VietNamNet Bridge - Industrial development of Vietnam has been a success but it has been proceeding at a slower level in recent years.

Between 1986 and 2012, the growth rate of industrial added value was at a high level, averaging 8.3%. International competitiveness of the processing industry significantly improved and its products became quite diverse.

After nearly three decades of development, the industrial growth of Vietnam has leveled off and is on the decline. The majority of Vietnamese enterprises are only involved in simple processing activities or low added value production.

Behind these results, of course, are many reasons, but one of the most important causes lies in the relationship between the state and businesses.

As a socialist-oriented economy, the favor shown state-owned enterprises (SOEs) and discrimination against private enterprises is unavoidable. However, the situation of discrimination depends on the level of acrimony of the tradeoff between political ideology and economic legitimacy, the internal structure of the state, and the stature of leadership.

In the early 1980s, the centrally planned Soviet-style economy fell into severe crisis, challenging the legitimacy of the leadership of the Party. Under the leadership of the acting Party General Secretary Truong Chinh, Vietnam carried out market-driven innovation in 1986.

The private sector, both domestic and foreign, was still on the margin but for the first time it was officially accepted as an economic sector. Thanks to available capacity and politically neutrality, foreign-invested enterprises (FIEs) were asked to have joint ventures with SOEs. Within a decade, the FDI sector surpassed the state-owned sector, contributing the most to Vietnam’s industrial growth.

In the late 1990s, Vietnam's economy fell into difficulties again, though not reaching a crisis, but it was enough for the Communist Party of Vietnam to be concerned about its legitimacy.

This time, Prime Minister Phan Van Khai - a technocrat who soon realized the importance of a market economy - along with his reform group, with the Research Unit of the Prime Minister and the Central Institute of Economic Management as the nucleus, succeeded not only in designing but also the enforcement of the Enterprise Law 1999, creating direct incentives for the blossoming of the private sector.

It should also be stressed that in 1997, just several months after taking office, Prime Minister Phan Van Khai held the first meeting with the business community, marking fundamental change in the relationship between the State and businesses. It was the first time that private enterprises were officially recognized by the State not as the "object of rehabilitation" or "the objects for management" but "dialogue partners".

In terms of industrial growth, if the FDI sector was the champion of the 1990s, the private sector was the champion of the 2000s, while the SOEs, a key sector of the economy, despite all the advantages given by the State, has become the sector that has contributed the least to industrial growth.

Different from the two first versions of the Enterprise Law, the Enterprise Law 2005 (Unified Enterprise Law) was born when the economy was at the peak of growth; the internal structure of the state was changed by decentralization, while the model of state economic corporations began to be replicated.

In terms of management, the state-owned economic groups increasingly moved away from ministries and moved closer to the prime minister. Decentralization contributed to increase competition between localities. This competition on the one hand helped increase the power of those "holding" the SOEs, and on the other hand encouraged local governments to be closer to enterprises, especially large enterprises. Consequently, while the business environment in localities generally improved, cronyism in the relations between the State and enterprises at both the central and local levels spread.

This led to policy implications. Firstly, the experience of Vietnam showed that a prerequisite for rapid industrial growth in late industrialized countries is that leaders must put national interests above political, ideological and personal interests. This is the premise to create alliances with the most advanced economic forces and to receive support from this force, to gather reformed brains and to build an incorruptible and capable state apparatus, which were the key factors in the success of Japan, South Korea and Taiwan.

But in Vietnam, as a companion to the most dynamic and most effective economic areas, it is only considered a temporary concession rather than a coherent strategy, so the success is only by-half.

More fundamentally, for political reasons, because relationships of interests, the public sector, specifically SOEs, has always been regarded as a key area, despite its inefficiency. Moreover, on one hand, due to the role of SOEs in maintaining the socialist orientation, and on the other hand due to its ineffectiveness, the State is hardly capable of imposing hard budget limits or discipline on weak state-owned groups.

When the State’s management of large SOEs is reduced and simultaneously they are given too much favor, the relationship between the State and SOEs is more at risk of turning into a relationship of friendship and corruption.

Secondly, industrial development requires effective coordination between the State and businesses. This combination, in turn, requires effective coordination within the state system itself as well as in the corporate sector.

In the case of Vietnam, as the combination in the corporate system is ineffective because associations are designed as the extended arm of the State rather than the loyal representatives of the interests of the business community, and the coordination between the ministries is divided and ineffective, then the concentration of coordination rights may be necessary.

Although Vietnam has never had any institution like the Economic Planning Board of South Korea or the Council for Economic Planning and Development of Taiwan, the combination of the Research Unit of the Prime Minister with the Enterprise Law Enforcement Group led to the success of the Enterprise Law 1999. In contrast, the absence of these important factors has made the Enterprise Law 2005 not as successful as the original expectation.

Thirdly, the biggest effect on industrial development is not necessarily brought about by the industrial policy in the narrow sense, or not even by purely economic policies.

Vietnam's experience shows that by changing the position of the private sector - from being the "objects of renovation" in the early 1980s - to the "economic sector" in the early 1990s, and then "dialogue partners" from the late 1990s, the State can create new life for the industry in particular and the economy in general.

Vu Thanh Tu Anh