Policy Reform in Viet Nam and the Asian Development Bank's State-Owned Enterprise Reform and Corporate Governance Program Loan

Abonyi, George Working Paper Policy Reform in Viet Nam and the Asian Development Bank's State-Owned Enterprise Reform and Corporate Governance Program Loan ERD Working Paper Series, No. 70 Provided in Cooperation with: Asian Development Bank (ADB), Manila Suggested Citation: Abonyi, George (2005) : Policy Reform in Viet Nam and the Asian Development Bank's State-Owned Enterprise Reform and Corporate Governance Program Loan, ERD Working Paper Series, No. 70, Asian Development Bank (ADB), Manila, https://hdl.handle.net/11540/1901 This Version is available at: https://hdl.handle.net/10419/109275 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/3.0/igo ERD Working Paper No. 70 POLITICAL ECONOMY OF REFORM: CASE STUDIES OF ASIAN DEVELOPMENT BANKSUPPORTED POLICY-BASED LENDING OPERATIONS POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI August 2005 George Abonyi is Executive Director, Asia Strategy Forum and Associate Senior Fellow, Institute of Southeast Asian Studies ([email protected]). This work was undertaken as a consulting assignment with the Economics and Research Department (ERD), with Xianbin Yao, former Assistant Chief Economist, and Richard Bolt, former Senior Economist, ERD, providing overall guidance. It builds on earlier work for ERD initiated under the direction of David Edwards, former Assistant Chief Economist; and also links closely to related work undertaken by ERD and published in June 2003 by the Asian Development Bank as the Economic Analysis of Policy-Based Operations: Key Dimensions. Comments provided by Raymond Mallon were particularly helpful in finalizing this paper. The analytic framework for policy reform presented in the paper was influenced by earlier collaboration with John Thomas (Harvard University). The views and opinions expressed in the paper are those of the author. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ©2005 by Asian Development Bank August 2005 ISSN 1655-5252 The views expressed in this paper are those of the author(s) and do not necessarily reflect the views or policies of the Asian Development Bank. FOREWORD The ERD Working Paper Series is a forum for ongoing and recently completed research and policy studies undertaken in the Asian Development Bank or on its behalf. The Series is a quick-disseminating, informal publication meant to stimulate discussion and elicit feedback. Papers published under this Series could subsequently be revised for publication as articles in professional journals or chapters in books. CONTENTS Abstract vii Foreword to the Case Studies 1 I. INTRODUCTION 3 A. Prologue 3 B. Policy Reform: Political Economy Perspective and Framework 4 II. SETTING THE STAGE 6 A. Viet Nam in Transition 6 B. Context: SOE Reform 15 III. EXPLAINING THE ODDS: POLICY REFORM PROCESS, SOE REFORM, AND CORPORATE GOVERNANCE PROGRAM LOAN 20 A. Initiating Policy Reform: Getting on the Policy Agenda 20 B. Managing Complexity: Design of the SCPL 21 C. Endorsing Reforms: Approval of SCPL Reform Measures 27 D. Implementation 28 E. Sustaining Reforms 30 IV. BUMPS ON THE ROAD TO REFORM: POLITICS AND INSTITUTIONS 33 A. The Politics of Policy Reform 33 B. Institutions: Shaping and Implementing Change 35 C. Government Commitment: Stability of Expectations 37 V. CONCLUSION: IMPROVING THE ODDS 38 A. Preconditions for Policy Reform and Policy-based Lending 38 B. Political Acceptability 39 C. Institutional Feasibility 40 EPILOGUE—“RETHINKING CONDITIONALITY”: AN ALTERNATIVE PERSPECTIVE 42 REFERENCES 49 ABSTRACT This paper presents a case study of the Asian Development Bank’s StateOwned Enterprise (SOE) Reform and Corporate Governance Program Loan that was aimed at supporting fundamental and sensitive reforms in Viet Nam’s transition. It examines the context of SOE reform involving Viet Nam’s unique, domestically driven process that shapes policy decisions; the design of the Program; and key issues related to implementation and sustainability of selected core reform measures. The purpose is to draw lessons that can assist in better understanding the policy reform process in order to lead to the more effective preparation and implementation of programs supporting such reforms. In order to help structure the case study, a framework is introduced for the analysis of the political economy dimension of policy reform. This framework is proposed as a useful general tool both for the ex post understanding the political economy dimension of policy reform, as well as an analytic tool for assisting in the ex ante design of specific policy reform programs and related policy-based lending. 1ERD WORKING PAPER SERIES NO. 70 FOREWORD TO THE CASE STUDIES Research Strategy This research focuses on exploring the political economy dimension of policy reform. The research strategy involves developing a set of comprehensive case studies of policy-based lending programs supported by the Asian Development Bank (ADB) in three countries: Indonesia, Thailand, and Viet Nam. This paper focuses on Viet Nam. The case studies were designed to present detailed stories about the policy reform process, focusing on the political economy dimension of reforms. The aim of each case study is to provide not only an account of a particular ADB program, but more important, to place it in the specific— and evolving—reform context in which the program was formulated and implemented, describing the policy process involved. Since the context is so crucial with respect to policy reform initiatives, the case studies provide narratives on local conditions and historical circumstances. The focus of the cases is on the interplay between ADB’s program and the surrounding environment, with particular emphasis on the policy reform process, and its political economy dimension. The basic purpose of the case studies is to find out why and how things happened, so that this knowledge can be used to better understand the policy reform process, in particular the role of political economy factors; and more specifically, to assist in the future planning and implementation of programs supporting policy reforms. The general preparation for the case studies has involved an extensive literature review focusing on policy reform and on the policy/reform process, with particular emphasis on the political and institutional dimensions. Examples of the literature reviewed include Grindle (2001), Grindle and Thomas (1991), Drazen (2000), Brinkerhoff and Crosby (2002), Haggard and Kaufman (1992), and Bates and Krueger (1993), as well as a variety of related case studies. A second part of the preparation for the conduct of case studies involved the development of a framework for “In order to learn how men will act in a given situation, or how a change in the situation will modify their behavior, it is surely more practical to observe their behavior than to attempt to discover by introspection or otherwise what they might be supposed to do if actuated by a certain motive operating alone…. Of much greater importance to the economist than any “pure” theory are the knowledge and understanding of the concrete facts of production, distribution, consumption, of the whole economic situation with all its causal processes. To most of this material the processes of specific observation, systematization, and inductive inference are applicable. To much of it, particularly in its dynamic processes, or processes of change, no other method is of any service.” Jacob Viner (1917) 2AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI understanding/representing the political economy dimension of policy reform. A preliminary framework, drawing on both literature review and in-depth examination of a variety of cases/examples in diverse settings, is presented in Abonyi (2002). The preliminary framework discussed in that paper was further refined prior to the case studies, including through training workshops; and is then tested through application to this set of case studies. The Case Study Case studies have been an accepted part of research and teaching in a wide range of disciplines, including law, medicine, management, as well as public administration and public policy. There is an extensive and growing literature focusing on the case study method (e.g., Yin 1994, Flyvbjer 2004, Helper 2000, Odell 2001); as well as many cases and related research manuals prepared in top management and public administration/public policy schools. However, the use of the case study is relatively rare in economics as a research strategy. The issues raised in the earlier quote from Viner (1917) are equally relevant today, and as Helper (2000) notes: “Modern economics began with Adam Smith’s visit to a pin factory, which helped him explain how the division of labour worked…. However, not many economists today do much fieldwork, which involves interviews with economic actors and visits to places they live and work.” What counts as a case can be as flexible as the researcher’s definition of the subject. In general, a case from a research perspective refers to a single instance of an event or phenomenon, such as a decision to devalue a currency, a trade negotiation, or in the particular instance here, a specific policy-based lending program of ADB involving a set of reform measures. A comprehensive case study can make an important contribution to the understanding of a complex issue such as policy reform. It allows for concrete, context-dependent learning and presentation of a detailed and nuanced view of the world that approximates the complexities and contradictions of the reality of the reform process. Case studies complement other types of economic research such as theoretical, mathematical, statistical, and econometric inquiry. In general, the benefits of case studies include the following: (i) A case study conveys a much fuller understanding of the particular concrete event and behavior studied—including richer evidence and reasoning about process and context than is possible through more abstract methods. (ii) Complex processes may be most effectively documented through case studies. The world of economics is marked by significant processes such as market evolution, competition, bargaining, institutional change, regional integration, and policy reform. (iii) Institutional and structural change can perhaps best be understood through case studies. For