Hanoi, Vietnam, August 29, 2003—
Informality and unequal playing field create obstacles to the development of the Vietnamese private sector, according to a study released jointly today by the International Finance Corporation and the World Bank. Despite rapid growth of private small and medium enterprises, Vietnam’s formal domestic private sector remains small. As of 2002, it accounted for less than 8 percent of GDP, 6 percent of manufacturing, and less than 3 percent of total employment.
Vietnam’s recent economic growth has been accompanied by a significant increase in the size of the unofficial economy, particularly in the non-state sector, the study,
Informality and the Playing Field in Vietnam’s Business Sector
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http://www2.ifc.org/news/PlayingField.pdf
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shows. It finds that local governments contribute to informality through excessive regulations and cumbersome administrative procedures. Regulations and their applications often tend to encourage informality by penalizing success, growth and visibility. As a consequence, private entrepreneurs tend to spend significant amount of time and resources hiding their success from the government and, in the process, missing opportunities for further growth.
Informality thrives in Vietnam in part because businesses of different categories of ownership and size are treated unequally. As a result resources such as capital and land do not flow to entrepreneurs that can put these resources into their most productive uses.
The study identifies steps that the key players in Vietnam’s business environment –policymakers, banks and companies – can take to increase the contribution of the domestic private sector to the growth of the Vietnamese economy. It recommends that in order to encourage continuing private sector growth the government should create a level playing field for all enterprises by intervening less, focusing instead on improved commercial legislation and more open markets. Financial institutions must develop to serve the private sector, while private enterprises need to mature and improve their corporate governance to derive the most benefit from improvements in the business environment.
“The government should accelerate the development of a more business-friendly and transparent legal regulatory framework and make even the playing field for private domestic-owned companies, state-owned enterprises, and foreign-invested companies” said Assaad Jabre, IFC vice president for operations.
The World Bank Group has emphasized improvements to the business environment as an important condition for sustained growth and poverty reduction. This study was designed to provide new insights into the status of the Vietnam’s business sector and new ideas for ways to support and participate in its future growth.
The study, based on fieldwork as well as World Bank Group’s international experience, was carried out by Stoyan Tenev, Amanda Carlier, Omar Chaudry, and Quynh-Trang Nguyen. The Central Institute for Economic Management supported and facilitated the study. AusAID provided funding and continued support and encouragement. The study draws on a technical report by the Asia-Pacific School of Economics and Management of the Australian National University and the Central Institute for Economic Management, which conducted the fieldwork. Research for the study began in first quarter of 2002 and is based heavily on field work in eleven provinces and cities in Vietnam. Fieldwork involved structured interviews with more than 220 CEOs and senior managers in private and state owned companies, some 750 mailed-out questionnaires, and discussions with industry associations, financiers, government officials, and academics.
The mission of IFC is to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people's lives. IFC finances private sector investments in the developing world, mobilizes capital in the international financial markets, helps clients improve social and environmental sustainability, and provides technical assistance and advice to governments and businesses. From its founding in 1956 through FY02, IFC has committed more than $34 billion of its own funds and arranged $21 billion in syndications for 2,825 companies in 140 developing countries. IFC's worldwide committed portfolio as of FY02 was $15.1 billion for its own account and $6.5 billion held for participants in loan syndications.
