Vietnam and China: Who Is Moving Toward a Free Market Economy?

China and Vietnam:
Who is moving toward a free market economy?

By
Gerald Headd II
Prof. Sujian Guo
Political Economy of Asian Transition
Abstract
Anyone can foolishly take a quick look at many Asian economies in transition and come to an even quicker assertion that they have taken on a capitalist market mindset. However, one can only determine whether a country’s economy is that of a capitalist market or socialist market by analyzing it based on public/private ownership and market/state control.[1] When basing the system on realistic key indicators, I think you would have no choice but to agree in my belief that Vietnam and China –even though many economists and politicians, both abroad and domestically, rather equate the two previous countries with systems mirroring a capitalist type market economy- are indeed more so market socialist economies than capitalist market economies. [2] Though these two countries have experienced significant growth over the last decade or so, and have added certain components similar to that of a market economy, public ownership and state control are just as evident as they were before the days of market-oriented reform. On the surface some adjustments have been made to give the private sector more ownership and market forces more control over the economy, but at the very foundation of those two dimensions, is where you find the state is still pulling the strings.

Introduction With Vietnam and China’s economies growing at an unusually rapid rate for the past few decades, at 7.25%[3] and 8-9% respectively, much is being said about whether the economic reforms themselves or the additions of market economy mechanisms are responsible. Whichever one chooses to site as the deciding factor as to why these countries are experiencing unprecedented economic growth, many countries and economic institutions –most notably WTO, IMF, and ASEAN- are attempting to persuade, and at times coerce, them to further free their markets, loosen state control and privatize more in various sectors.

Of course many state economies are of a hybrid type, meaning they don’t necessarily fall in a straight free market economy or a planned command economy. These two ideal-type political economies have four key points: Control of factors of production; production decisions; value established; and role of the state. The first key point is related to ownership but the latter points are more so related to control. It is true that all countries to a certain extent are still slow to relinquish complete control to market forces and the distribution and allocation of vital resources, but Vietnam and China especially, are adamant in their stance on those issues. For the most part SOE’s (state-owned enterprises) have been reduced and more private enterprises and joint-ventures have been allowed to “compete” in both the public and private sectors. Prices are supposedly, left up to the market forces via “supply and demand” and the allocation of resources have been distributed amongst non-state actors. Financial institutions have been more welcoming to foreign influence and trade policies have been more relaxed, especially tariffs. Yet within these key empirical dimensions, public ownership still reigns and state control is still stronger than ever.

Public vs. Private Ownership Within the public sector both Vietnam and China’s governments play a vital role in appointing managers, examining and approving major decisions, and in the non-public sector, deciding on policy restrictions and regulations. Although private firms and enterprises are on the rise and are also responsible for the increase in employed workers, the private sector’s contribution to the GDP is relatively low and the firms and enterprises are mainly concentrated in non-pillar areas.[4]

When it comes to the privatization policy in China, major SOE’s that are considered pillar entities are “corporatized” into conglomerates, also known as “enterprise groups”, while the smaller, less significant SOE’s are allowed to merge, sell off, or be leased. As Sujian Guo stated in his book, The Nature of Asian Transition, “The CCP has constantly rejected a large scale privatization and continued to emphasize the predominant position of public ownership in the economy as the most important socialist criteria and reform principle” (pg. 106). “As a matter of fact, corporatization has been used by the CCP as an alternative to avoid a large scale privatization.”[5] Both Vietnam and China have ignored external advice to rapidly privatize their state-owned enterprises (SOEs) and instead have concentrated on creating opportunities for new private enterprises to grow and on reforming existing state-owned enterprises to make them more competitive. Under the socialist system in Vietnam, SOEs were not expected to provide health, education and other social services to their workers so their reform has been easier than in China (Terry McKinley, 2004).

