Edmund Malesky and Jonathan London (2014) State-led development in Vietnam

Although we lack counterfactual evidence, it appears likely that SOEs were more often beneficiaries, rather than engines, of growth. Recent analyses of the role of the state sector in Vietnam have demonstrated [...] profound underperformance. As Pincus et al. 2012 demonstrate, SOEs in Vietnam can no longer claim to be the vanguard of the working class, at least in a numerical sense, as they account for only 11% of employment and have actually seen net employment drop by 22% between 2006 and 2010. Growth decompositions show that the state sector accounted for only 19% and 8% of GDP and industrial growth, respectively, between 2000 and 2010. Moreover, given their tremendous advantages, SOE contributions to export have been absurdly small, with most exporting accomplished by small-scale farmers and foreign investors. From textiles (Vinatex) to shipbuilding (Vinashin), Vietnamese SOEs have failed to be competitive on world markets. TFP studies by ownership in Vietnam have not been credible, because they fail to properly account for the contribution of free land and cheap capital to SOEs’ bottom line. For now, London’s (2013) characterization of Vietnam’s poorly performing industrial policy as “chaebol dreaming” remains apt.

With even modest assumptions about these cheap inputs, the state sector seems to have been a net drag on the Vietnamese economy. Three distortions have been documented: First, even though SOEs have not been successful at exporting in their core competencies, they are protected in those core competencies by Group A investment restrictions on private entry and phase-in requirements on WTO tariff-reduction obligations (Auffret 2003). Second, protections in core businesses, cheap land to rent to private producers, and cheap capital have generated tremendous cash flow that SOEs have funneled into subsidiary investment projects in unrelated businesses, as SOE managers seek to maximize their individual revenue. Vinashin, for instance, had 445 subsidiary businesses and 20 joint ventures, which ranged from real estate to hotels and karaoke. These sideline businesses crowd out more dynamic and entrepreneurial businesses (Nguyen & Freeman 2009). Third, Phan & Coxhead (2013) demonstrate adverse effects of these policies on labor markets, showing that state-sector activity has both depressed returns to skills in nonstate sectors and crowded out more skill-intensive forms of private-sector growth. The effect arises directly from the privileged role of the state sector and the lack of oversight to ensure meritocratic hiring. Because SOEs are capital intensive and protected, the returns to skills in SOEs are higher than in the private sector. Therefore, employment in SOEs is highly coveted. Nevertheless, hiring into SOEs is based on nonmarket mechanisms, such as familial connections, relationships, and outright corruption. Those without such connections have less incentive to invest in high-level skills, leading to lower-quality labor available for private-sector producers.

Critical to the debates about a new economic model is the demonstration by fine-grained scholarship that SOEs are remarkably unproductive relative to nonstate competition. Furthermore, scholars have shown that the greatest periods of growth and poverty reduction occurred when the state sector was at its weakest. In Vietnam, the 2001–2006 boom was correlated with robust growth in private investment; the post-2007 decline correlates with the return of SOEs.

Edmund Malesky and Jonathan London (2014) The political economy of development in China and Vietnam

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