine of the economy; the FDI sector is encouraged to develop consistently with the socio-economic development strategies and plans.”(1)

The renovation of the economic mindset at the 6th National Congress of the Communist Party of Vietnam was rooted in the reality of the country and based on the application of V.I. Lenin’s perspective which viewed “a multi-sector economy as a characteristic of the transitional period(2). The private economic sector was officially recognized as an important component of investment and socio-economic development in Vietnam, creating the political foundation for further breakthroughs in the Party’s mindset on the position and role of the private sector.

Summarizing the development and contribution of the private sector to national socio-economic development over more than 15 years of renewal, the 5th plenum of the 9th Party Central Committee issued Resolution 14-NQ/TW on March 18, 2002, on "Continuing to renew mechanisms and policies to encourage and create conditions for the development of the private sector." The Resolution included important measures to promote the private economy and private investment.

The 10th National Party Congress officially recognized the private sector as one of the driving forces of the economy. The 10th Party Central Committee issued Regulation 15-QD/TW dated August 28, 2006, on “Party members engaging in the private sector." The Politburo issued Resolution 09-NQ/TW dated December 9, 2011, on "Building the Vietnamese business community and promoting their role in the era of accelerating industrialization, modernization, and international integration."

The 11th National Party Congress advocated perfecting mechanisms and policies on reforming the growth model, restructuring the economy, improving the investment and business environment, and attracting diverse forms of investment. This approach aimed to effectively mobilize and utilize all resources from various economic sectors, promote the formation of private economic groups and encourage private investment in state-owned economic groups. At its 12th National Congress, the Party asserted that the market plays an essential role in effectively mobilizing and allocating development resources, serving as the primary driving force to unleash productive forces. Consequently, the Party set the task of continuing the comprehensive development and smooth operation of various types of markets, while acknowledging that the private sector is a significant engine of the economy.

The 5th plenum of the 12th Party Central Committee issued Resolution 10-NQ/TW dated June 3, 2017, on "Developing the private sector into a significant driving force of the socialist-oriented market economy" with specific goals and five groups of measures to encourage and support the development of the private sector.

At its 13th National Congress, the Party continued to emphasize that "The private economy is encouraged to develop in all sectors and areas that are not prohibited by law and is supported to develop into strong, highly competitive private companies and groups. Private businesses are encouraged to cooperate and collaborate with state-owned enterprises, cooperatives, and the household-based economy, and to develop joint-stock companies involving various social entities, especially workers."(3) The Party emphasized the need to improve the system and enhance public-private cooperation to mobilize social resources for developing infrastructure and providing public services. The Party set the target of "at least 2 million businesses by 2030, with the contribution of the private  sector to GDP reaching 60-65%"(4) and total social investment averaging 33-35% of GDP.

From 2010 to 2022, the evolving theoretical thinking of the Party laid the foundation for building and refining institutions, mechanisms, and policies on the development of the private sector in Vietnam. According to Article 51 of the 2013 Constitution, the Vietnamese economy is a socialist-oriented market economy with varied forms of ownership and economic sectors with the state economy playing the dominant role. All economic sectors are important components of the national economy. Entities in different economic sectors are equal before law and shall cooperate and compete with one another in accordance with law. The State shall encourage and create the conditions for businesspeople, enterprises or other individuals or organizations to carry out investment, production and business activities and to develop economic branches in a sustainable manner in order to contribute to national construction. The legal property of individuals and organizations engaged in investment, production or business activities is protected by law and is not subjected to nationalization.

Mechanisms and policies on the development of the private sector have constantly been improved through the issuance of a system of laws. This has led to the following outcomes(5):

A unified legal framework has been established for the establishment, organization, and operation of various business entities, regardless of forms of ownership. This framework is increasingly aligned with international norms and regulations.

1. The property rights and business freedom of individuals and organizations are institutionalized to protect investors.

2. The private sector is free to compete and is treated equally under the law compared to the state-owned sector and the foreign direct investment (FDI) sector. Discrimination against the private sector in accessing state resources and support have been gradually eliminated.

3. Tax and technology policies and administrative procedures have been improved to create favorable conditions for the development of private investment.

