Resilience for household businesses

Linh Bui, economic researcher, and Andreas Stoffers, country director of the Friedrich Naumann Foundation for Freedom Vietnam

In comparison with Thailand and Singapore, Vietnam reveals some similarities in the characteristics of household businesses which are highly individual and lack a connection among each other. They tend not to form into unions or associations as enterprises do.

This type of business also varies, from simple models like a Pho stall and a café, to machine-operated ones, such as printing facilities and automatically-operated organic vegetable growing units. Previously, household businesses were a form of artisan households or farming cooperatives.

Today, this form of business plays an important factor in Vietnam’s economic development. According to the Statistical Yearbook of Vietnam in 2019 by the General Statistics Office (GSO), the household business sector contributed around 30 per cent to GDP throughout 2015-2019 despite its downward trend in recent years.

The business model has compound benefit in job creation in Vietnam. Based on the GSO’s stats, there were around nine million workers in this sector. Due to the variety of qualification requirements, the entrance barriers to join the sector are relatively low.

In some European countries, self-employment is becoming trendy, as workers are not required to commit eight hours per day in an office. For example in 2020, nearly 10 per cent of Germans were self-employed. Meanwhile, the number in developing countries was approximately 5 per cent.

In Vietnam, the sector has attracted more than 60 per cent of unskilled workers, which eased the burden in unemployment rate. However, the group faces many obstacles in finding jobs at government agencies and private companies due to lack of qualifications. Since the launch of Decree No.01/2021/ND-CP in January on enforcing new regulations on enterprise registration in Vietnam, the limit of 10 workers in one household business has been removed, allowing the sector to attract more labourers.

Nevertheless, household businesses have made a modest contribution to national budget, particularly from non-registered ones. According to the 2017 Economic Census, the average amount of national budget contributed by households and individuals was $117.4 per unit. Meanwhile, the figure contributed by an enterprise was estimated at around $74,000.

No trade unions or associations

Based on a non-farm household business research co-conducted by the Vietnam Institute for Economic and Policy Research, BIDV’s Training and Research Institute, and Friedrich Naumann Foundation for Freedom in Vietnam, before the latest COVID-19 wave, almost all owners of household businesses radiated optimism about their business performance.

In February, just 1 per cent of these businesses had no plan for upscaling, and 42 per cent remained on their current scale, while 48 per cent decided against expansion. However, as the pandemic resurged, household businesses have been hit severely. In Hanoi and Ho Chi Minh City, more “house for rent” notes have been showing up in many busy streets.

Recreation facilities and parks in tourist cities such as Halong and Danang have been temporarily suspended due to travel restrictions imposed by local authorities. Amid social distancing, the situation became even worse, pushing household businesses to change their strategies, including to temporary cease operations.

Based on the performance evaluation of household businesses throughout 2020, the report also disclosed different hindrances they had to surmount as a negative impact of the global crisis.

According to the report, their enormous difficulties were the capital shortage, restricted access to new capital sources, insufficient personnel, human resource training, and technology transfer. In which, restricted access to capital was regarded the most challenging factor. Most surprisingly, the survey revealed that household business considered technology transfer as a practical solution to this crisis, following the access to capital.

With regards to government supportive policies, household businesses express desire to benefit from tax reductions and access to capital to carry out their day-to-day operations. Besides this, they also hope to receive favourable conditions for human resource capacity building and approaches to technology advancements. However, these are not their urgent needs in the short run.

The results of a survey collected from 1,018 household businesses throughout Vietnam showed, the government’s supportive policy, which aimed to support businesses by cutting down 50 per cent of tax obligations over the third and fourth quarter of 2021 seems reasonable. This support should have been mobilised since 2020, but instead was issued for the last two quarters of 2021. Many said they did not receive the same support as enterprises.

The only lifeline for them was to cling on to the $2.7-billion package related to social security. However, in practice, this financial aid did not work well, as the disbursement rate reached around 22 per cent, and the package targeted to the most obvious vulnerable groups, such as poor households or those relying on social subsidies.

Meanwhile, a series of paradoxes remain that perhaps only individuals and households experience, such as individuals working with 4-wheeled vehicles are not supported while 2-wheeled businesses are.

Small but flexible

In comparison, household businesses do not receive much support from the government as enterprises do. Nonetheless, they are more flexible in operating. Specifically, in order to suspend their business, households only need to notify tax agencies and related departments, but they will not be liable for tax responsibilities immediately during the business suspension. The small number of employees and simple contracts also makes insurance and salary obligations largely based on mutual agreements while enterprises face many constraints on paperwork for legal entities and employees.

In the short run, based on the report’s findings, the government should seek solutions to untangle the capital problems for household businesses. Tax exemptions and extensions proposed by the Ministry of Finance seem to be an effective solution.

However, household businesses have been temporarily shut down in large cities and the southern region, resulting in no profits and no tax responsibilities for the majority of them. That questions the realism of the policies. The social security packages estimated at around $2.7 billion and $1.1 billion respectively in 2020 and 2021 would probably be a more favourable solution.

In the long run, the freedom of household businesses is a key success to help them be resilient to the crisis. Facing numerous difficulties caused by the pandemic, it is crucial to facilitate household businesses to formalise and legalise their business model to protect the rights of workers and ensure social security.

However, the legalisation should not be carried out with a burden of administrative procedures, which could retain the household businesses’ freedom and flexibility.

Thus, similar to European countries during the pandemic, the Vietnamese government should prioritise balancing public health protection and economic growth. Therefore, the sooner the pandemic is put under control, the more economical it will be to rescue household businesses.