VIETNAM: WHY PRIVATISE? BECAUSE WB SAYS SO?

8:23 PM Apr 9, 1996

VIETNAM: WHY PRIVATISE? BECAUSE WB SAYS SO?
Penang Apr (TWN/Peter Limqueco) -- A World Bank study last year on Vietnam, "Viet Nam: Economic Report On Industrialisation and Industrial Policy", proposed a strategy for industrial development of the country, and for transforming its economy from socialism to capitalism, politely referred to as `market economy'.

It was a study typical in form in that it recommends the large-scale privatisation of state enterprises -- well-worn advice given over the years to East Europeans, African, Asian and Latin American nations.

The cornerstone and key to the success of the strategy designed "to eliminate poverty... by promoting Industrialisation", says the Bank, is "divestiture [privatisation] of non-strategy state enterprises", adding that in accordance with its definition of non-strategy this would "involve a very large number of [state] enterprises in many sectors".

That's hardly an original or surprising thought. Large-scale privatisation has been the Bank's policy-recommendation stock in trade ever since Maggie Thatcher made it famous if not respectable.

To motivate such a policy in Vietnam, one could have expected the Bank to recite its usual litany of state enterprise ills - inefficiency, unprofitability, overstaffing, drain on the state coffers, and threat to macroeconomic stability of the country.

Well, guess what! None of the above are there.

An "ultimate target of full privatisation of nonstrategic state enterprises" - all those "producing private goods and services" - is envisaged "in spite of the success of state enterprise led industrialisation since 1991" [author's emphasis]. Or, as the Bank report states elsewhere, in spite of the fact that "state enterprises have responded very well to... reforms: Short-term financial stability is no longer an issue of concern, the sector contributes significant revenues to the budget, and its growth rate is faster than the economy as a whole".

These summary points are supported by 30 pages of careful analysis and such comprehensive statistical details as to - unwittingly - constitute perhaps the best defence of socialism in Vietnam written in recent history. Communist Party hardliners would be hard pressed to come up with arguments as convincing in their battles with the party's free marketeers.

The report even goes so far as to state: "The performance of the state enterprise sector in Viet Nam not only is superior in comparison to the highly centralised economies of Central Europe and the former Soviet Union, but is also remarkably good in comparison with most developing countries with mixed economies, and it is indeed comparable to the high performing state enterprise sectors in Korea and Thailand."

Annual GDP (Gross Domestic Product) growth rates of the state sector overall as well as in industry, including construction since 1990, have far exceeded those of the non-state sectors, sometimes in spectacular fashion. Only in agriculture and services was it a close contest [see table].

Whatever criteria one uses, whether neo-classical or Marxian economics, the conclusion is inescapable as the World Bank report concedes that Vietnam's "impressive results since the introduction of a comprehensive program of adjustment and reform in 1989" are due principally to the very state sector that it wants to dismantle.

Neither can it be argued (nor does the World Bank attempt to argue) that state sector success in propelling the Vietnamese economy has somehow been artificially induced or come at the expense of macroeconomic stability.

Over the past several years, most loss-making state enter- prises have been phased out - their total number has been reduced from more than 12,000 to approximately 6,000 and the remainder have performed their locomotive function fair and square, pulling the country's overall GDP growth up to nearly 9% in 1995.

And while average annual growth from 1989 to 1995 was 7.6% - very respectable even by high-growth East Asian standards - inflation was brought down from nearly 100% in 1989 to single digits in 1993-94. A worrisome uptick in 1995 has, by all accounts, been brought under control, with 1996 inflation again expected in the single-digit range.

The progress and management achievements lauded by the World Bank include a tripling of exports since 1989; budget deficit reduction to 1.8% of GDP in 1994 (4.8% in 1993); increased public and private savings; successful sourcing of external financing (foreign direct investment, official development assistance) to cover the US$1 billion (1994) current account deficit, and a basically stable currency since 1991.