State of the development of the private sector in Vietnam

The private sector is experiencing robust development. From 2010 to 2021, over 100,000 new businesses were established each year on average, with annual registered capital totaling over 500 trillion VND (nearly 21 billion USD). Notably, from 2018 to 2022, more than 130,000 new businesses were established each year with annual new registered capital of over 150 trillion VND(6).

Several large-scale private enterprises have been established(7), with diverse forms of business. They have gradually become significant economic players. Additionally, some private businesses(8) have ventured abroad,  achieved success, and built reputable brands. Entrepreneurs are developing vigorously with a strong business spirit, innovative mindset, a desire to advance forward, and growing social responsibility, ethics, and culture.

The private sector has made substantial contributions to economic development.

First, from 2010 to 2021, the contribution of the non-state economic sector (including private and collective economies) accounted for over 50% of   GDP (specifically 50.55% in 2019; 50.56% in 2020; 50.04% in 2021(9), including contributions from the cooperative economic sector). This sector accounted for the largest share in GDP among the three sectors (state, private, and FDI).

Second, the non-state economic sector’s contribution (excluding personal income tax) to the state budget rose from 11.7% in 2011 to 18.48% in 2021(10). Since 2017, the private sector’s contribution to the state budget has surpassed both the state-owned sector and the FDI sector.

Third, the private sector has gradually engaged in production networks and regional and global value chains through coordination with the FDI sector. By 2021, the private sector produced 91.27% of sea salt, 88.45% of sugar, 48.69% of NPK fertilizer, 44.64% of cement, 39.21% of cast iron or raw iron, and 49.91% of rolled steel(11).

Fourth, private investment in total social investment has consistently risen and has surpassed both the state and FDI sectors, jumping from 44.6% in 2010 to 59.5% in 2021(12). As a result, despite a decrease in public investment, the overall investment in infrastructure has continued to rise. Notably, from 2010 to 2022, numerous large infrastructure projects undertaken by the private sector were completed and put into operation(13).

Fifth, private businesses have relatively stable capital turnover ratios, ranging from 0.7 to 0.78 times between 2010 and 2017. While lower than the FDI sector (0.84 to 1.08 times), these ratios were significantly higher than those of state-owned enterprises (0.36 to 0.59 times).

Sixth, the private sector plays an essential role in replacing public investment in the face of shrinking public investment sources. During the 2010-2021 period, the highest ratio of public investment in total investment was 36.1% (in 2012) and the lowest was 24.1% (in 2019). Furthermore, increasing private and foreign investments have contributed to economic stabilization.

Seventh, the private sector contributes significantly not only to the economy but also to society, particularly in terms of labor and employment. Despite a decrease in the proportion of workers aged 15 and above in the private sector from 86.3% in 2010 to 82.6% in 2021, this sector still provided employment for over 80% of the labor force in the economy. The average growth rate of the labor force in the private sector from 2011 to 2018 was over 3.6%, with private businesses recording nearly 5.4%.

However, there are things standing on the way of the development of the private sector.

First, the private sector still faces many obstacles: 1. Despite the political system’s improved perception of the private sector, prejudice and discrimination against this sector remain, especially among a considerable number of officials, civil servants, and even citizens. The role of the private sector in the socialist-oriented market economy is not fully  understood. 2. Inconsistent and overlapping legal frameworks, mechanisms, and policies hinder the performance of economic entities, especially those in the private sector. Competition policies are ineffective, access to resources is unequal among economic sectors, and policy implementation is inconsistent. Policies on protecting domestic production and combating smuggling and trade fraud are inappropriate and reveal  many weaknesses. 3. There exist shortcomings in state management, particularly regarding ineffective and inefficient enforcement of regulations and policies, as well as a lack of incentives to encourage the private sector’s innovation and creation of globally competitive products. Administrative reform has failed to achieve the “3 reductions” goal, namely reduction of  time, reduction of costs, and reduction of paperwork. Administrative procedures remain cumbersome and overlapping in many stages. Support is scattered, less effective, and sometimes not aligned with the purpose nor with target groups. Vietnam is one of the countries with relatively high compliance and business costs.

