ASIAN AFFAIRS INTERVIEW WITH WOLFANG BERTELSMEIER

Chief of Mission - International Finance Corporation (1)

THE PRIVATE SECTOR IN VIETNAM

Serge Berthier.- The head of the most famous think-tank of Vietnam, Mr. Le Dan Doanh, is fond of saying that at the government’s level, there is no broad consensus on the course of action, but rather consensus are reached daily on a case by case basis. As the representative of a World Bank’s arm, dealing on many issues with the government whether short-term ones or long-term ones, do you share that opinion?

Wolfang Bertelsmeier.- I would agree that overall we have a situation where there are various tendencies, politically and otherwise. We do not have the situation that we have in China where it is very clear who determines the course and the speed of reform and of political and economic progress. Here, there are many different views and in order to make important steps, it is very important to bring the many different views together. That is often what is referred to as the consensus approach in Vietnam, and it is just a fact of life. Of course, all this does not take place in a vacuum.

SB.- The government seems to have concluded that only the private sector can create the jobs Vietnam needs. The country is very much a rural country, the private sector is small. It seems there is a mismatch between expectation and reality which is a recipe for social tension. Can we expect the private sector to cope with the labour issue?

WB.- The current demographic trend creates enormous pressure because about 1.2 million people enter the labour market every year. Jobs are indeed mainly in the urban areas because, even though 80% of the people are working in the agriculture, the farms being very small, the capacity of the rural area to create jobs is very limited, all the more because as far as agriculture is concerned, there is the enormous pressure of globalization which only pushes for the creation of productive jobs. Creation of productive jobs is really the only way the people can get out of poverty in the long run, whether in Vietnam or elsewhere. Indeed, it is difficult to see how this can happen here without a real stimulation of the development of the private sector.

SB.- Is Vietnam going as fast as it could but more slowly than it should?

WB.- We have to allow for the fact that we are in a transition period. Vietnam started its economic reform and its opening about ten years ago. “Duo moi” was very successful yet we have to keep in mind that the privatization of agriculture is the main force of the economic progress registered in Vietnam. Its success is uncontested and the changes it brought are dramatic. Notwithstanding, such progress of agriculture is largely based on private initiatives and family-farms. It was not a matter of state policies.

SB.- The agriculture can only deliver so much, and it did deliver as much as it could, and you point out it can’t create more jobs than it did in the past. Therefore Vietnam has to restructure further. However there is the perception that part of the elite has not yet made up its mind. What are the stumbling blocks?

WB.- As always in a transition economy, there are a number of obstacles. I would like to mention two, one a psychological one and the other a financial one. On the psychological angle, you have in a transition economy this feeling among a number of people that the private sector is something that needs to be watched with caution. It is quite obvious even to a first time visitor to Vietnam that the Vietnamese are very entrepreneurial and that there is an enormous energy among the population which is a very positive thing. However, in order to really unleash their energy and dynamism and channel them into economic growth and job creation, I think it is paramount to send a more positive signal that it is okay to be a private entrepreneur, that it is okay to be rich and make money. China, in that aspect, has probably gone a little bit further than Vietnam. More signals from the top level and the local level are needed to make clear that private businesses are useful partners and a very important element in the whole machine rather than something that is tolerated because it is needed. That is probably in a way one of the most important psychological factors we need in Vietnam, because talking to a number of Vietnamese private entrepreneurs over the years, it is my impression that many of them are a bit timid and actually sometimes decide not to expand their business as much as they could because they are afraid that they may step on somebody and may raise attention, and that it is going to be detrimental to them. So it would be important to send stronger signals. The second element, one that is valid for both the domestic private sector but also the foreign private sector, is really the need for stronger support for the financial market. Again many transition economies, because of their Marxist origin have somewhat some difficulties accepting the concept of a financial market. At the moment, there are so many restrictions placed in the financial market to check and control who should really mobilize resources and allocate them efficiently that it does not work very well. The system also has to provide people who save with ways to invest properly. It is not the case and there is much anecdotal evidence that a lot of people keep money at home, under the bed, because they don’t trust the financial institutions and the confidence in the banking system is limited. That is an enormous constraint.

SB.- The factors you mention are, to a point, a matter of trust, trust in the private property and trust in the institutions and not so much in the legal framework, even though it certainly needs to be improved. Do you see any sign that the mentalities are changing?

WB.- Certainly, and I hope that at the May 2001 Congress of the Communist Party the political establishment will come more forcefully on the two points I mentioned. And you are right. It is not so much in the legal framework, on a particular set of law, or regulations, that we need a substantial change, although we need them, but it is the psychology that needs to be changed in order for the private sector to kick-off. It is in fact at the centre stage of what we are trying to do with the government. We are organizing quarterly meetings between the private sector, donors and high-government people to discuss these kind of things.