As for Vietnam, the Company Law, Law on Private Businesses, and Law on Encouragement of Domestic Investment have a profound impact on development of the private sector in Vietnam.[6] One thing is for certain, no matter if you look at ownership just within the public sector, between public and non-public, separately with the public and private sector, or all the sectors as a whole, in both Vietnam and China, the state still has an overwhelming amount of and importance in when it comes to ownership. “The very foundation of a free market economy is the private ownership or the ‘impersonalization’[7] of property rights (Guo, pg. 98). It is most evident that private property does not exist in China, nor does it exist in Vietnam. What both countries have done instead, throughout the years of reform, is grant long-term use rights. Though this does not live up to the true billing of “privatization”, this definitely was a small step in the direction towards a form of privatization. For Vietnam, the Land Law enacted in 1987 and amended in 1993 did not establish private property, but granted individual households long-term use rights over land and freedom over production in the rural area. Land remained owned by the state, reverting back to authorities when a household moved or stopped farming. The commune authorities were entrusted with the power to decide how the land was to be allocated and how much land could go to any one household. The Land Law also prohibited voluntary re-contracting of land-use rights after the decollectivization.[8] China was pretty much identical in the sense of how it decided to grant land-usage rights. The main thing that both countries share in this instance, and many countries whom have or state that their economy possesses socialist or communist ideologies, is that property (the land itself) is owned by the state; which in my mind is expressed only to validate the states’ reasoning and excuses for maintaining ownership.

Still, Vietnam 's economy is still very much in transition from a command to a free-market system. Many outward-looking local businesses and entrepreneurs are still struggling to comprehend international business practices. At the same time, more foreign imports and competition will inevitably lead to wrenching change and dislocation across many industries, creating potential social pressures on the government. WTO-mandated removal of subsidies and increased foreign competition will directly hit and potentially send into bankruptcy as many as 2,000 state-owned enterprises, which currently account for 38% of GDP and provide millions of jobs. The government has applied pressure to speed up the privatization process, which in Vietnam is referred to as "equitization". How the government handles dismantling these inefficient state industries will have huge implications for social stability and the country 's future attractiveness as a destination for FDI (John, 2007).
Market vs. State Control While ownership is one of the two dimensions in evaluating what type of economic system a country possesses, control in my mind is the most intricate dimension, which is why I dedicated more time and space to this particular issue. Both China and Vietnam state that market forces determine prices according to supply and demand, yet it is quite evident that both states continue to control pricing when necessary, especially when it comes to certain monopolies. Beijing still places stricture measures on investment and capital flow, public ownership continues to dominate the economy, and the government continues control over the key resources.[9] Therefore, prices are not totally free, but subject to government manipulation and intervention (Guo, pg. 108). When it comes to Vietnam, the state sets rates for electricity, petroleum, telecommunications, water and fares for train and air travel. Price controls also exist on natural monopolies. The government can impose a direct price control through “price stabilization measures” by the Price Management Office and the Ministry of Finance (Guo, pg. 131).

When someone has legal ownership to a resource, good, or commodity, then that someone usually has control over how the resource, good, or commodity is used. Combined ownership and control is important to the efficient allocation of resources (Guo, pg. 102). Both China and Vietnam state that ownership is being given to private and non-public actors and these actors are also experiencing more control of various resources, yet the state sector in both countries, continues to control all the key aspects, industries, resources, production factors, and “commanding heights” of their national economies.[10] The monopoly business in Vietnam can be classified into two categories: state monopoly or administrative monopoly, which is created by the administrative regulation of the state[11], and the natural monopoly. However, there are not many differences between the state and natural monopoly because all the natural monopoly industries are in the hands of the state (Guo, pg. 132).

The monopoly sectors can be divided into state enterprise monopoly sectors and oligopoly sectors. The state enterprise monopoly sectors, where the monopoly SOEs normally occupy over 80% of market share, include the following industries: aviation; telecommunications; sea transportation; railways; electricity; energy; financial and banking; stock exchange center; construction and operation of ports, port services, passenger car stations, bridge and roads, etc.; international trade of newspapers and books; production and distribution of film; production and distribution of cigarettes; water supply, etc. The oligopoly sectors, where the monopoly sectors are controlled by more than one SOE, include petroleum product distribution, insurance, commercial banking, production and distribution of cement, steel, sugar, etc (Guo, pg. 133).

