VIETNAM'S SOCIO-ECONOMIC DEVELOPMENT No.2

MICROECONOMIC ADJUSTMENT AND INSTITUTIONAL CHANGE IN VIETNAM: ISSUES, OBSERVATIONS AND REMARKS

CAROLYN L. GATES
* Carolyn L. Gates is a Fellow at the Institute of Southeast Asian Studies, Singapore, and Senior Economist (on leave) at the Foundation for Indochina Studies, Faculty of Economics and Econometrics, the University of Amsterdam, the Netherlands.

One of the most salient objectives spanning Vietnam's protracted economic reform process has been the restructuring of the enterprise to make it more efficient and effective. Regardless of the model Vietnam has followed, the enterprise has been viewed as a key building block of economic growth and development. In the early years following the reunification of North and South Vietnam, the reality that state and collective enterprises on the whole were not performing well economically, organizationally, or technologically under socialist transformation prompted "trial and error" adjustment measures. At the same time, market and entrepreneurial forms of organization that could have played important transitional roles were ideologically opposed and legally prohibited. Nevertheless, private economic activities (mainly at household or small production unit levels) were frequently tolerated.

Since the initiation of Doi Moi in December 1986, stronger measures have been established to restructure state enterprises and permit private capitalist enterprises to take on a more dynamic role within the economy. Change within the enterprise will be essentially determined by institutions—or rules of the game—which are now emerging in Vietnam and the interaction between micro-organizational structures and the macroeconomy. This article, based on field research on "Enterprise Behaviour under Reform and Institutional Change in Vietnam", will present issues, observations and remarks on organizational and economic restructuring and institutional change faced by Vietnamese industrial enterprises. The methodology used was in-depth interviews of selected private, state and cooperative enterprises and of administrators of key regulatory organizations (banking, taxation, enterprise registration, etc.).

We concentrate on Vietnam's industrial enterprises for two main reasons. The industrial unit constitutes the heart of Vietnam's state enterprise restructuring problem. Secondly, Vietnam has focused on the industrial sector as the nucleus and commanding heights of the country's economy. industrialization has been viewed as the solution to Vietnam's classical development problem. The state-owned industrial enterprise is seen as a main vehicle to technical progress, economic growth and rapid socio-economic transformation.

We employ an eclectic analytical approach drawn from new institutional, evolutionary and behavioural economics to examine enterprise behaviour and institutional change. Key categories include bounded rationality, opportunism, knowledge and economic competences, transaction costs, and the structure of interaction as a bargaining game.

Table 1: Taxonomy of Eclectic Approach (New Institutional, Evolutionary and Behavioural Economics)

Enterprises do not operate in a vacuum: they function through a large matrix of institutions and governance structures; and they are subject and linked to the logic of socio-economic systems in which they exist. Two basic issues emerge. The first concerns the nature of the interface between an economic system and micro-organizational components. The second concerns the prerequisites for effective competition in a market-oriented economy. William Byrd has considered the conditions for effective competition; Table 2 indicates the presence or absence of these conditions in the Vietnamese economy. Before price, financial and enterprise reforms were implemented, markets that existed were very thin. As the policy and institutional environment changed significantly after 1989, elements of effective competition have emerged through the establishment of buyers' markets in consumer goods industries. However, many SOEs that have survived restructuring have not been subject to buyers' markets, hard budget constraints, and effective competition: a significant share comprise monopolies or low competition industries.

+=present, 0=absent. CG=consumer goods, PG=producer goods, PE=private sector, SOE=state sector. Source: Byrd; Gates and Truong.

The evolution of enterprise will greatly influence future economic and technical progress in Vietnam. As fundamental transformations are occurring within the institutional environment, information and decision-making structures, and incentive system, Vietnamese enterprises are responding in diverse ways. Networks and governance structures—both formal and informal—play a critical role in how enterprises adjust to the new market-oriented environment. The interaction between state agencies, enterprise managers, and private actors shapes the trajectory of microeconomic adjustment. Legal and regulatory frameworks are still evolving, creating both opportunities and constraints for enterprise behaviour.

Where is Vietnam's industrial enterprise headed? With rapidly changing institutional conditions, enterprise performance and behaviour—characterized by groping and uncertain adjustment—are highly variable and unstable. The state enterprise is in general exerted through the dual role of the State as owner and as regulator. Different categories of enterprises (state, cooperative, private) are legally and effectively functioning under different rules of the game. Changing socio-economic alliances and de facto institutional arrangements will continue to shape the path of microeconomic adjustment. The differentiation among enterprise types and the varying degree of exposure to market discipline imply that Vietnam's industrial sector will evolve in a heterogeneous manner. Only through continued reform of institutions, governance, and enterprise structure can Vietnam secure durable and efficient industrial development.

William A. Byrd (ed.) [1992], Chinese Economic Reform; William Byrd [1991], The Market Mechanism and Economic Reforms in China; Alfred D. Chandler, Jr., Scale and Scope; Adam Fforde and Stefan de Vylder [1988], Vietnam: An Economy in Transition; Douglas North [1990], Institutional Change and Economic Performance; Janos Kornai [1980], The Economics of Shortage; Carolyn L. Gates and David H.D. Truong [1994], Vietnam: Industrial Policy Reform and State Enterprise Renationalization; and other works cited in the original.