SB.- Yet little has been translated into a message as forceful as Deng Xiao-ping’s messages to the Chinese when he launched the Chinese economy into a new path.

WB.- The reason here is that we are not dealing with an homogeneous group on the government, party and local authorities side. I think most of our counterparts, if not all, fully understand what I mentioned earlier and support our views, but not everybody feels that way. There is resistance at different levels and sometimes resistance at lower level. The Prime Minister himself has made that point often, that policies are enacted, but are not implemented by the lower level, because the bureaucrats are either not convinced or don’t like the change.

SB.- Or do not understand what is going on?

WB.- It is less likely so. They may understand what the implications are but not everybody may think that is the right way to go.

SB.- Is it the case in the financial sector where the regulations have been changed and improved, the banks reorganized to discover that the management is still acting as if nothing happened?

WB.- In the financial market, the problem is that there still are so many restrictions that it really stifles the initiative of the operators. There is still no stock market. We are told that it is to be implemented possibly this year but then, once again there are too many regulations on the companies that can deal in securities. They cannot have more than 30% of ownership, they cannot buy more than so many shares, so on and so forth. Then, to raise money, there are many different ceilings on interest rates to comply with. If the banks lend to a private enterprise, there are rules on how much securities and collateral they have to seek that they don’t need to seek if it is a state-owned enterprise. Everything in a way becomes overly restricted. What financial institutions should do is make judgments, they have to know whether they want to support that kind of company, and if they do, what kind of security they should seek, rather than to say, that company is such and such and the regulations are such and such. That regulatory approach takes away the managerial responsibility of the institution and therefore there is little expertise in the sector.

SB.- There is little expertise also because banks in Vietnam or in China, or in the Soviet Union were only banks in name. They are certainly not banks in the western sense of the word.

WB.- That is very much the case. They were and are basically a channel to execute the central plan of a centrally planned economy. The problem starts when you enter into a transition period, where banks are evolving from that kind of role to a role where they have to make business judgments. We have to recognize that it takes a lot of adjustment to go from one stage to the next.

SB.- What is the real strength of the private sector?

WB.- There are more than 2 million household enterprises in Vietnam and 24 to 25,000 small and medium enterprises while the state-owned enterprises (SOes) are 5,700. In fact, the SOes of Vietnam have little in common with the SOes of China. They employ only 5% of the labour force. This is so because you do not have SOes in agriculture which is private and employs 80% of the work-force. Then there are the small and medium enterprises and the fully or partly foreign-owned enterprises. With those numbers in mind, it is obvious that the redundancy issue arising from the reform of the state-owned enterprises, which is always a serious issue, is very manageable and not as critical as in many other economies in transition.

SB.- Yet, not much is happening on this front. There are still a lot of arguments on what should be kept and what should be discarded and how efficient is the state sector.

WB.- The problem is elsewhere. A very large share of the financial resources goes to the state-owned enterprises and in a way takes resources away from others, and it is also a problem for the banks because many of these loans are not being serviced. Furthermore, the resources go to a very small number of the state-owned enterprises. A few thousand takes the lot, because the rest are really small and medium size state-owned enterprises.

SB.- What is the level of indebtedness of the SOes or the level of bad loans in the books of the banks?

WB.- We do not have a figure but I think the government probably has a figure of the bad loans floating around. Obviously you touch on the right point. State-owned enterprise reform is the other face of the banking reform. They go together. It is difficult to see how they can do one without doing the other.

SB.- If that is the case, and I agree with you, they go together, it may explain why so little is happening in both sectors. How do you see the government tackling the issue?

WB.- The banking reform and the state-owned reform are not so much the issue of the small and medium ones, so the government is willing to start with them. We are studying two programs to help the small and medium size state-owned enterprises to be privatize. The issues for those is that, traditionally, everything was state-owned, from a barbershop to a restaurant. If we want to encourage people to start private businesses and expand them, not be afraid, and really take charge, then they have to feel comfortable with what they run. It is very important in a way to get the government out of these sectors and to transfer to private hands the businesses so that other private entrepreneurs in the same sector feel less inhibited.

SB.- Don’t you think that the government needs to address larger issues rather than micro-manage the transition at the household level?

WB.- If we were told that the government wants to privatize the large SOes, then we would probably be very interested to work with them but the thrust of the policy has been to start with the small ones. We are here to help. The benefits to start with the small ones is to create an even playing field and eventually establish confidence within the system. If the privatize ones have good track records, then one can look at bigger fishes.

SB.- Yes, but it is doubtful that the transfer of restaurants and barbershops into private hands will bring much money into the state-coffers as most of these businesses are worthless.

WB.- Right, the impact on the banking system is not as much as the larger ones would be. Yet, it may bring home the message that private companies need the support of the banking institutions.

SB.- What is the mood between the banks and the SOes?