Although China and Vietnam both are state dominant in the financial institutions and markets, Vietnam is a little more open to non-state actors than China. In China, state-owned banks make up the majority of banks of China. People’s Bank of China, which acts as the state central bank, has a hand in many of the decisions, administrative and supervision and audit functions in banking.[12] It’s main duty is to formulate and implement state financial policy, regulate and control the scale of credit and the amount of money supply of the whole society, manage the state treasury and public funds, issue state bonds, represent the government to participate in the related international financial activities, control foreign currency and gold reserves, and assume the leadership, administration, coordination, supervision and audit work of the specialized banks and other financial institutions in China (Guo, pg. 109). Majority of the collective, joint-ventured and foreign branches are allowed, yet they are limited to insignificant levels such as credit bureaus.

Vietnam, has no credit bureau and only a rudimentary system of deposit insurance, consumer lending is nearly nonexistent, banking has been dominated by five state-owned institutions—including the largest, the Agriculture and Rural Development Bank (Agribank)—which traditionally focused on financing large, government-owned factories and other enterprises, and the country 's burgeoning private businesses were virtually ignored (Kay Johnson, Open Season, 2007). [13] In Vietnam the financial institutions are mostly state-run but the bank system has been reformed and has taken on a two-tier system. According to this the central state bank is separate from commercial banks.[14] In 2007, only 8% of Vietnam’s 85 million people even had a bank account (Johnson, 2007). While Sacombank, one of Vietnam’s private commercial lenders profits shot up 50%, Nguyen Quang Trung, Sacombank 's deputy director, is anything but complacent. "We have to expand quickly throughout the country," Trung says. "We need to build capital. Our whole banking sector must grow up very fast" (Johnson, 2007). Although state banks are few in number, they control the majority of assets that are the key to policy control and resource control in Vietnam (Guo, pg. 134). Bank reforms of 2001 in Vietnam were mainly focused on restructuring joint stock banks, restructuring and commercialization of state-owned banks, improving regulatory framework and enhancing transparency. Commercial banks hold 80% of total bank assets, however 2/3 of bank lending goes to SOEs.

Conclusion On the surface both China and Vietnam’s economies look like they have significantly distanced themselves from planned command economies and have taken on more market economy mechanisms. However, by breaking down each country according to the two major dimensions in which to analyze an economic system, ownership and control, it is clear that names have changed , laws have been passed and a lot of maneuvering and restructuring has taken place, but the main foundation still exists: state control and ownership. Even when both were facing years of requests and coercion in order to win entry into the WTO, each country found its own way to side-step certain requirements or place loopholes so that the state kept and maintained authority. While private actors have increased in both the public and private sectors, more so the private sector, the state still controls the an overwhelming amount of shares and accounts for most of GDP production. Private property has been avoided at all costs and replaced by land-usage rights, collectives and household ownership systems. Prices are said to be determined by market forces, in other words supply and demand, yet the state owns and controls many of the “commanding heights” and pillars of the economy and its resources, and therefore the state ultimately has the final say in pricing. The control of resources and the allocation of such are in the hands of the state and never left. And as the clincher, the state continues to maintain control over the decision-making, managing, administration, coordination, and supervision of the banking system and financial institutions. Though globalization and the opening of their economies, when it comes to China and Vietnam, has benefited private actors and the masses, and paint a picture that state ownership is lessening and control is loosening, it has not forced these states to fully adopt international requirements proposed by various international organizations and institutions.

I think Carsten Herrmann-Pillath said it best when speaking about the role of ideology in China’s transition, in “Culture, Economic Style and the Nature of the Chinese Economic System”:

“As is well known from theoretical analyses of reforms, the political economy of transition is very much dependent on the expectations that concerned actors form about the future state of the system. Many contributions in the literature treat this determinant as if there were an objective, risk-weighted measure for the future results of reforms, however, in particular with reference to such encompassing reforms as complete system changes, this assumption cannot be taken for granted. In particular, economic theory supposes that one condition of successful institutional changes is the implementation of compensation mechanisms between winners and losers of reforms, so that resistance of losers can be smoothed. This, however, requires the expectation that the institutional arrangements governing this mechanism themselves are stable, which precisely is not warranted in the case of wholesale systemic changes. Thus, expectations are highly subjective assessments of possible future states of the system, which have to face fundamental uncertainty. They will be strongly influenced by the conceptual and communicative schemes prevailing in social discourse over transition, and which build particular frames of perceiving transition. Transition is a fundamental test of system trust, and ideology can be an important determinant” (Herrmann-Pillath, 2005). References 1. Akya, Chan. “Vietnam’s Hard Economic Lesson for China”. Asia Times. June 24, 2008. http://www.atimes.com/atimes/asian_Economy/JF24DK01.html

