The Vietnam government has remained faithful in spirit to the 1986 Doi Moi reforms, a series of pro-growth initiatives instituted after a failed decade of post-war central planning. Liberalization of markets, reduction of trade barriers, elimination of rationing programs, and promotion of private firms in specific industries revived Vietnam’s economy and unlocked sizable productive potential in the private sector. Given the magnitude of the project, Vietnam has taken a gradual approach, with the privatization of state-owned enterprises (SOEs) an example of later-stage reform. Throughout this effort, however, the Vietnamese government has encountered two dilemmas related to the socio-political balance of power: distributional trade-offs, and the trade-off between enhanced corporate governance and political image. In both cases, the government must choose between inconvenient outcomes, either of which could compromise political stability.
Dilemma #1: Distributing the Gains of Privatization
Two interrelated elements must be considered in the SOE privatization process. First, there must be a mechanism for allocation of ownership. For example, an equity-based system allocates shares of privatized SOEs through a competitive market, with an initial public offering at an established price that fluctuates according to investor confidence. This approach requires several initial conditions. First, there must be a domestic stock market that is reliable, offers fair access, and functions independent of political intervention. Second, a transparent corporate governance structure must provide relevant financial information to the investing public. Finally, the investing public must be prepared to assume risk. Without an efficient and competitive market, SOE stock prices could be falsely distorted by intervention from government-backed purchases.
Absent such a market, governments have two other options. In a 2003 article, scholars Elise Brezis and Adi Schnytzer examined communist regime collapse and economic reform. The authors argued that privatization occurs in two ways: “embezzlement for a rainy day” (favored by post-Soviet Eastern European countries) and “market-Leninism” (favored by China and Vietnam). In the first, fraudulent privatization reserves ownership options exclusively for government officials and cronies. In the second, the original structure of SOEs is maintained while the private sector is permitted to compete directly without barriers to entry. The authors argue that the embezzlement approach, typical in weaker transition states like those in Eastern Europe, helps officials and cronies retain resources for use against civil unrest and political turmoil. By contrast, in countries with a pre-existing and effective “repressive” base, a more prosperous civil society is not seen as equally threatening.
Brezis and Schnytzer appear to assume that Vietnam has chosen the “market-Leninism” approach because the Vietnamese government’s resources are sufficient to manage political instability. Vietnam had previously received support from the former USSR, but additional economic reforms were adopted in the early 1990s – after aid was discontinued. If, theoretically, Vietnam is behaving like a country with a sufficient “repressive” base (funded through “market-Leninism”), is it still receiving external support or is marked-based privatization the main source of finance? The answer lies in how the proceeds of privatization are allocated. As civil society’s stake in privatization grows, its political bargaining power strengthens and the capacity of the state apparatus declines in relative terms. Given that the portion of privatization benefits accruing to Vietnam’s civil society may continue to rise, the government faces a dilemma: the choice between the broader economic benefits of competitive market-based privatization versus the political stability of constraining SOE investment opportunities available to the public.
Dilemma #2: Privatization and Corporate Governance
As SOEs privatize, their financial and management practices are placed under greater scrutiny. This process is crucial to economic growth because it strengthens accountability and generates incentives for efficiency. SOE privatization and ownership restructuring, when accompanied by effectively designed corporate governance, can be a powerful catalyst for economic growth in transition economies. However, for privatized SOEs retaining a government presence in management or ownership, corporate governance as a monitoring mechanism has the inconvenient tendency to expose inefficient or counter-developmental practices, including those primarily benefitting well-connected insiders. This raises the specter of populist blowback and political instability – both growing trends around the world.
On the other hand, a more robust corporate monitoring system would empower civil society and the market mechanism to evaluate privatized SOEs on the basis of organizational practices and economic performance, channeling capital to productive enterprises. Incorporating information that would have been unavailable for pre-reform SOEs, improved accountability has the potential to propel aggregate economic growth. The choice among degrees of transparency, and their implications, is the government’s second dilemma.
Unfortunately, transition economies provide few examples of effective corporate governance for SOEs. Among governments wishing to undertake such reforms, there is concern whether developed world benchmarks are applicable. International organizations such as the Asian Development Bank and OECD have established programs to assist transition governments in this endeavor. Regardless of the broader applicability of developed world corporate governance practices, it is crucial that the Vietnamese government supplement its otherwise successful privatization initiatives with a commitment to global standards of transparency for SOEs.
In 2015, Vietnam offered a 3.47 percent stake in Airports Corporation of Vietnam to the public, of which over 80 percent was purchased by foreign investors. From a geopolitical perspective, external investment can support privatization by deepening economic interdependence and providing politically neutral financing. Foreign investors demand “good governance” and the transparency that makes it evident, particularly in transition economies. Yes there are more hurdles to market-based privatization than insufficient corporate governance; many of Vietnam’s SOEs are laden with debt ($39.22 billion in 2015) and structural inefficiency. A thorough understanding of these dilemmas in reference to enhanced transparency will help the government better evaluate the durability of SOE reforms and at the same time improve the financial standing of SOEs.
Applying corporate governance in privatized SOEs should be considered not as a trade-off between – but as a catalyst for – economic growth and political stability. Even though Vietnam’s government appears capable of weathering civil society pressures, stalled growth through the failure of SOEs is a greater threat to political stability than the enhanced socio-economic mobility resulting from transparent, market-based privatization.
Dr. Le Vinh Trien is a Lecturer in the School of Business at Vietnam National University – International University in Ho Chi Minh City. Dr. Kris Hartley is a Lecturer in the Department of City and Regional Planning at Cornell University.