The Emerging Legal Framework for Private Sector Development in Viet Nam's Transitional Economy
| Author | Pham van Thuyet |
| Profession | Executive Board of Directors |
| Pages | WPS1486 |
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A major objective of Viet-Nam's transition to market economy is to reactivate the private sector within a "multi-component economy" or mixed economy. Several new laws have been introduced in the past five years to implement this policy and create an enabling environment for the private sector to formally engage in business in many areas.
Viet-Nam's private sector has considerable potential for rapid growth that has been realized in successes in agriculture, trade and services, and is only beginning to make its presence felt in some light industry subsectors. Factors crucial to this success have been Vietnamese entrepreneurship, a literate population, and a comparative cost advantage in labor intensive industries. Unlike other transitional economies in Eastern Europe or China, the southern half of Viet-Nam is still familiar with the workings of a market economy - clearly an added advantage for easier transition. However, considerable impediments remain for further development of the private sector. Private investment remains quite low; less than 10 percent of GDP in 1993 and only slightly improved in 1994. A deficient legal framework made up of complicated regulatory laws and uncertain substantive laws is perceived by the private sector as one of the most serious obstacles to its expansion.1
This paper will review some of the more important laws and regulations in Viet-Nam affecting private sector activities - including the laws on real property, intellectual property, companies law, domestic investment, foreign investment, bankruptcy, contracts, and dispute resolution. Although anti-monopoly law has not yet been introduced in Viet-Nam, the issue of competition will be addressed in the larger context of current trade law, the relative roles of state sector versus private sector, and the restrictions in the company law. The above areas establish the foundation of a legal framework for a market economy. The paper will also discuss Viet-Nam's judicial institutions, including its civil code tradition and socialist orientation, the capacity of its court system, and the efficiency of law enforcement. As in China, Viet-Nam's legal framework is still influenced by ideology, which causes problems in several areas, such as private ownership of real property, and can affect fundamental legal concepts such as "due process of law".
Viet-Nam's transition to a market economy begin in 1989 with a reform program called Renovation or Doi-Moi. Initially, the program focused on price reform including exchange rate liberalization and abolition of subsidies to state-owned enterprises (SOE).
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Subsequently, the Law on Private Business, promulgated in 1991, formally allowed the private sector to be involved in business activities for the first time in many years. Prior to the Reform(1989), all industry and trade were stated-owned, and agriculture was collectivized. 2 The emergence of the private sector, rebom in the new legal framework for transition, has changed the structure of the economy significantly. The cooperative sector flourished when the economy was centrally planned but collapsed during the years following the 1989 Reform program. The cooperative sector contribution to industrial output fell from 42 percent in 1989 to less than 2 percent in 1993. By contrast, private sector involvement has grown in many subsectors, particularly agriculture, trade, and trade services. SOEs, however, continue to dominate the industrial sector.
Household business units in the trade sector were the first private undertakings to emerge in the urban areas following the Reform. They now number about 300,000 units and form the core of what may be considered Viet-Nam's informal sector. Under Viet-Nam's Company Law (see Section IV), these household business units are registered as "individual businesses" or sole proprietorships. In the "organized" or "formal" sector defined as non- household businesses, 6,024 units were registered by March 1994. About half of these businesses were trade and half were industrial.
Most private industrial units are small. More than half of the total 2,557 units in private industry have equity capital of less than dong 500 million (US$50,000), and fewer than 500 have equity capital exceeding dong 5 billion (US$500,000). Under the Company Law of 1991, the private sector began incorporating into two French-type limited liability companies: (i) shareholding companies or Societe Anonyme (SA); and (ii) limited liability companies or Societe a Responsabilit6 Limitee (SARL). Most of the smaller companies (2,531 units) incorporated as SARLs to restrict ownership and to preserve their tight management, while most larger companies (91 units) incorporated as SAs.
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Table 1.1
| Viet-Nam's Organized non-Agricultural Private Sector:Corporations (SAs and SARLs)and Sole Proprietorships (as of March 3, 1994) | ||||
| Sector | Number of Units | RegisteredCapital(dong million) | ||
| Manufacturing | 2,557 | 622,318 | ||
| Trade | 2,913 | 965,127 | ||
| (Foreign Trade) | (14) | (67,948) | ||
| Transport, Tourism, and other Services | 554 | 574,366 | ||
| Total | 6,024 | 2,161,811 | ||
| Source: State Arbitration Authority, Hanoi; unpublished data provided during mission. | ||||
Private sector involvement in the industrial sector grew rapidly in 1989-90. A series of failures led to a consolidation in 1991-92, reducing both the total number of private units and their output. As a result, private industrial output growth has averaged a modest 6 percent p.a. during the last three years. Unlike other transition economies in Eastern Europe, Viet-Nam's private sector has not been enlarged by privatization of state-owned enterprises. Only three SOEs have been designated to be privatized in a pilot program.
In general, Viet-Nam's industrial sector is still dominated by SOEs, although the private sector is more active in the trade and service sectors. The dynamism of the trade sector is evidenced by the increasing number of new shops throughout the country and, more importantly, by their increased earnings. Private sector activities in the trade sector are, however, limited to domestic trade. Current trade laws and regulations practically give SOEs a monopoly in foreign trade. Although some 3,000 foreign trade permits were issued recently, only 14 were given to the private sector.
A policy milestone in Viet-Nan's transition toward a market economy was the new Foreign Investment Law enacted to attract foreign capital and technology. The revision of the Foreign Direct Investment (FDI) law in 1990 and amendments in 1991, 1992, and 1994 (including an important provision to allow 100 percent foreign-owned investment) formed a basis for facilitating FDI. Viet-Nam's incentives package for FDI is standard, more or less Page 4comparable to FDI incentive systems of other East Asian countries (see Sec. V, Table 5.1). Despite these developments, however, Viet-Nam's FDI remains constrained by an uncertain legal system and by complicated regulations regarding investment sanctioning. Foreign investment has been most active in two subsectors: oil and gas and hotel construction. Project implementation is slow (Table 1.2) with about 25 percent of the total US$6.7 billion net (excluding licenses revoked or expired) foreign investments approved through February 1994.3 In manufacturing, only a small number of projects have been implemented of the total US$1.7 billion approved. Most of these are joint-venture projects (mainly with Korea and Taiwan) with short gestation periods involving garment subcontracting, consumer electronics, and scooters. An improved...
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