example, reforms involving introduction of market-based mechanisms into once centrally managed economies involve changes in institutions over time. Documenting such changes is the first step toward deeper analysis and generalization. Preparing comprehensive case studies takes a great deal of time and effort. It requires going into extensive details on the event and its context in order to construct the “narrative” that captures the complexity and nuances of the real life situation. In particular, preparation of the case studies presented here has involved the following steps: 9ERD WORKING PAPER SERIES NO. 70 (i) rural reforms, involving dismantling a system of collective farming and shifting toward family farms as the basic productive unit (ii) price reform, which in effect ended the centrally planned “command economy” through a shift to market-determined prices for most goods and elimination of most subsidies (iii) macroeconomic stabilization program, which included fiscal and monetary policy reforms to control money supply and prevent inflationary pressure, for example including an extensive IMF-style domestic adjustment package in 1988–1989 focusing on positive real interest rates, drastic exchange rate adjustment, and efforts to balance the state budget; this was accompanied over time by an increasing sophistication of the government in managing macroeconomic policy (iv) trade reform, involving liberalization of the trading environment through quota and tariff reductions, eventually covering almost all aspects of the trading regime—but with state trading agencies retaining significant power; involving also the continuing maintenance of licensing and quota systems in selected areas (v) exchange rate reform, which included adoption of a more market-oriented exchange rate policy, accompanying steps toward restructuring of the financial system (vi) opening up to foreign investment, beginning with enactment of the Foreign Investment Law in 1988, amended over subsequent years, as in 1992 to accommodate business cooperation contracts, and in 1997 to allow for build-operate-transfer (BOT) projects Two key areas of reform that proceeded more cautiously and where significant differences emerged with key donors (IFIs) involved the expansion of the private sector, and the (related) reduction of the role of the state in the economy, particularly in terms of SOE reform. Private sector development began with the introduction of measures such as the 1990 the Law on Private Enterprise and Law on Companies that provided important legal basis for the establishment and operations of private firms, and the key revision of the Constitution in 1992 allowing individuals to exercise property rights over income-producing assets and personal property. Over time, private sector growth made notable contributions to Viet Nam’s economic performance, particularly to employment growth. However, the movement has been gradual toward the acceptance of a significant active role for the private sector and private property in the economy (e.g., through privatization, deregulation of the role of the state, facilitating the establishment and operations of private firms); as distinct from a more rapid and less ambiguous acceptance of the role of markets in economic governance and in mediating the flows of goods and capital (e.g., through the elimination of price supports, freer trade, market-determined exchange rates). With respect to SOEs, as will be discussed in later sections, issues of enterprise management, control, and particularly ownership have been approached cautiously. As a consequence, SOEs have continued to retain a relatively important role in production and trade, and as recipients of financing. Underlying the more measured approach to both private sector development and SOE reform is in part the intent on the part of key political stakeholders to retain a significant role for the state in the economy, and the domestic debate over what that role should be. The Vietnamese approach to reform turned out to a large extent to be effective. Following the launching of doi moi, in 1986-2001 Viet Nam underwent a remarkable transformation. There was rapid and sustained economic growth; inflation was brought under control; poverty was substantially reduced; the traded sector (exports and imports) expanded significantly; FDI inflows SECTION II SETTING THE STAGE 10 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI increased substantially; and the economy underwent considerable structural transformation with significant contraction of the relative share of agriculture, and a corresponding expansion of the share of industry.13 Policy and institutional reform through doi moi is generally seen as having played a central role in Viet Nam’s rapid and sustained transformation and development, including through improved incentives, increased competition, reduction in barriers to trade, import/adoption of new ideas and technology, and creation of new market institutions. However, despite key institutional changes in two decades of reform, substantial challenges remained at the time of the SCPL, including among others: (i) weak law enforcement, particularly as related to property rights and business-related dispute resolution, leading to continuing constraints on the development of markets and the expansion and performance of firms (ii) lack of transparency and cumbersome administrative procedures resulting in a proliferation of new and changing legislation, decrees, and regulations issued by numerous agencies and local authorities; these have created a confusing and at times contradictory tangle of requirements for private business that left considerable discretion for authorities at various levels, contributing to a rising incidence of corruption—recognized and increasingly addressed by the government 14 (iii) financial sector problems, including a still heavily regulated financial system with a segmented credit market dominated by four large state-owned commercial banks, with considerable barriers to entry through licensing control by the State Bank of Viet Nam (SBV), and a significant share of credits still channeled to SOEs by the four main banks One important, persistent, and widespread problem in the reform process has been the gap between policy decisions—directives, regulations, legislation—and the implementation of such decisions. The capacity of central agencies to ensure and monitor the implementation of reforms by various levels of government and implementing agencies has been limited within the framework of Viet Nam’s political and economic management system. 2. Political Institutions and Economic Management15 A key characteristic of the Vietnamese reform process has been the continuity of political institutions and an orderly, if bureaucratic, administrative system. This has provided a relatively 13 See for example data related to Viet Nam in ADB’s economic indicators (see various issues of the Asian Development Outlook). See also table 3.2 in Arkadie and Mallon (2003). 14 The Vietnamese government has taken important steps to fight corruption—in the time horizon of the SCPL—including addressing it as a major item in the Sixth Party Plenum in 1998, launching of an anticorruption campaign in 2000, and establishing in 1998 a hotline to receive business complaints. However, corruption at various levels continues to be an issue and constraint on business and economic performance. 15 This section is based to a large extent on Arkadie and Mallon (2003) and Doan Hong Quang (2004). 11ERD WORKING PAPER SERIES NO. 70 stable environment for policy decisions, enabling the government to make decisive macroeconomic decisions and implement significant reforms, despite limited development of a formal legal system. Politically, Viet Nam remains a one-party state, governed by the Communist Party of Viet Nam, whose role in state management is somewhat “opaque.” Most senior government officials are members of the Party; most ministers and provincial leaders are members of the Central Committee of the Party; and the prime minister, president, and chairman of the National Assembly are members of the Politburo, the inner core of Party leadership. The National Assembly is defined by the 1992 Constitution as the highest organ of the state, highest representative body of the people, and the only organization with legislative powers, including power to amend the Constitution. It is elected every five years, meets usually two to three times a year, and has the mandate to oversee all government activities. A significant institutional change at the time of the SCPL involved the growing importance of the National Assembly in the policy decision process. The Assembly was becoming increasingly active in reviewing government plans, budgets, and implementation performance; and in drafting and scrutinizing legislation that have historically tended to be written in fairly broad terms with interpretation and implementation depending on administrative directives from the prime minister, ministers, and provincial administration. For example, in the case of the 1999/2000 Enterprise Law (related to key reform measures in the SCPL), the National Assembly played a strong role in amending and influencing the details of the legislation. The National Congress of the Communist Party convenes every five years to set the country’s overall policy direction, with resolutions of the Party Congress providing the country’s broad economic strategy. This is translated into the Socio-Economic Development Strategy and Plan (SEDP), in particular the 10-year Socio-Economic Development Strategy and the 5-year Socio-Economic Development Plan. These, in turn, are supported by a number of annual and sectoral plans. For example, in April 2001, the Ninth Party Congress endorsed the 10-year SEDP for 2001-2010; and the 5-year SEDP for 2001-2005 was subsequently approved by the National Assembly. The government operates at four levels: the central government and three local governments that include provinces, districts, and communes. There is a significant degree of autonomy extended to local administration with regard to implementation of economic decisions and expenditure of allocated budgets. The formal system notwithstanding, unambiguous statements of policy direction, to the time of the SCPL, have been relatively rare. This reflects both the transitional nature of Viet Nam’s economic system, and the challenges and on-going debates of reconciling a continuing fundamental commitment to a Marxist-Leninist one-party state, with market-oriented reforms and an expanding role for the private sector. In this context, the policy reform process in Viet Nam may be generally described as “behavior-led” rather than “rule-led”.16 That is, in practice, many formal reforms and regulatory changes often formalize what in effect, is already happening in practice in some part of the country, or have initially been implemented as “experiments” on a pilot basis.17 SECTION II SETTING THE STAGE 16 For a further general discussion of behavior vs. rule-led change see Abonyi (2002), and in the Vietnamese context, Arkadie and Mallon (2003). 