WB.- Some of the SOes are currently reluctant and hesitant to be equatized because they say that they have now good access to funding as a SOef. They wonder what will happen when they are equatized. The rules say that for ten years, they will still be treated as a SOe by the banks, but they have some doubts about that. They might feel they will be treated differently and will have to provide collateral for funding that they do not have to provide right now. And clearly, the private sector is not very well appreciated, because it brings some sort of danger. People are starting to be aware of that. Currently, we still have a situation where private and public enterprises are treated differently for banking and other things. Foreign and domestic enterprises are also treated differently under different aspects of the law. Eventually Vietnam will get a situation where everyone is treated the same way, but that is not the case now.

SB.- What is the impact of the globalization on Vietnam which is a rice and coffee exporter and therefore very much subject to the prices of the world market price of those commodities?

WB.- The farmers are now very much aware that prices are fixed globally and it is a positive situation. I never heard anybody say that the price of coffee, for example, could be determined locally. The benefit is that the farmers understand their exposure and know they are competing with others. It is unavoidable. We are coming to a situation where everything is becoming global, and the people are subject to changes on the international markets. There is no other way.

SB.- Are there cases where the international prices are so low that the farmers end up without enough income for their crop?

WB.- So far, Vietnam has done pretty well. There is of course now and then the tendency to protect the income of the farmers because the people are such a large part of the society and represent also political constituencies, but I do not know to what degree that card is played. The bottom-line so far is quite encouraging. However, if the sector has a big issue to tackle, it is the issue of quality versus quantity. In many agro activities the quality is not yet what it should be. The quantity has been quite good, but the quality is not there. The rice that is exported is mainly broken rice. Vietnam is therefore not competing with Thailand. It is altogether a different product than the Thai rice. Overall there is a consistent concern about quality. It is one area that Vietnam is looking at.

SB.- The level of foreign direct investments has so far been disappointing. Is it a fundamental problem?

WB.- To look at it properly, we need to keep in mind that Vietnam opened its system only ten years ago. Then if we look at the size of the economy, which is small, with a GDP of about US$24 billion, we certainly cannot say that the level of FDI has been small. Actually in the mid 1990s, Vietnam had the highest ratio of FDI to GDP of anywhere in the world. It was too much and it was not sustainable. It was a period of euphoria. Everybody thought money would keep pouring in, and Vietnam would be the next tiger, but everybody forgot that the institutions and the policies were weak while the people were very poor. So one has to have realistic expectations (2).

SB.- Certainly, a higher level would bring a higher level of growth.

WB.- Today if on the one hand there could be additional foreign investments in the country in infrastructure, on the other, Vietnam in many things has an over capacity, in the industry, in hotels, in many commercial sectors. The lack of capacity which creates investment opportunities are largely confined to the infrastructure, where the private sectors could play a role. When I say infrastructure, I mean infrastructure in the broad sense, that is social infrastructure, education and heath-care as well. For example, we are looking at a private university in Ho Chi Minh. There is also the infrastructure needed in what would be foreign exchange earning activities such as mining. For sure, we would like to see more investment in that sector and in agro-business such as rubber.

SB.- It seems that there is a problem of perception about Vietnam. Even the overseas Vietnamese are quite reluctant to invest…

WB.- Quite frankly the perception of Vietnam as a place to invest is not a very good one. That is quite obvious reading the international press. However after the years of euphoria, the perception is, as always in such a case, probably worse than the reality. Having said that, I think that there are several things that the government can do in order to attract more investments. For example, it would be useful to close a deal in the infrastructure, because after so many years the private sector is still without any deal. This perception that the discussions are endlessly dragging on and on would change overnight. There is encouraging signs with BP and Amoco which are involved in gas projects. Any done deal would strengthen the credibility of the government. Another critical area is the banking sector. If the government were to lift some of the too many restrictions that exist in order to attract world banks, it would be helpful. We have established under the Private Sector Forum a banking forum to discuss that issue and the talks are very encouraging.

SB.- One cannot escape the feeling, looking at Vietnam, and having China as a reference point as regards an economy in transition, that there are ten times more encouraging signs, talks, meetings and foreign advice to deal with Vietnam’s problems than China ever had or has to turn its economy from centrally planned to market-oriented. Why?

WB.- All I would like to stress about Vietnam, and maybe it has to be done, is that we have intensive dialogue with the key people involved in the reform at government level. They have good qualified and well trained experts. Yet to some degree, things are compartmentalized. Maybe co-ordination is what is lacking. Communication among the Ministries is sometimes an issue, but if I compare to other countries, their record keeping is very good. They are always very well informed and the statistics are good.

SB.- Then we come back to your original remark about the consensus. Things are compartmentalized, as you say. Yet, consensus is needed. Who dialogues with whom then?