2. Crispin, Shawn W. “In Capitalist Vietnam, it’s ‘Repression as Usual’”. Asia Times. July 6, 2006. http://www.atimes.com/atimes/Southeast_Asia/HG06Ae03.html

3. Guo, Sujian. “The Political Economy of Asian Transition from Communism”.

4. Herrmann-Pillath, Carsten. “Culture, Economic Style and the Nature of the Chinese Economic System”. January 15, 2005. http://www.bm.ust.hk/~ced/iea/Herrmann-PillathCultureChina.pdg

5. Hoang, Nam; Liao, Jean. “Economic Effect of Globalization in Developing Countries: An Analysis of Vietnam and China”. Winter 2002. http://www.standford.edu/class/e297c/EconomicEffectsofGlobalization.pdf

6. John, Karl. “Vietnam’s WTO Hopes and Dreams”. Asia Times. January 12, 2007. http://www.atimes.com/atimes/Southeast_Asia/IA12Ae03.html

7. Johnson, Kay. “Open Season”. Time Magazine. April 19, 2007. http://www.time.com/time/magazine/article/0,9171,1612370,00.html

8. McKinley, Terry. “Macroeconomic Policy in Transition Economies: A UNDP Discussion/Summary Paper”. March 2004. http://www.undp.org/poverty/.../macroeconomics-transition-ipd-10-03-Part1.doc

9. Perlez, Jane. “U.S. Competes With China for Vietnam’s Allegiance”. New York Times. June 19, 2006. http://www.nytimes.com/2006/06/19/world/asia/19vietnam.html

10. Tran, Anh Le. “China’s Rise Stirs Vietnam’s Anxiety”. Asia Times. June 12, 2009. http://www.atimes.com/atimes/Southeast_Asia/KF12Ae01.html