17 However, with the benefit of hindsight, some of the Central Committee meetings in late 1997–1999 did set out some of the broad directions for reforms affecting business. See for example World Bank (2005) (from R. Mallon, private communication). 12 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI The corresponding policy decision system places emphasis on collective leadership and consensus. Decision making at all levels is characterized by consensus-seeking, engaging a wide range of stakeholders before decisions are finalized. This leads to a sharing of responsibility, as well as of political risk. It also means that the policy decision process is often “opaque”, in that it is difficult to identify clear decisionmakers or decision points. In this context, central agencies, however seemingly powerful (e.g., State Bank of Viet Nam, Ministry of Planning and Investment) are generally not in a position to impose policy decisions for which a broad consensus does not yet exist. That is, the initiation of major policy and institutional reform requires sustained, timeconsuming, and nationally led efforts at consensus building. Within this framework, implementing policy decisions requires a “buying in” by relevant state bodies before action is taken by a designated agency. Yet, individual agencies can be quite decisive in matters they see as lying within their mandate. As a consequence, cooperation/coordination between line agencies and/or different levels of government can be challenging. The implementation of reforms even after high-level (prime ministerial) policy pronouncements and directives therefore often requires to be “negotiated” with and among implementing agencies and associated vested interests. In sum, at the time of the SCPL, the Vietnamese approach to policy reform involved a pragmatic, gradual, “step-by-step” process of behavior-led change, guided by a consensus-seeking decision system. This sometimes resulted in a slow and “opaque” process of policy decisions, but one which also ensured minimal open conflict, relatively stable outcomes, and domestic/national ownership of reforms. It was also a system where implementing agencies and authorities at various levels could exercise significant de facto power over the implementation of policy decisions. In this domestic-driven process of policy reform, external input, for example the role of IFIs, was generally limited either to the presentation of international experience, or to assistance in analyzing the potential impacts of new types of policy options. 3. External Donors and the Reform Process The policy decision process in Viet Nam was domestically driven and therefore the resulting decisions reflected national priorities and ownership. External financial assistance played a negligible role in the critical initial stages of reform in the late 1980s and early 1990s. Therefore external policy advice was not seen as the necessary means to external financing, but instead was assessed on the basis of perceived relevance to domestic priorities, and likely feasibility given domestic conditions and constraints. This general attitude to external policy advice did not change substantially as interaction with key IFIs increased in the mid-1990s (see for example, IMF 2004, World Bank 2001, and Arkadie and Mallon 2003). The case of SOE reforms provides a useful illustration of the more general issue. (i) IMF and Policy Reform in Viet Nam Following normalization of relations, the IMF approved Viet Nam’s first three-year Enhanced Structural Adjustment Facility (ESAF) financing in 1994 (see IMF 2004). This was the IMF’s key mechanism for policy-based lending focusing on structural reforms. However, the ESAF was not implemented as planned. In its progress review the IMF criticized Viet Nam’s pace of reform, 13ERD WORKING PAPER SERIES NO. 70 particularly with respect to SOEs and trade liberalization. As a consequence, although the second annual arrangement under the ESAF was completed, agreement could not be reached on the third annual arrangement, and the program closed in November 1997 without disbursing all the allocated funds. There were to be no further such programs until 2001. Negotiations between the IMF and the government with respect to policy reform were restarted in 1998. However, negotiations stalled because of fundamental differences over the scope and pace of policy reforms as advocated by the IMF and the government’s domestic reform agenda. The IMF was pushing hard for a more ambitious reform program, particularly as related to areas such as SOE privatization (nominally from the perspective of the fiscal burden imposed by SOEs), trade liberalization, and financial sector reform. However, the necessary domestic consensus was not in place on fundamental issues related to the basic role of the state in an increasingly market economy—hence SOE reform—and the pace at which reforms should be implemented. Without such a consensus, the government was not likely to agree to any externally suggested reform program. More fundamentally, as discussed earlier, the government was taking a more gradual and measured approach to reform in an effort to maintain social and political stability, and in order to ensure the relevance and feasibility of policy reforms. Reform of SOEs was perhaps the most controversial of the structural reforms under discussion with the IMF. Although traditionally the World Bank had taken the lead in this general area, SOE reform was a key part of the IMF agenda in Viet Nam because of the perceived macroeconomic significance (i.e., fiscal implications) of the financing of SOEs.18 The very strong advocacy position taken by the IMF, for example in the May 1999 Article IV consultations (see IMF 2004), emphasized the need to reduce the role of the state in the economy; requirement for a comprehensive reform framework; and a wider and faster SOE privatization program, with particular emphasis on the larger SOEs. By contrast, the government’s position was one that advocated a continued sustained role for the state in the economy; and a “gradualist” approach to SOE reform. As will be discussed in greater detail, the government’s general approach to SOE reform focused on improving enterprise performance, creating greater autonomy and accountability particularly of the larger SOEs; divestiture of smaller SOEs; and leveling the playing field between private firms and SOEs. A key concern of the government was ensuring that jobs existed in the private sector to accommodate workers released by downsizing of the public sector (through SOE reforms), in order to maintain social and political stability. Furthermore, the lack of consensus and expected political resistance by vested interests, (SOE workers and management, controlling institutions), were seen as additional key factors in a need for a slower pace of SOE reform. It was only in March 2001 that a request for a new 3-year IMF program was brought to the IMF’s executive board, after agreement was finally reached with the government. The program was by then under the Poverty Reduction and Growth Facility (PRGF), which was intended to place more emphasis on national ownership of the reform agenda, and integrate more closely macroeconomic policy and poverty reduction. The SOE component of the program was based on a 5-year SOE reform plan adopted by the government in March 2001 that included SOE reform targets for 2001–2003. 18 See for example Annex I in IMF (2004): SOE reform is listed first on the major issues under discussion between the IMF and the government throughout the period 1996–2002. SECTION II SETTING THE STAGE 14 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI In general, the agreement was seen as reflecting more a shift in the IMF position to align its program more closely with the domestic reform agenda, than an accommodation by the government to IMF pressure (IMF 2004). (ii) World Bank and Policy Reform in Viet Nam The World Bank’s focus in its policy-based lending to Viet Nam was intended to be on structural reforms and transition to a market economy. Although a number of such programs were proposed, between 1994 and 2000 only one was approved, the Structural Adjustment Credit (SAC), implemented 1995–1997, and including a focus on SOE reform. However, according to the World Bank’s own assessment, its impact on the reform process was modest at best: “…in hindsight, the relevance was not high” (see World Bank 2001). As with the IMF, it was not until 2001 that a World Bank policy-based lending program, the Poverty Reduction Support Credit I (PRSC I, formerly SAC II) was put in place. The technical advisory role of the World Bank was seen as generally more effective than its attempts at policy-based lending. However, this experience also reflected the domestically driven nature of Viet Nam’s reform process. The experience with the State-Owned Enterprise Reform in Vietnam Project (supported by the Poverty Reduction Strategy Credit I, or PRSCI) demonstrated the reluctance of the Vietnamese to follow advice they felt was “out of synch” with domestic requirements and constraints (World Bank 2003, 6).19 As the IMF’s, so the World Bank’s approach to policy reform in general, and SOE reform in particular, evolved in Viet Nam, increasingly accommodating the domestic reform process. Emphasis shifted away from an emphasis on the scope and pace of SOE privatization, toward a focus on private sector development. In this context, there was increasing emphasis on the “demonstration effects” of privatization of the more “medium size” SOEs (see IMF 2004). The World Bank’s first Poverty Reduction Support Credit (PRSC I), which accompanied the approval by the IMF of the PRSC in 2001 noted above, focused on enhancing transparency of SOE operations and the effectiveness of the SOE “equitization” process (a concept discussed in detail in the next section). The World Bank’s approach continued to evolve under PRSC II, approved in May 2003, in part reflecting a tacit acknowledgment of the on-going resistance to externally pushed privatization by the government, and the practical difficulties of implementing enterprise reforms. In the words of the IMF’s review, “by mid-2003 IMF and World Bank came to accept the government’s desire to retain a relatively large share of the economy in the public sector, and restructure (rather than equitize) large SOEs” (IMF 2004, 38). (iii) ADB’s Prior Experience with Policy Reform in Viet Nam Although ADB had limited involvement with the SOE sector in Viet Nam prior to the SCPL, its experience with policy-based lending echoed to some extent that of the IMF and the World 19 “The Vietnamese recipients/ beneficiaries tended not to share consultants’ recommendations based on experiences in transition and market economy countries. The recipients often felt that the project recommendations were ’too radical’ or ‘too demanding’ against the existing evolutionary SOE reform policies in Vietnam, and some of the proposed measures were ‘out of synch’ with the legal and regulatory framework of Vietnam.” 