WB.- It is very important in Vietnam, and it is a thing we learned the hard way, that you should dialogue not only with the stake-holders, not only with the government, but also with the party, the National Assembly and the local authorities. They are all involved in the transition process. Otherwise what you propose is going to be rejected. A good example of this process is the land-law reform. It was prepared by the government with the support of donors. To everyone’s surprise, the National Assembly turned it down saying to the government we don’t want this. People were surprised. They had taken for granted the position of the legislators.

SB.- Does it show that we have a complete misconception of the political system at work? As it is a single party system, we assume that there is a strong government. Obviously, it is an over-simplification.

WB.- Absolutely. There are in Vietnam many different views and there is some sort of a democratic debate about the options to take (3).

SB.- And what you imply is that the government does not have an upper-hand in the process.

WB.-Well, the National Assembly started to assert its power in 1996/1997 when it rejected a nomination by the government for a ministry position. Many observers said how can this happen? What is going on? But that is the reality. Furthermore, the top priority for anyone dealing with Vietnam is to be sure that what you do is done with the knowledge and the consent of the local authority, otherwise it does not work.

Spring 2000

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Notes;

1.- Since 1994, IFC has played a major role in assisting Vietnam’s transition to a market economy by approving investments in 20 projects with a total cost of US$1.3 billion. IFC will support these projects with debt and equity investments totaling almost US$ 500 million, including more than US$250 million of syndications with other financial institutions. The projects approved to date by IFC are in industries ranging from cement, steel, and infrastructure to agribusiness, tourism, and financial services. IFC has also established a facility to assist small and medium enterprises and is providing technical assistance in the areas of capital markets development, attracting foreign investment, and state-owned enterprises (SOEs) equitization and asset divestiture.

As an investor, one of IFC’s main contributions to Vietnam has been to provide the first medium-term, limited recourse loans in the country. These financing demonstrate that the Vietnamese non-state sector can attract funding on its own without relying on government guarantees, hence freeing up scarce government resources for other development priorities. From a broader perspective, IFC’s strategy in Vietnam is to support the entry and expansion of the private sector into those industries which will form the foundation for a market-based economy. This strategy is fully consistent with the World Bank Group’s overall objectives in the country.

In addition to supporting larger non–state sector investments, IFC recognizes the importance of developing small and medium-sized enterprises which play a vital role in generating jobs and distributing the benefits of economic development more fully. To this end, IFC has established the Mekong Project Development Facility (MPDF), with contributions from bilateral and multilateral donors, to support entrepreneurs in developing ideas into bankable projects. IFC manages MPDF and has contributed US$ 4 million to its five–year, US$25 million budget. IFC has also approved the Mekong Financing Line through which it will extend US$5 million in seed capital for project finance to small and medium-sized enterprises. The financing line helps mobilize additional capital and complements MPDF’s technical assistance in strengthening local private companies.

Furthermore at the request of the People’s Committee of Hai Phong, IFC has recently begun implementation of a Pilot SOe Equitization and Divestiture Project. Financed by a US$730,000 grant from the Australia agency for International Development (AusAid), the aim of the 18-month Project is to assist Hai Phong in transferring a number of SOEs from the state to the non-state sector, wherever possible through open auctions.

2.- With a GDP of about US$24 billion, Vietnam was able to attract about US$ 2 billion in foreign direct investment in its best years. The comment is rather surprising because Vietnam's ratio of FDI to GDP is far behind China.

3.- Although Wolfang Bertelsmeier seems genuinely puzzled by a lack of consensus at the top, it is one of the characteristics of the Vietnamese system since the mid 1990s. In 1996, after the re-election of the aging leaders, General Secretary Do Muoi, who was then 79, President Le Duc Anh, 75, and Prime Minister Vo Van Kiet for another five-year term that none of them was to accomplish, a battle ensued between reformers and conservatives. Previous leaders such as the former General Secretary Nguyen Van Linh accused people in power to protect those directly involved in corruption. The Politburo's squabbling with the Central Committee were such that the Congress cancelled the Party Secretariat and created instead a new "Standing Board" of five members which in effect are curtailing the authority of the Central Committee and the General Secretary at the same time. The Standing Board is made up of five members of the Politburo and that is where consensus is important. Then in late December 1997, the ailing Do Muoi engineered the election of his protege, Le Kha Phieu, a former general and military commissary, three years before the end of his term, once Vo Van Kiet relinquished his position to let a southerner, Phan Van Khai, take over as Prime Minister. The President, Anh, too relinquished his post to let Tran Du Luong to be elected as a compromise candidate. They also relinquished their position as politburo members but created for themselves a position of "honorary adviser" to supervise it from behind the scene. The nominations were followed by even more squabbling between the old guards. Eleven party veterans accused Pham The Duyet, newly named in the elite five member standing committee of corruption, forcing the party to launch a probe. Therefore, constant challenges seem to be the norm rather than the exception.

Spring 2000

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