VietNamNet Bridge - As discussed in the article “State – business relations and industrial growth in Vietnam,” state-owned enterprises (SOE) are chosen as the key sector of the economy but it lacks discipline of the state and discipline of the market, and at the same time the sector is given too much privilege. When this occurs, the relationship between the State and enterprises may be transformed into ties of friendship and corruption.

Since the mid-2000s, important economic policies have worsened this situation.

Firstly, the policy to extensively develop the model of state-owned economic groups should be considered.

With generous support of the State, the scale of State-owned economic groups (SEGs) increased and they were allowed to operate in various fields of business. At the same time, they were granted greater autonomy more than ever. As a result, the SEGs expanded into various areas such as real estate, banking, investment, finance, and securities trading.

Once they were permitted to own banks, the SEGs were less dependent on funding from the state budget because they could use capital from their banks to finance their projects.

With the superiority of access to land, which under the Constitution belongs to the People's ownership but is managed by the State, and now being allowed to involve in real estate business, the SEGs rushed to seek land with “golden” positions, thereby contributing to overheating the real estate market which was already in a bubble. It was similar for financial investments and securities businesses.

The next policy that brought about serious consequences was the "urbanization" of rural banks.

For small banks with capital of a few tens of billions dong (several million USD), to become urban banks, the rural banks were required to have a minimum charter capital of VND1 trillion ($50 million). these banks were forced to raise additional capital from outside, especially from the SEGs, leading to a wave of businesses owning banks and causing overlapping ownership in the banking system.

In addition, with a strategy to accelerate growth in credit management while the administrative capacity was weak, these banks significantly contributed to the increase of bad debt with the consequences still remaining unresolved.

The third policy was enhancing decentralization in management of development investment, state budget, land and natural resources.

The first consequence of fiscal decentralization was that the provincial governments had to seek to raise additional budget revenue to complete the higher spending obligation, while the budget share structure with the central government remained almost unchanged.

As the local budget depends on the operation of businesses, this policy encouraged some provinces to become more active in building a good business environment to attract investors, thereby increasing their budget revenues. At the same time, the decentralization policy also exacerbated the situation in which businesses seek privilege and build friendly relations with local governments.

For local governments, in the short-term, the biggest source of revenue, which came fast and simply, was land and natural resources.

To increase tax revenues from land-use rights transfer, just by an administrative decision, the local government can switch the land-use right purpose of hundreds of hectares of agricultural land to industrial or urban land, and then transfer the land for investors at a greater value. The huge source of "rents" generated easily and quickly was the greatest source of corruption at the local level.

According to the Government Inspectorate, in the period of 2003-2010, there were more than 1.2 million complaints and denunciations sent to the administrative agencies at all levels, of which approximately 70% were related to land problems.

According to data from the Ministry of Natural Resources and Environment, within three years, from 2004 - when the 2003 Land Law came into force - to 2007, the number of land-related complaints increased by three times.

In many localities, the pressure of decentralization made local governments find the need to build a number of key state-owned enterprises as their right arm in the infrastructure development projects and in mobilizing capital for them.

These companies might seek privilege or improve social welfare or both. This depended very much on the local governments’ commitment to economic development.

Some localities even nurtured a number of private enterprises as their efficient “supporters” in the mobilization of resources from the central government.

Nominally, these firms were authorized by local governments in raising capital for key projects in their provinces.

With this authorization, they conducted "lobby for projects", by firstly seeking to put the projects into the central government’s plan, and then bringing this plan to the Ministry of Finance to ask for capital.

Also, businesses, by saying they intended to raise capital for local economic development, could directly lobby the Vietnam Development Bank, commercial banks, or stimulus funds for loans with preferential rates.

For example, during the period of economic stagnation, subsidies from the central government to a number of provinces in 2009 increased substantially, even doubling that of 2008, thanks to the "dynamism" of a few local private firms who had close ties with the government.

Thus, the deterioration of the institutional and business environment created serious implications for the development of the private sector in the country.

If in the early stages of innovation, most businesses developed by capacity building and market development, now businesses were focused on finding privileges and building relationships with politicians, government officials and state-owned enterprises as demonstrated in a number of "economic cases".

In the 2013 report on the provincial competitiveness of the Vietnam Chamber of Commerce and Industry (VCCI), when more than 8,000 private enterprises in 63 provinces were asked whether they agreed with the statement that "contracts, land and other economic resources are mainly in the hands of the businesses that have close links with the provincial governments”, up to 96.6% agreed.

Vu Thanh Tu Anh