15ERD WORKING PAPER SERIES NO. 70 Bank (see for example ADB 1999b). ADB resumed lending to Viet Nam in October 1993, providing two loans to support policy reform prior to the SCPL. The first was the Agriculture Sector Program Loan, the second the Financial Sector Program Loan. The experience with the Agriculture Sector Program Loan reflected the complexities of undertaking policy-based lending in Viet Nam. Declared effective on 17 April 1995 for an implementation period of three years (1995–1998), the loan was closed on 30 June 1998. There were a number of delays and difficulties during implementation, particularly as related to trade liberalization in the rice export and fertilizer import trades, and settlement of nonperforming loans (NPLs) and outstanding loans with the Viet Nam Bank for Agriculture and Rural Development. This resulted in a delay of more than 1 year in the release of the 2nd tranche. Viet Nam marched at its own pace in reform. It should be noted that this Program did touch on SOE-related issues in the agriculture sector. The experience with the Financial Sector Program Loan was similar. Declared effective on 3 February 1997, the loan was closed on 31 Dec 1999 with release of the second tranche delayed as in the case of the Agriculture Sector Program Loan. In general, the government did not implement on schedule a number of policy conditions, particularly as related to the drafting and enactment of legislation; and there were also differences in interpretation of key policy conditions between ADB and the government (ADB 1999b). In general, ADB’s experience with the loans supporting policy reforms, prior to the SCPL, seemed to indicate that Viet Nam was likely to implement measures that it saw appropriate, and often already “in the pipeline” prior to the loan (as in the case of the Agriculture Sector Program Loan), where domestic consensus was already in place. The timing of the implementation of reforms also could be uncertain, given Viet Nam’s consensus-based approach to policy decisions. Reforms where domestic consensus was not yet in place were unlikely to be “rushed” because of loan funds, particularly with measures involving legislation (as in the case of the Financial Sector Program Loan). In summary, the experience of all three IFIs prior to the SCPL indicates that the policy reform process in Viet Nam was under strong domestic control, with national ownership. Reforms that were part of policy-based lending by IFIs were likely to be agreed to and implemented only to the extent they were seen as relevant and feasible by the government, and subject to a domestic consensus being in place. B. Context: SOE Reform 1. SOEs in the Vietnamese Economy: Overview Viet Nam’s economic transition had mixed results by the time of the SCPL. In certain areas such as price liberalization, exchange rate unification, tax reform, and liberalization of the trade regime—in the development of the role of market mechanisms and related institutions—progress had been substantial. However, the government made much less progress in transforming the ownership structure of the nonagricultural economy in general, and SOEs in particular. Since the SECTION II SETTING THE STAGE 16 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI start of economic reforms in the late 1980s, the share of the state sector in gross industrial product had declined only slowly.20 Historically, SOEs played an important role in the economy of Viet Nam. However, this role had been more modest than in other transition economies such as the People’s Republic of China, former Soviet Union, or the countries of Eastern and Central Europe. Therefore the consequences of a slower pace of SOE reform in Viet Nam have been less significant as a constraint on economic growth and development than some external commentators, in particular the IFIs, have initially predicted. Around the time of the SCPL, SOEs accounted for a still significant share in national income, averaging around 30% of GDP between 1986 and 2000, with non-oil SOEs contributing around 23% to the state budget (40% if oil SOEs are included). The share of SOEs in industrial output was around 50% in 1991, falling to around a still considerable 36% by 2000. The relative share of employment by SOEs was historically modest, employing around 7.5% of the total labor force in 1990, falling to around 5% by 2000. There were relatively few large-scale, capital-intensive SOEs, and the vast majority of enterprises employed under 500 people, with many employing under 100. Generally sound macroeconomic management, particularly since the initiation of doi moi limited government budget resources used to subsidize SOEs, thus hardening the budget constraint (Mekong 2002). However, a significant share of state-linked bank credits continued to be channeled to the SOE sector, making up approximately 45% of total credit to the economy in 2000, down from close to 53% in 1996 (IMF 2002). 2. SOE Reform Process: Key Elements up to the SCPL21 The need to strengthen the performance of SOEs was a recurring subject of debate well before the doi moi reforms. However, fundamental to this debate was a continuing commitment to a key role for the state in the economy, and therefore for SOEs in economic development. Over time, there was increasing focus on the role of the private sector in long-term economic development, and on the relationship between SOEs and private enterprises. Therefore SOE reform and the development of the private sector have been interrelated in Viet Nam’s reform and transition process. In this context, SOE reform had a dual purpose: (i) strengthen the performance of SOEs so that they can perform more efficiently and effectively in an increasingly market environment, and at the same time reduce the burden on government finances; and (ii) help develop the private sector by shrinking—within limits—the scope of SOEs in the economy. Before summarizing key elements of SOE reform up to the time of the SCPL, it may be useful to briefly touch on the SOE-private sector development interface as providing in part the rationale for SOE reform. In general, SOEs were seen as a key constraint on private sector development, a central feature of doi moi. Government gave preferential treatment to SOEs and in effect, restricted private enterprise from moving much beyond smaller businesses that could compete with SOEs. Constraints on the development of private enterprise included (i) lengthy, cumbersome, and 20 See for example Arkadie and Mallon (2003), Mekong Economics (2002), and ADB et al. (1998). 21 This section is based to a large extent on Arkadie and Mallon (2003), Mekong Economics (2002), and ADB (1999a). 17ERD WORKING PAPER SERIES NO. 70 expensive business registration procedures; (ii) licensing requirements from the Ministry of Trade, including needed support from local “people’s committees”, who often may have had a stake in maintaining the dominant position of local SOEs as a source of revenues and were therefore threatened by potential new private entrants; (iii) preferential access of SOEs to land and foreign investment; and (iv) preferential lending by state-linked banks to SOEs. Therefore an important dimension of SOE reform should be related to “leveling the playing field” between state enterprises and private business through effective reform of the SOE sector, and formulating and implementing measures that facilitate the establishment and operations of private business.22 In general terms, Viet Nam has taken a cautious approach to SOE reform, involving “two tracks” (see Arkadie and Mallon 2003). On one track the focus was on exposing SOEs to the pressures of markets—termed in the reform process as “commercialization”—by forcing them to compete, on a gradually more level playing field with each other, with imports, and with a growing private sector. On a second track, the focus was on developing a new policy and regulatory framework for the SOE sector to force individual enterprises to restructure, and to alter the landscape of the SOE sector as a whole through ownership reform measures such as “equitization” and liquidation. This second track stood in marked contrast to the rapid privatization in the former Soviet Union and in Eastern and Central Europe. (i) Commercialization of SOEs: In late 1987 the Soviet Union and Eastern and Central Europe drastically reduced trade and financial flows to Viet Nam, causing SOE performance to deteriorate. This triggered a focus on shifting SOEs to a more commercial (market) basis, with greater autonomy and increased responsibility for their own financial viability. The issuance of Decision 217/HDBT in November 1987 marked the first postdoi moi step toward a broad-based SOE reform program. It involved giving SOEs the autonomy to formulate their own operating plans within the framework of broad government guidelines on development priorities. The key operational change involved a shift to market-based relationships with suppliers and customers through the introduction of economic contracts as the basis for transactions