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[1] Guo, pg. 101. Ownership and control are the two most important indicators that distinguish one type of political economy from the other and thus constitutes a feasible analytical framework against which to examine and evaluate the transition from communism in these Asian countries. (pg. 102)…Ownership and control is a direct consequence of the institution of private property underlying capitalism…However, in some cases ownership comes without control and control comes without ownership.
[2] Guo, pg.98-99. In a free market economy, it is private citizens or private firms who own the private property or the means of production, and therefore control their own factors of production, determine what should be produced, and have the right to the residual income from their asset. It is the “invisible hand” of the market forces that establishes the exchange value while the state plays a passive role allowing private actors to operate freely in the market and prevent private actors from doing violence to each other or violating the rights of others. In a planned command economy, it is the state who owns the means of production, and therefore controls and runs the economy, and determines what to produce and who will receive what products at what levels according to the state plan. It is the state who sets the official values for all exchanges of goods and services.
[3] John, Karl, 2007. Vietnam 's Communist Party leaders have stutter-stepped toward a market economy since the mid-1980s, at times encouraging foreign investors, at others driving them away with xenophobic regulations and restrictions. Over the past three years, leading up to final WTO negotiations, the pace of foreign-friendly reforms has increased. So, too, coincidentally, has Vietnam 's total economic output, which has nearly doubled over the past five years. An average economic growth rate of 7.25% over the past decade has doubled per capita gross domestic product (GDP). Economic growth reached nearly 8.2% in 2006, the second-fastest clip in Asia, trailing only China.
[4] Xinhua News Agency (China) reported that the public sector share for FY2001 was 37% of GDP. They also reported that, in March 2002, the private sector had accounted for 33% of GDP. [Guo] In Vietnam, the state sector accounted for 38.7% of GDP in the public sector…where as the nonstate sector, including collective, households, mixed, private domestic enterprises, and FIEs, accounted for about 61% of GDP in 2001.
[5] Guo, pg.107. China has sought to improve SOE performance and financial capacity not through privatization as in other transition economies in Russia and East Europe, but through corporatization as means of improving corporate governance, management, fund raising, intra-group cross-financing, and retaining the continued domination of state ownership.
[6] Guo. The laws assure the business activity of private enterprises and private property ownership, and encourage their investment in trade, production, and other commercial activities…There is a 30% limit of foreign owned enterprises, and the government is considering raising the ownership limit to 40% to aid the stock exchange.
[7] Guo, pg. 98. “According to Kornai, as the economic theory of property rights would put it: ‘the residual income that emerges as the difference between receipts and expenses does not pass into the pockets of natural persons, and the losses are not covered by the same natural party’. This embraces the central thesis of the property rights approach: that it is only the natural-personal owners who control and direct production and distribution of residual income, and that is only based on this condition that modern capitalist economies have developed.”
[8] See Guo pg. 137
[9] Guo, pg. 108. Prices of many key commodities and materials, such as energy, raw materials, and construction materials are decided by the government. Prices of many commodities directly affecting residents’ lives, such as grains and meat, are supervised by the government. Therefore, since the prices of many basic inputs are set by the government, and all the key aspects, industries, resources, and “commanding heights” of the national economy, which seriously affect the market formation process, are still determined by the government and state agencies, it is really hard to assess what percentage of the economy is truly adjusted by the market force, even though Chinese officials are claiming that 90% of the products in the Chinese economy have prices at least partly determined by the market.
[10] Guo, pg. 109. (China)The state obtains resources through various forms of revenues, including tax revenues, surtax revenues, government capital funds, special-item revenues, revenues form all kinds of administrative fees and levies at all levels of government, currency-minting (mint=industrial facility manufactures coins for currency) revenues, extrabudgetary revenues, and nonbudget revenues. The state also controls natural resources, such as land, mine deposits, forest resources, water resources and so forth…The government continues to manage and control most of health and social resources…
[11] Guo, pg. 132. (Vietnam)The state-owned corporations have been granted monopoly status and supported by the state budget and preferential financial aid from both domestic and foreign loans. These businesses are protected by the administrative barriers from the entry of any other enterprises, including joint-ventures with foreign firms, local private firms and even other state-owned enterprises.
[12] Guo, pg. 109. Major decisions are typically made by the state central bank in concert with the Party Politburo and rubberstamped by the National People’s Congress.
[13] Johnson, Open Season. Because of these factors, "You have a pent-up demand for very basic banking services," says Patrick Winsbury, senior vice president for Moody 's Investors Services. "This is a once-in-a-lifetime opportunity."
[14] Johnson. The government has been wary of borrowing externally on commercial terms and has guarded against the volatility of short-term capital flows by maintaining fairly strong capital controls. It is not inclined to allow faster growth of short-term private external debts until a strong supervisory and regulatory framework for financial flows has been established. This policy stance is partly a response to Vietnam’s mini financial crisis of 1996-97, which arose because of very high domestic interest rates (vis-à-vis foreign interest rates) and the liberalization of foreign short-term borrowings (principally through letters of credit). Guaranteed by state banks, external borrowing was channeled into the speculative real-estate market, causing a speculative bubble in the property market that eventually burst in 1997. Because of this experience, the central bank has put strict limits on providing loan guarantees for such short-term external borrowing and has maintained capital controls on short-term capital flows, including those associated with trade credits.

References: 1. Akya, Chan. “Vietnam’s Hard Economic Lesson for China”. Asia Times. June 24, 2008. http://www.atimes.com/atimes/asian_Economy/JF24DK01.html 2 4. Herrmann-Pillath, Carsten. “Culture, Economic Style and the Nature of the Chinese Economic System”. January 15, 2005. http://www.bm.ust.hk/~ced/iea/Herrmann-PillathCultureChina.pdg 5 6. John, Karl. “Vietnam’s WTO Hopes and Dreams”. Asia Times. January 12, 2007. http://www.atimes.com/atimes/Southeast_Asia/IA12Ae03.html 7 10. Tran, Anh Le. “China’s Rise Stirs Vietnam’s Anxiety”. Asia Times. June 12, 2009. http://www.atimes.com/atimes/Southeast_Asia/KF12Ae01.html -----------------------