Second, the private sector still faces many challenges: 1. The number of private economic establishments is increasing rapidly, especially the number of newly established businesses, but the number of businesses ceasing business activities, dissolving, or going bankrupt is also very high. It takes private businesses, mostly involved in trade and services, much time to improve their quality and effectiveness. 2. Most private businesses   are small and medium-sized, with a high proportion falling into the micro category. In terms of the number of employees, in 2017, 74% belonged to the micro category (compared to 63% in 2010). Fewer than 1% of private  businesses employed 200 people or more, while 30% of FDI businesses and 7.7-13.4% of state-owned businesses employed fewer than 10 people. 3. The private sector had a high rate of enterprises experiencing losses, equivalent to the rate in the FDI sector during the 2010-2017 period (except for 2010 and 2012). 48-49% of private businesses reported losses in 2016 and 2017, the highest among all sectors in the 2013 - 2017 period. 4. The social labor productivity of the private sector is lower than the average of the economy(14).

Third, the contribution of the private sector to economic growth is not commensurate with its potential. Its GDP share was unchanged during the 2010-2021 period. The average size of domestic private economic units remains modest, with the individual economy accounting for 30% of GDP, and private businesses making up only 9% of GDP. As few as 21% of domestic private businesses participate in global value chains. The domestic economy (including both private and state-owned enterprises) accounts for only 30% of exports, compared to 70% by the FDI sector.

Fourth, the average income of employees in the private sector has  increased year by year but is still the lowest among the three sectors. In the 2010-2021 period, it ranged between 3.4 and 7.5 million VND/person/month, 49-82.15% of that in the state-owned sector and 73-90.1% of that in the FDI sector(15).

Fifth, the capacity of the private sector remains limited: 1. Private economic entities lack the necessary resources for innovation and the  development of new technologies and production processes. According to the World Bank, there has been no significant improvement in expenditures on research and development (R&D) by Vietnamese enterprises. Vietnam ranked 42 out of 134 countries with a score of 3.6 out of 10 in 2008; 27 out of 133 countries with a score of 3.8 in 2010; and 49 out of 138 countries with a score of 3.5 in 2017. 2. The private sector’s production capacity and competitiveness in terms of quality and price remain low. Its labor productivity is equal to 34% of that in the state-owned sector and 69% of that in the FDI sector. Investment in technological innovation accounts for only about 0.3% of revenue, much lower than that of other countries such as India (5%) and the Republic of Korea (10%). Only 21% of small and medium-sized enterprises participate in a portion of the global value chain and 14%  successfully establish foreign partnerships(15).

Sixth, domestic private investment is overshadowed by FDI and public investment. In many industries including electronics, automobile and motorcycle manufacturing, FDI enterprises have dominated and competed against, instead of supporting and leveraging, domestic private businesses. Moreover, as domestic private enterprises have fewer developmental advantages (such as resources, experience and expertise) than FDI and state-owned enterprises, they are more prone to external factors such as crises and recessions as well as the negative impacts of the market economy such as speculation, pursuit of profit, and group interests.

Some lessons for the development of the private sector in the new context

The domestic and international landscapes present numerous opportunities and challenges for the development of the private sector.

First, the global economy is currently facing recession, inflation, and the depreciation of most currencies against the USD. Rising inflation in some major economies has adversely affected the global economy, while tightening monetary policies may pose a risk for global economic downturn. The world-wide economy may be on the verge of a new recession.

Second, international integration and division are intertwined. While new-generation free trade agreements (FTAs) are being promoted, a trend of separation has emerged, evidenced by the UK's departure from the European Union (Brexit) and the Russia-Ukraine conflict. Russia has been  sanctioned, leading to global division and various repercussions, including energy difficulties in Europe.

Third, investment capital is shifting to emerging countries. States are adjusting their strategic goals to cope with geopolitical risks. These developments adversely affect the countries losing capital while triggering a competition to attract investment. As a result, all countries need to adjust their economic development strategies.