among enterprises and businesses. Within this framework SOEs now had to purchase inputs directly from suppliers, and could sell their products on the open market. (ii) Re-registration, reorganization, liquidation: Decree 217-HDBT also allowed, however, for the decentralization of authority to establish SOEs. This, in turn, led to a proliferation of new SOE registrations, particularly at the local level. By 1990–1991 Viet Nam had around 12,300 SOEs with a total capitalization of Dong 34,000 billion (or approximately $2.4 billion at the current exchange rate). This helped trigger a second round of reforms focusing on reorganizing and consolidating the SOE sector. The government issued a decree in November 1991 requiring all SOEs to re-register or close, and made commercial viability as the main criterion for establishing SOEs. As a consequence, by 22 An additional link between SOE–private sector development was that much of the initial FDI into Viet Nam involved joint ventures with SOEs. Assets (mostly land) were often moved from SOEs into “greenfield” projects with foreign investment, involving in effect partial privatization measures. Strong growth in these ventures provided opportunities for the emerging private sector, and “demonstration effects“ from private sector-led development (from R. Mallon, private communication). SECTION II SETTING THE STAGE 18 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI April 1994 the number of SOEs shrank to around 6,300 enterprises through liquidations (about 2,000) and mergers (about 3,000). However, the total capitalization of the new SOEs increased to around Dong 53,000 billion (about $3.8 billion). In practice, most liquidated and merged SOEs were small, locally managed enterprises with less than 100 employees and Dong 500 million in capital (about $45,000). Moreover, the total assets of liquidated SOEs accounted for less than 4% of total SOE assets. Following government instructions in March 1994 for a second phase of re-registration, a new wave of mergers and liquidations reduced the number of SOEs to around 5,500 by the end of 1997. This led to the retrenchment of over 1 million SOE workers, many of whom were absorbed by private businesses. (iii) Equitization and divestiture: Following the Seventh Party Congress’ call for the dissolution or change of ownership of SOEs not seen as essential for state ownership, the National Assembly approved a pilot “equitization” program in December 1991, implemented by the government. Equitization was a politically sensitive concept; in effect, a form of partial privatization though not explicitly stated that way, with the state in most cases retaining a share in the enterprise and in principle, a commitment to worker control through share ownership. Operationally, SOEs were to be transformed into joint stock companies, with a proportion of state shares in the enterprise required to be sold, and employees given preferential access to such shares. The objectives of SOE equitization were to create a new type of enterprise with diversified owners; lead to a more efficient use of state assets; and mobilize investment in the new types of SOEs. However, progress was very slow, despite follow-up policy directives. For example, although the Prime Minister issued another decree in March 1993 to accelerate the pilot equitization program, nearly three years later at the end of 1995 only five SOEs were equitized. To accelerate the process, in May 1996 the government issued a further directive to extend the scope and scale of equitization, requiring SOE-controlling agencies to select enterprises for equitization. This was further strengthened by subsequent decrees and decisions in 1997 and 1998, including listing steps that had to be followed in the equitization process. The pace of equitization during 1998–2000, although proceeding much faster, remained slow at the time of the SCPL. The number of equitizations did increase significantly to around 550 enterprises during 1998–2000, as compared with just 17 during 1992–1998.23 However, in practice, equitization generally targeted only smaller SOEs with capital stock of less than VND 10 billion, or $700,000. (iv) Legal framework for SOE activities and corporate governance: Legal framework governing business enterprises evolved slowly, but gradually reduced differences in treatment between enterprises—SOEs and private businesses. Steps in this direction included the approval by the National Assembly of the Laws on Foreign Investment in 1987, and on Private Enterprise and on Companies in 1990. A key measure was the inclusion in the Constitution in 1990 of the rights of the nonstate sector to operate alongside the state sector. To facilitate improved corporate governance and closure of nonviable SOEs, the 1993 Law on Bankruptcy and the 1995 Law on State Enterprises were 23 The exact figures vary among different sources, see for example ADB (1999a), Mekong Economics (2002), and Doan Hoang Quang (2004). 25ERD WORKING PAPER SERIES NO. 70 to be released about one and a half years from the initial disbursement (actually disbursed on 18 December 2002). The overall objectives of the SCPL were to “promote industrial growth by restructuring the industrial sector to (i) facilitate FDI inflows, (ii) support the development of private enterprises, and (iii) accelerate industrial SOE reform and improve corporate governance of enterprises.” To achieve these objectives, the SCPL was very comprehensive in scope, including a wide range of measures (many with submeasures), and involving a number of implementing agencies. There were 15 first-tranche conditions, and 13 second-tranche conditions that had to be met for the disbursal of the funds. The SCPL timetable required the government to implement this comprehensive and wide-ranging program of reforms within approximately 36 months.33 In general, elements of the policy matrix addressed important issues in Viet Nam’s reform process. The core focus of the SCPL was on “industrial SOE restructuring”: on improving the policy and institutional framework for SOE reform. Of particular significance, as discussed earlier, was the introduction of the concept of corporatization and related measures, including enacting the revised Enterprise Law that provided the necessary legal foundation for corporatization. These were potentially significant contributions that addressed important gaps in the SOE reform process, and facilitated the development of the private sector. At the same time, there was a view that the SCPL design was overly ambitious: too wide in scope, with too many conditions, and included measures whose feasibility was likely to be uncertain. For example, issuing a policy directive for the corporatization of 60% of the medium and large SOEs under the SCPL was one thing, implementing such wide-scale changes at the enterprise level— given the sobering experience with actual SOE reform to date—was likely to prove to be a rather different matter. In this context, the inclusion of measures that required approval by an increasingly active National Assembly (revised bankruptcy procedures, law on accounting) was also a potential source of uncertainty in terms of both timing and final content of reform measures.34 4. Road Not Taken: Alternative Perspective on SCPL Design35 The SCPL case raises a more fundamental issue with respect to the design of a reform program. Program design involves reducing the complexity of policy issues by drawing boundaries—explicitly or implicitly—with respect to the scope and focus of reforms. This shapes the subsequent institutional and political dimensions of the policy reform process, including implementation requirements. In the case of the SCPL initial discussions about broad issues of private sector development and SOE reform could have led to different program designs. The particular SCPL design that emerged focused primarily on a relatively small number of the larger state enterprises. Most Vietnamese SOEs are too small for corporatization as joint-stock SECTION III EXPLAINING THE ODDS: POLICY REFORM PROCESS, SOE REFORM, AND CORPORATE GOVERNANCE PROGRAM LOAN 33 See the policy matrix in Appendix 2 of ADB (1999a). 34 Based on interviews with senior government officials, ADB consultants, and staff. 35 Based on interviews with ADB consultants and staff, and senior government officials. See also the PPTA report (ADB et al. 1998). 26 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI companies, and were therefore outside the scope of the SCPL—although the program did contain some references to divesting small SOEs. However, initial discussions and explorations about a potential ADB program started along different lines in the context of the PPTA. This was more along the broad lines of an “enterprise development program” that provided potentially wider scope, and could have led to a substantially different type of program design, but one still consistent with the key objectives of private enterprise development and accelerating SOE reform.36 It is important to stress that the relevance of the SCPL design that emerged is not in question. The SCPL policy matrix focusing on corporatization was recognized as an important contribution to Viet Nam’s SOE reform process. The intent here is to illustrate using the SCPL case, that the design of a reform program involves identifying and reducing design options with respect to the definition of the policy issue and corresponding reform measures. Different program designs, in turn, could have considerably different political and institutional implications for the policy reform process. For example, an alternative program design could have focused primarily on removing impediments to domestic private sector development arising from the large number of mostly small SOEs present in a wide range of product markets. By extension, focusing on smaller SOEs could have had at its core, policy and institutional measures aimed at strengthening the capacity of the government to divest such small SOEs, and related measures to facilitate the development of private enterprise. An alternative design of this type would have had different implications for the political and institutional dimension of the Program, and for the implementation and sustainability of associated reform. The history of ambitious reform programs aimed at larger SOEs had not been encouraging to date at the time of the SCPL, as reflected, for