Right approach necessary for private sector to drive Vietnamese economy

Truong Hai factory in the central province of Quang Nam. Illustration photo.

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When talking about growing the private sector, microeconomic elements, such as management or marketing abilities, are usually a point of discussion. However, this article is only focusing on the macro level and the role of the government, specifically what the government should do to allow the private sector to flourish.

Bling picking the cuter pig

The debate on the role of the state-owned and private sectors has been going for the past 10 years. Looking at the arguments, it seems that we are divided between the state-owned and the private sectors. We need the private sector but we also need the state-owned sector. We need to grow the private sector, but we also need to grow the state-owned sector. This is the usual channel of the circular debate.

However, in reality, much of the debate is semantics and issues of real substance receive little attention. History shows that government failure, or heavy government interference in the market, always leaves worse and harder-to-fix consequences than market failure. Apparently, the government should limit its involvement.

In a debate about the role of the state-owned and private sectors in the United States, when asked by the moderator to comment on the role of the state in a market economy, Professor Michael Munger (Duke University) brought up an amusing analogy of a contest to find the cuter of two contestant pigs. Upon seeing the first pig, the judges gasped “This pig is so ugly, let us give it the second prize.” Michael Munger argued, the first pig, like the private sector, is ugly, but why pick the second pig (the state-owned sector) as the winner, when nobody has seen it.

Now, looking at the Vietnamese state-owned sector, the question is how to restructure and help it achieve the highest efficiency with the right approach that takes into account historical legacy. However, if the argument is that the private sector is too small, and hence state-owned enterprises are needed for the economy to continue to grow, we are repeating the mistake in Professor Munger’s analogy.

John Stuart Mill, the famous philosopher and economist who argued in favoụr of market economy in Principles of Political Economy (1848), contended that lighthouses in England need to be built by the state because the private sector would not collect enough revenue and therefore have no incentive to build them.

John Stuart Mill’s argument proved inaccurate. At the beginning of the 19th century, in John Stuart Mill’s very hometown in England, up to three-quarter of the lighthouses were built by funding from families of sailors and non-profit organisations.

This story about John Stuart Mill’s argument illustrates Professor Michael Munger’s analogy. The question is, why do we favour the state-owned sector when we do not know how the market will work?

A right approach to grow Vietnam’s private sector would be to create a level playing field for all, one that does not lean towards the state-owned sector because the private sector is too small. Certainly, national security and defence-related industries require state oversight, but if we continue to favour the state-owned sector, it will be difficult for the private sector to grow.

Macroeconomic stabilisation by all means

When discussing the role of the state in a market economy, what is often overlooked is the importance of limiting the state’s arbitrary interference, no matter the political system or current situation of the country. The underlying condition to limiting the state’s arbitrary involvement is macroeconomic stability. Economist Milton Friedman is known as the fiercest and most extreme defender of the free market. His idea that the government needs to create macroeconomic stability through a central bank’s management of the money supply made him famous.

When discussing market economy and the government’s role, we need to avoid the “deregulation” mistake. It is true that “deregulation,” or removing rules and red tapes, gives everyone a fair chance to pursue wealth, but there is a distinction between deregulation and the inability to manage the economy.

The 2008 financial crisis in the US in which monetary policies and banking regulations allowed banks to become “too big to fail” (necessitating government bailout) is an example of incompetence on the part of the government, not a result of deregulation. The question whether to rescue several commercial banks in Vietnam in recent months resembles the banking problem facing the US government.

At a closer look, when the government cannot ensure macroeconomic stability, the private sector will not only thrive in this volatile environment, but it will also be hurt by its. Racing to meet growth targets at all costs will cause a rapid rise in public debts, tax burden, inflation, or interest rates, which will hurt the private sector.

Meanwhile, the state-owned sector and the well-connected interest groups will not only avoid these problems, but will also seize opportunities to enrich themselves. Following interest rate or gold or real estate bubbles, it is the super-rich that got richer, while small and mid-sized enterprises were further squeezed.

To create a level playing field for all sectors, the government needs to find long-term solutions, such as reforming the system or removing and reducing red tapes that are a burden on the private sector, instead of half-hearted solutions targeting one or two industries.

Studies show that when the government intervened in specific industries or markets with supportive policies, economic growth was hurt. These policies not only distort the market, but also redistribute resources inappropriately. Rescue packages or stimuli for a few agricultural segments in recent years have left more questions than answers for the goal of sustainable economic growth for the private sector.

Private sector and reducing poverty

Economic reforms will create a level playing field for many, but will not necessarily eliminate the informal economy in Vietnam, where small and very small businesses play a key role in reducing poverty.

Putting enough resources into growing this informal economy is an important task for the government. The best policy is to give everyone access to resources to do business and earn a living, as well as ensure that property and land ownership is protected so people can have access to credit in the course of doing business.

We need to avoid the misconception that the informal economy lacks skill and information, has low productivity, and therefore needs to be limited. The right approach should be to consider the private sector and the informal sector to be the main drivers of the economy.

When the potential of the official economy is strong enough, resources and labour from the informal economy will flow in. The private sector will become the main driver of growth if we do not forget the informal economy. Otherwise, policies to grow the private sector will lose their effectiveness in the long term.