To dispel the notion that the state sector outperformed the private sector because it was extended special government favours, it should be noted that since the beginning of 1992, the year of the formal recognition of the private sector in the Constitution, the share of the private sector in the total stock of credit has increased rapidly, from 10% at end-1991 to 37% at end-1994.

This change was brought about by a very fast rise of the private sector share in the total flow of new credit from 20% in March 1992 to a peak of 65% in March 1994 (though later in 1994 it declined again to about 50%, partly due to a slowdown of credit demand by farmers). Similarly, the state sector which accounts for 30% of GDP (private sector 60%), has contributed more than its fair share to government coffers, accounting for 49% of total revenues in 1994, compared to only a 13% share contributed by the non-state sector.

Vietnam's state enterprises are hardly on the dole. So, what exactly is irking the World Bank? What's its beef with a sector of the economy that has thoroughly reformed itself, is outdoing the rest, has played the leading role in the country's take-off and remains the economy's mainstay?

Going through the Bank's report with a fine tooth comb to find the answers has yielded only the sparsest of results - certainly no coherent, well-documented argument demonstrating the urgent need for wholesale dismantling of the state sector.

First, there is the claim that industrialisation led by state enterprises would require higher levels of external debt and thus ultimately result in lower growth. Higher levels than incurred by private enterprises? Only if, one would assume, state enterprises proved less productive and profitable. But throughout the report there is no coherent attempt to prove that point, only some vague reference to "international experience". Well, Vietnam's state enterprises may prove the exception - as in many ways they have already done.

Second, there is the level playing field argument and the charge that holding on to state enterprises encourages protectionist attitudes and special privileges.

But the privileges, the report notes, are rapidly being scaled down and there is certainly no great "international experience" to fall back on when it comes to saying only state enterprises want to be protected - current examples in India and the Philippines, if anything, prove the opposite.

The only sound point that can be identified and which, at first sight, would seem to speak in favour of large-scale privatisation, is job creation. State enterprise employment declined from 2.5 million in 1990 to 1.7 million in 1994 while private sector employment rose by 4.7 million. For demographic reasons, Vietnam must create at least a million new jobs a year. If the enterprises sector can't do that, it should be left to wither.

But the World Bank can't have it both ways - on one hand calling for the phase-out of loss-making units and then complaining about lack of job creation.

It is well-known "international experience" that larger enterprises, private or not, are not the main motor of job creation. Small and medium-size ones are. In Vietnam, the state enterprises are the larger enterprises, the private firms the smaller. So, there is an excellent argument for encouraging and supporting small and medium-size company creation, but that hardly translates into a cogent privatisation argument.

A final point to be addressed is the Bank's complaint that private enterprises are not doing as well as the state sector because they are not attracting enough foreign joint venture partners. Does the Bank want to steer foreigners to the private sector? Here, perhaps, it should pay more attention to its own creed and let the market make the pertinent investment decisions.

It is impossible to untangle the inconsistencies of the World Bank report. One is left time and again with the question: Why dismantle what has the best track record?

Anyone trained in the most elementary logic will recognise that there is something frightfully wrong with saying that, notwithstanding Vietnam's record of success which is largely due to the exceptional performance of the state enterprise sector, Vietnam must now confront the more difficult task of privatising that sector.

It reflects, at best, a purely ideological commitment asserted in the face of most contrary empirical evidence. At worst it is a recommendation deliberately intended to produce disaster.

The report's recommendations all but ignore the dismal experiences in the former East bloc with precipitous privatisation on a large scale which produced economic and social chaos and in the former Soviet Union has left large sectors of the economy in the hands of criminal mafias.

Is that the World Bank's bizarre vision of what Vietnam should emulate?

Happily, that is not for the Bank but for Vietnamese policy makers to decide.

Not only in Western Europe but also in some of the most successful economies of East Asia, strong state sectors have been retained in mixed economies and performed well. Thatcher-style wholesale dismantling, on the other hand, has hardly made Britain the stellar economic performer of the EU.