example, in the World Bank’s experience in Viet Nam. Generally, larger SOEs were relatively more powerful, often with limited incentive to cooperate with directives from central agencies. Furthermore, the impact of changes in the much smaller number of larger SOEs were likely to be more limited in terms of their employment and income generation, and in facilitating the development of domestic businesses. Therefore a program design that focused on small SOEs perhaps could have been politically and institutionally less complicated, and therefore more quickly implemented in terms of bringing about change at the enterprise and industry level, with potentially wider impact on business development.37 36 In fact the particular design of the SCPL is one of a large potential set of design options consistent with the much broader range of enterprise development issues addressed in the PPTA, then reflected in the final design of the SCPL. Most of the reforms proposed in the final technical assistance report were subsequently implemented and are seen by some as having had a greater impact on business development and poverty reduction than the particular reforms included in the SCPL. This raises the basic issue as to the reason for the particular design of the SCPL, or why this set of reforms. Was it partly due to preconceived notions by ADB (and generally by the IFIs) about SOEs? The result of rigorous analysis of the specific context in Viet Nam? Or perhaps it suited the purposes of the government to use external “agents“ for introducing politically more sensitive reforms? (From R. Mallon, private communication.) 37 Based on interviews with ADB staff and consultants and senior government officials. 27ERD WORKING PAPER SERIES NO. 70 C. Endorsing Reforms: Approval of SCPL Reform Measures38 In principle, policy reforms are endorsed through a process of political decision making within a country’s existing institutional framework. This has both formal and informal dimensions. The output of the policy decision process is deemed, at some point, to be decisions endorsing (if approved) a program, that is taken to signal the commitment of the government to undertake the approved reform measures. This is expected to lead to instructions to implementing agencies, directly or mediated through different levels of government, on the priority of the reform measures, and to the allocation of the necessary resources, such as through the budgetary process, for implementing such reform initiatives. As discussed earlier, endorsement of policy reforms in Viet Nam is a multi-level and multiplayer process. It involves the Communist Party (formally through various Party Congresses), the National Assembly (with the mandate to oversee all government activities), the central government (expressed through Prime Ministerial directives introducing reforms), and lower levels of government (provinces, districts, communes). Informally, given the consensus-based decision process, implementing agencies and key enterprises generally also need to “buy into” proposed reforms— indicating their de facto endorsement of proposed measures for implementation. All these levels were relevant to the endorsement of the SCPL reform measures. In general, signing of the SCPL by the government (SBV on behalf of the government) signals its official endorsement of the set of reform measures in the policy matrix. However, on closer scrutiny, as a practical matter, the reform measures in the SCPL fall into three categories from the perspective of effective endorsement or approval. To the extent that policy measures are consistent with the existing domestic reform program and are within the powers of the central government to approve, agreement by the government to the SCPL can be seen as constituting endorsement in the sense of a commitment to implement, e.g., Prime Minister issuing Decision 36/2003 to allow foreign investment in equitized SOEs (first tranche condition). In this context, as noted, the concept of corporatization as reflected in the SCPL required prior approval at the Party level, involving significant time, effort, and discussion within the political system, given the complexities and sensitivities involved, before the government could endorse it in the SCPL. The second type of reform measure requires endorsement or formal approval ultimately through the political decision system, in particular, involving the National Assembly. Here the government can “endorse” in the sense of agreeing to submit such measures, but cannot in practical terms approve these measures nor guarantee their ultimate form. The power to approve—and modify— the actual reform measures rests with the National Assembly after the People’s Supreme Court submits the revised Bankruptcy Law to the National Assembly (second tranche condition). It should be noted that even the National Assembly’s endorsement of a measure such as the revised Bankruptcy Law cannot—or should not—be interpreted as necessarily leading to effective implementation, as discussed earlier in the context of experience with the original Bankruptcy Law.39 SECTION III EXPLAINING THE ODDS: POLICY REFORM PROCESS, SOE REFORM, AND CORPORATE GOVERNANCE PROGRAM LOAN 38 For a further discussion in the context of Thailand, see Abonyi (2005a); in the context of Indonesia, Abonyi (2005b). 39 As noted earlier, the original Bankruptcy Law was the outcome of World Bank conditionality requirements; subsequent support was provided by a number of donors, including UNDP and GTZ. 28 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI The third type of reform measure is one that can be endorsed by the government, but such endorsement—even with the best of intentions—cannot guarantee that the reform will indeed be implemented as planned in the level of particular agencies and enterprises (or even by different levels of government). For example, the government could issue a policy directive aimed at corporatizing 60% of SOEs by 2005 (first tranche condition). However, this type of endorsement cannot—or at least should not—be taken to mean that implementation will then necessarily follow, given the gap between government intentions and enterprise behavior in SOE reform. The effective implementation of this reform measure requires de facto agreement by the individual enterprises and the agencies controlling them (ministries, provinces, districts). The above discussion suggests that even if policy reforms are formally endorsed by the government, as in the signing of the SCPL, it may not be certain that all the reform measures will have the necessary approvals—formal or informal—at other points in the policy decision system. Furthermore, as the examples suggest, endorsement and implementation of reforms are closely intertwined. In practice, it may be difficult to identify in the policy decision process a “stopping point” that results in a binding or irreversible commitment to reform in the policy decision system. In some cases only when reforms are actually implemented, e.g., SOEs are corporatized not only in terms of legal status but also in terms of their operational performance, can it be concluded that they have (or had) the necessary endorsements in key points in the policy decision process. The implication is that the “endorsement of reforms” is an on-going activity throughout the policy reform process extending beyond implementation given the possibility of the reversal of reform measures such as restoration of subsidies. D. Implementation 1. Implementing Measures in the Policy Matrix In general, ADB’s internal review (Program Completion Report, or PCR) concluded that almost all of the specific reform measures of the SCPL were implemented satisfactorily, including the 15 first-tranche conditions, and 12 of the 13 second-tranche release conditions (ADB 2004a). Given the progress in the implementation of the measures in the SCPL, the program was closed one year earlier than planned, on 31 December 2002. A number of important contributions were made to Viet Nam’s reform process through the implementation of the reform measures in the SCPL. The adoption of the Enterprise Law (in 2000) was a fundamental reform that improved significantly the institutional environment for private business, for example by greatly reducing the cost and time needed to register new businesses. It also provided the necessary legal framework for transforming SOEs into shareholding/joint-stock and limited liability companies, allowing the implementation of key corporatization measures.40 The SCPL also supported the establishment of the National Steering Committee for Enterprise Reform 40 It should be noted that the approval of the Enterprise Law involved first and foremost a domestic process of consensus building, as discussed earlier. In terms of external support, in addition to the SCPL, it had varying levels of input/ support from UNDP, GTZ, Japan’s Miyazawa Initiative, and USAID. 