Fourth, the world is in the midst of the Fourth Industrial Revolution with numerous opportunities and challenges. Industry 4.0 has created opportunities such as new economic spaces, new technologies, new products, and stronger connections globally but it also poses challenges, such as the potential risks of shifting capital and competition between the real and virtual worlds. Additionally, alongside adjusting business goals and  strategies, many tech firms are laying off thousands of employees.

Fifth, significant non-traditional security and climate change risks are emerging. Non-traditional security challenges, such as the unprecedented COVID-19 pandemic, have seriously affected production and supply chains due to social distancing. Climate change is happening faster and more intensely than predicted, resulting in significant impacts such as rising sea levels, salinity intrusion, droughts, floods, and tsunamis.

The development of the private sector in recent years has provided some lessons.

First, the awareness of the role and position of the private sector needs to be overhauled. The private sector should be consistently and fully recognized by the entire political and social system as a leading driving force of the national economy, in order to create favorable conditions for its development and make full use of its advantages and potential.

Second, the legal framework, mechanisms, and policies on the development of the private sector need to be fine-tuned to create a favorable and fair business climate among all economic sectors. It is crucial to synchronously and effectively execute tasks and solutions on the development of the private sector; build a lean, effective and efficient state apparatus; and develop a contingent of officials with integrity, steadfast political ideology, and  high qualifications. Greater efforts should be made to strengthen discipline and resolutely combat corruption, waste, and negativity.

Third, administrative reform should be enhanced to achieve the "3 reductions" goal, namely reduction of time, reduction of costs, and reduction of paperwork. It is essential to implement robust and effective solutions to reduce production and business costs as well as mechanisms and policies to enable the private sector to actively participate in international economic integration. Attention should be paid to ensuring that incentives for the private sector are compatible with market mechanisms and principles and with international commitments, and that they promote the sector’s autonomy and competitiveness. It is necessary to refine and effectively carry out regulations and policies on support for the private sector, particularly small and medium-sized enterprises.

Fourth, emphasis should be placed on promoting the role of the private sector, honoring businesses with innovations and competitive products in the domestic and international markets. The direction on developing the private sector in close association with economic restructuring has created numerous opportunities for the sector to improve its capacity. Vietnam's economy has become known globally through some private groups.

Fifth, the private sector needs to be promoted in localities. Private economic establishments must update and fully understand State regulations and proactively seek partners and opportunities for collaboration to improve competitiveness in the pursuit of international economic integration. It is necessary to enhance the responsibility of departments and agencies in  implementing orientations and policies on the development of the private sector. Party and State discipline in implementing directions, law, and policies on the development of the private sector should be strengthened. It is important to promote Party building in the private sector, especially among enterprises. Outstanding private economic establishments which make significant contributions to socio-economic development should be honored and rewarded in a timely fashion. 

Sixth, it is crucial to adhere to the principle that external resources are important and domestic resources are essential. Resources from the private sector should be recognized as a driving force for development, while  administrative reform and improvement of the business environment should serve as an important foundation to encourage the development of and investment from the private sector. State investment should serve as a "bait" to attract social resources and private investment to the development of economic infrastructure, especially with regard to the transportation system.

Furthermore, the development of the private sector should take into account the following:

First, fully translate the principle that the private sector is an important driving force of the national economy in the Party and State’s directions, institutions, mechanisms, and policies, and their implementation at all levels and in all branches, sectors, and localities.

Second, create a favorable environment for the development of the private sector while removing barriers to the operation of private businesses.

Third, encourage private businesses to generate jobs and income for workers with the goal of inclusive growth.

Fourth, seek financial support for newly established businesses and create an environment for startups. Focus should be placed on the enhancement of the competitiveness of the nation, enterprises, sectors, and products. 

Fifth, create a favorable environment in terms of institutions, science and technology, finance, credit, land access, and fair competition among  economic sectors to improve the effectiveness of the economy.

Sixth, focus on investment and private investment. It is necessary to attract resources from domestic businesses and individuals to develop economic infrastructure so that the state economy serves as the mainstay, while avoiding public debt and foreign debt traps. Incentives should  be offered to make full use of the achievements of Industry 4.0 with a focus on successfully building a digital economy for the digital society.