29ERD WORKING PAPER SERIES NO. 70 and Development (NSCERD) to oversee the formulation and implementation of the SOE reform strategy. The introduction of the concept of corporate governance through the drafting of model corporate charters by selected enterprises was a further important contribution by the SCPL; as was the strengthening of accounting and auditing standards for all enterprises through the preparation of the Accounting Law. There was one measure that the government was not able to implement: elimination of the minimum wage differential between domestic and foreign-invested enterprises. As the PCR noted, there were ambiguities in the design of this measure, principally whether the gap should be eliminated by raising the lower minimum wage of domestic enterprises or by lowering it for foreign enterprises. Furthermore, this turned out to be a politically more sensitive and difficult measure than anticipated, since increasing the minimum wage—the measure favored by the government— in SOEs as well as private businesses had potentially significant budgetary implications. ADB eventually waived this condition, after it was satisfied that the planned reform measure of the government of gradually increasing the minimum wage was relevant and appropriate. A second measure not yet implemented at the time of the closing of the SCPL related to the requirement for the Ministry of Labour, Invalids, and Social Affairs (MOLISA) to submit a Social Securities Act for approval to the National Assembly. This related to a critical issue in SOE reform, that of putting in place an effective social policy to address the impact on workers of enterprise equitization and divestment. The social impacts of SOE reform was an important source of concern to SOE labor unions and of resistance to reform, and will be touched on again later. In terms of the SCPL, MOLISA planned to submit the Social Securities Law to the National Assembly for approval in 2005. The delay associated with the Social Securities Act is an example of a wider issue: where reform measures in the SCPL involved new or amended legislation requiring approval by the National Assembly, often significant delays were involved. For example, while the SCPL closed in December 2002, in addition to the delay in the approval of Social Securities Act, the Law on Accounting was approved in June 2003 and came into effect on 1 January 2004; implementation of land-use rights measures under the Land Law became effective in July 2004; the revised Law on Business Bankruptcy was approved on 15 June 2004 and came into effect on 15 October 2004; and the law related to the collection of uncontested debt was approved in 2004 and came into effect in January 2005. Therefore although the reform measures in the policy matrix related to such legislations were implemented on time in terms of the government submitting proposed legislation, the actual approval of the legislation often took considerable time, and involved extensive consultations, modifications, and political debate. 2. “Nominal Reform” vs. “Implanting Change” In general, significant steps were taken under the SCPL to support SOE reform. However, viewing policy reform as an extended and complex process of implanting change gives a more cautious perspective on the effective implementation of measures under the Program. On closer inspection, many of the measures in the SCPL involve issuing directives, drafting laws, decrees, and regulations. SECTION III EXPLAINING THE ODDS: POLICY REFORM PROCESS, SOE REFORM, AND CORPORATE GOVERNANCE PROGRAM LOAN 30 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI However, the fundamental challenge in policy reform is often more the implementation and enforcement of such measures, which generally involve a long-term process of institutional change.41 For example, as noted, issuing a Prime Ministerial Decision (No. 833/CP-QHQT) that targets corporatizing 60% of SOEs by 2005 implements issuance by the government of a policy directive, the reform measure written in the policy matrix. However, this is not the same as changing the fundamental behavior and operational performance of a large number of often powerful enterprises—a task that is likely to (and did) prove to be more challenging over an extended time horizon. The limited participation of implementing agencies (SOEs) and related institutions in the design of the SCPL was likely to provide a further constraint, given the need for SOEs and agencies that control them to “buy into” the reform process for effective implementation. The resistance by SOEs to be included in the audit list in preparation for corporatization, a key activity under an SCPL TA, for fear of this leading to privatization is an illustration of the challenges of implementation at the enterprise level.42 In this context, the establishment of the NSCERD provides a further example of such challenges. Although this institution was nominally established to oversee the SOE reform process as required under the SCPL, its actual capabilities and power to ensure and monitor compliance at the enterprise level were limited.43 E. Sustaining Reforms Reforms implemented under the SCPL have initiated and/or effected important changes in the SOE sector and related private sector development. In general, these involve strengthening the formal legal, policy, and institutional foundations of enterprise development. In order to sustain reforms a key challenge is operationalizing and enforcing the enacted decrees, legislation, and regulations so that they lead to changes in incentives, behavior, and performance at the enterprise level. Given the track record of implanting changes at the level of individual SOEs prior to the SCPL, this requires strong political support—which in turn requires an on-going national consensus on the reform strategy and its key measures—continuing attention to implementation, institutional capacity to implement, and “buy-in” of individual enterprises into the reform process. Sustaining reforms implemented under the SCPL requires follow-up at a number of levels. It requires implementation at the enterprise level of planned reform measures such as equitization and corporatization. Follow-up supporting activities at the enterprise level to reform measures such as equitization may also be needed to ensure effective transformation of enterprises. More generally, broader constraints in the Vietnamese economy that condition enterprise development also need to be addressed, and more fundamentally, sustainability of reforms may even require 41 See Abonyi (2002) for a discussion of policy reform as an extended and complex process of change. 42 The supporting TA 3354-VIE: State-Owned Enterprise (SOE) Diagnostic Audit involved, in part, putting together a list of SOEs for audit, in preparation for corporatization. However, enterprises had limited understanding of the concept of corporatization, and resisted being put in the list fearing that it would lead to privatization (based on interviews with senior government officials, ADB staff, and consultants). 43 Although supported by many donors, in fact NSCERD not only lacked institutional capacity, but also clout in the system: it did not have the “carrots and sticks“ to exercise control or ensure compliance. Therefore its role in the “institutional map“ related to SOE reform was unclear and its effectiveness uncertain (from R. Mallon, private communication). See more on this from ADB’s Program Completion Report (2004). 31ERD WORKING PAPER SERIES NO. 70 a reconsideration of the basic approach to reform. These challenges for sustainability will be discussed in turn. Examples of the achievements and difficulties of implementing planned reforms since the completion of the SCPL illustrate both Viet Nam’s basic commitment to reform, and the challenges of transition from reforms as changes in rules, to inducing and sustaining real changes in incentives and behavior at the enterprise level.44 In 2001 the government adopted a five-year plan for SOE reform. The target for the first three years was to subject around 1,800 out of around 5,600 SOEs to reform measures, mostly in the form of equitization. These enterprises accounted for around 30% of SOE employment, approximately 11% of state capital, and around 10% of total SOE debt. However, by the end of 2003 reforms were implemented in only around 50% of the targeted enterprises. A series of measures were then announced in 2003, an important transition year of the 5-year economic plan (2001–2005) aimed at accelerating SOE reform. The Plan targeted over 2,000 SOEs, which were subjected to specific reform measures, accounted for around 24% of SOE employment, and 3% of SOE bank debt. However, the government was able to implement only around 60% of the planned enterprise-level reforms after a year. As an example of the government’s continuing commitment, at a meeting on accelerating SOE reform in March 2004, Prime Minister Phan Van Khai underlined the need to speed up equitization, warning of possible collapse of SOEs after commercialization, i.e., removing subsidies and protection. At the same meeting Deputy Prime Minister Nguyen Tan Dung placed SOE reforms in a broader context, emphasizing their importance to the successful implementation of Viet Nam’s 5-Year (2001–2005) and 10-Year (2001–2010) Development Plans. However, the challenges to implementation were clear, given results at the enterprise level to date, and that the targeted SOEs included powerful enterprises in key sectors such as power, engineering, chemicals, and banking (see Vietnam Economic News, various years). Putting the above in context, SOE reform has had notable successes. Equitization and divestiture has reduced the number of SOEs from almost 6,000 in 1997 to around 4,000 by mid-2004. However, these reforms have involved, for the most part, smaller SOEs averaging around 215 workers at the time of their transformation, as compared with 421 workers in the average SOE. Total capital of these small SOEs accounts for around 10% of the total capital stock of SOEs in 2004 (Joint Donor Report to the Vietnam Consultative Group Meeting 2004). Therefore the planned reforms of the large SOEs, once implemented, could accelerate significantly the overall SOE reform process. At the same time, reforms have led to significant improvements in SOE performance. For example, recent enterprise-level data shows that SOEs in the manufacturing sector have expanded their output at an average of 12% per year, with minimal overstaffing in key sectors such as garments, textiles, and food processing (Joint Donor Report to the Vietnam Consultative Group Meeting 2004). Relatively strong SOE performance can be attributed to a large extent to the success of the commercialization and corporatization measures that resulted in the hardening of the budget constraint and forced increased competition in product markets. More broadly, within the context of Viet Nam’s transition, SOE reform through equitization and divestiture should be seen not as the end point, but as initial steps in the transformation to a competitive enterprise (see ADB 2004b). Sustaining reforms in terms of creating vibrant and SECTION III EXPLAINING THE ODDS: POLICY REFORM PROCESS, SOE REFORM, AND CORPORATE GOVERNANCE PROGRAM LOAN 44 For a detailed discussion of achievements and constraints in SOE reform since the completion of the SCPL, see ADB (2004b). 32 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI competitive enterprises from previously state-nurtured SOEs will require efforts and organizational change and business development, particularly in the case of the larger SOEs. Within this context, it should be noted in passing that an emphasis in reform on SOE workers becoming shareholders in enterprises that could prove uncompetitive may entail certain risks. An important issue, touched on in the SCPL that requires further attention for reform sustainability, relates to the impact of SOE reform on workers, critical stakeholders in the reform process. The SCPL recognizes the problem of labor mobility, and focuses on the issue of making the social insurance system more flexible. However, as the delay of the implementation of the relevant measures in the SCPL (the Social Securities Law) noted earlier indicates, this is a complex and sensitive matter. Labor mobility is part of a larger and deeper problem with important political and social implications: the significant social impacts of reform measures such as equitization and divestiture. The majority of SOEs are small and labor-intensive, involving limited technology and requiring low skill levels. It is estimated that approximately 1.6 million people work in this sector, most of whom are unskilled women with low levels of education.45 SOE reform for these workers can mean retrenchment or the loss of a range of critical social subsidies and health care benefits. As a consequence, trade unions have played an important role in drawing attention to the social costs of equitization, providing strong political opposition to the SOE reform process in its present form. Their concern is with what they see as an absence of an effective social policy to address the impact of measures related to the delayed measure in the SCPL such as equitization, government’s failure to implement effectively the Labour Code, requirement for new types of skills, and difficulties of workers transferring pension rights from the state to the private sector. Furthermore, surveys indicate that a majority of workers in equitized enterprises do not understand the conditions of their new employment. This reflects a basic need for more effective public education of the implications of reform, including the behavioral changes needed for adjusting to a market-based economy. Therefore the sustainability of SOE reform requires addressing effectively the social impacts of key measures. SOE reform is also a function of the wider reform process. From this perspective, Viet Nam is a success story—but with significant remaining challenges. Despite considerable policy, legal, and institutional changes in two decades of reform, important constraints still remain on enterprise development in Viet Nam. Some of these, touched on earlier, include weak enforcement of contracts and lack of transparency and cumbersome administrative procedures, reflected for example in a still contradictory tangle of requirements for entrepreneurs. To address remaining challenges— to sustain and accelerate reforms—there is need for changes in the historical approach to policy reform. This view asserts that further development of the Vietnamese economy is likely to require substantial reforms aimed at creating more effective institutions necessary to support markets and the increasing role of the private sector in the economy. The implication is that the “step-by-step”, experimental approach to institutional reform may not be as effective in the future as in the past— that it would unduly constrain further private sector development by creating uncertainty and discouraging large, longer-term private investment. This perspective holds that it is necessary to focus on the implementation and enforcement of existing rules to create a stable business environment, rather than creating yet more laws and regulations.46 45 See Evans (2004), an important source for discussion of this general issue. 46 For a detailed development of this perspective see Doan Hoang Quang (2004). 33ERD WORKING PAPER SERIES NO. 70 In sum, sustainability of reforms initiated under the SCPL is fundamentally a function of continuing strong political support—which in turn requires building and maintaining an on-going national consensus on the reform strategy and its key measures—and the institutional capacity to implement change. These core political economy factors that shape the on-going policy reform process are the focus of the next section. IV. BUMPS ON THE ROAD TO REFORM: POLITICS AND INSTITUTIONS Political acceptability and institutional feasibility play a central role in shaping reforms throughout the policy process. It is this role of politics and institutions that transforms the reform process from an exercise in technical problem solving, or “optimal policy design”, into a process of long-term societal change shaped by political economy factors. Many of the key political and institutional issues related to SOE reform in Viet Nam have already been noted at various points in the paper. Therefore this section is more a synthesis of earlier discussions, highlighting briefly key issues related to the role of politics and institutions in SOE reform. These factors are also sources of uncertainty and risk in “government commitment”, the assumed guarantor of reform in policybased lending, and the focus of the last part of this section. A. The Politics of Policy Reform Policy reforms are inherently political in nature, entailing a process of collective choice (see also Abonyi 2005a, 2005b, and 2002). That is, reforms are “political” in that they involve: (i) multiple interests or stakeholders, (ii) with differing perceptions, (iii) conflicting preferences, (iv) diffusion of power to influence outcomes, and (v) no easy way to align diverse and conflicting preferences.47 Therefore policy reform as politics requires some process of mutual adjustment among different stakeholders involving negotiation, bargaining, and consensus building that shapes and can modify or even block reforms at any point in the policy reform process. Selected issues related to the SCPL provide illustrations of ways in which politics can relate to the policy reform process. 1. Policy Reform as Consensus Building SOE reform touches the very core of Viet Nam’s transition to a market-based economy. In managing this transition there is a continuing commitment to retain a key role for the state in the economy, and therefore for SOEs in economic development—but there have been sharp differences and debate among key stakeholders over what that role should be. Therefore SOE reform involves fundamentally political decisions: a problem in collective choice. From this perspective, as discussed, Viet Nam is a politically complex society: a multi-level, “multi-player” environment for SOE reform, where key decisions are made on the basis of national consensus. The politics of reform involves as “players” not only “the government” or the central agencies, but also the Communist Party; National Assembly; different levels of government (provinces, districts, communes) SECTION IV BUMPS ON THE ROAD TO REFORM: POLITICS AND INSTITUTIONS 47 For a discussion of this issue, see Abonyi (1986). 34 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI and ministries that control particular SOEs; as well as SOE management and labor (trade unions). In addition, some of these players may themselves include differing perspectives that need to be reconciled, for example, as noted, different positions in the Party on the role of the state in the economy, and therefore on SOE reform. Within the policy decision process these players, singly or in combination, may be able to delay, block, or even reverse enterprise-level reforms. Therefore it is necessary to build and maintain consensus for change at various levels in shaping the endorsement, implementation, and sustainability of reforms; where consensus has the game-theoretic meaning of ensuring either a preference for or indifference to such reforms by all players (and coalitions of players) with the power to block proposed reforms.48 This takes time and resources, and the outcome of the process in terms of both the design and the implementation of particular reform measures may be uncertain. In sum, SOE reform in Viet Nam is fundamentally an extended exercise in political consensus building. 2. Political “Ownership” of Reform The concept of “ownership” of policy reforms is fundamentally a political concept.49 It means that a coalition of stakeholders supports a set of reforms (e.g., prefers them to the status quo); and has sufficient power within the context of the existing institutional framework to ensure that these reforms are placed on the policy agenda, endorsed, implemented, and sustained. It is important to stress that having preference for a set of reforms is necessary but not sufficient; it also requires the power to ensure that these reforms work their way through the policy process. Given the multiplayer, consensus-based environment of reform in Viet Nam, the concept of “ownership” of reforms is complex and potentially uncertain. It requires that all key players with the interest and power to influence policy reform decisions and their implementation “buy into” the reform process. In this context, ownership of reforms by government represented by a central agency such as the State Bank of Viet Nam or even by Prime Ministerial decrees is necessary, but far from sufficient. Ownership of reform in this context requires a collective ownership of reforms by all relevant political players. 3. Role of Bureaucratic Politics Although implicit in the above discussion, the role of bureaucratic politics requires added emphasis. The SCPL reflects a bias toward “high level” political decisions on reform in the form of specified government decrees and approvals by the National Assembly. However, an equally important factor in SOE reform relates to the role of “lower level” bureaucratic politics associated with the preferences, behaviors, and relative influence of both individual state enterprises— particularly the larger SOEs—and the institutions that control them (ministries, provincial and local governments). As noted, these agencies through their actions can modify or even block the implementation of “high level” policy decisions. Therefore effective reform requires ensuring in practical terms their support for particular measures at the enterprise level, or creating conditions under which they cannot exercise a de facto veto over planned change. In the case of the SCPL, 48 This formulation of “ownership of reforms” involves a game theoretic perspective. See for example, Howard (2004). 49 See Abonyi (2005b) on this issue in the context of Indonesia. 41ERD WORKING PAPER SERIES NO. 70 C. Institutional Feasibility 1. Assessing Institutional Feasibility of Proposed Reforms As the SCPL case illustrates, policy reforms are generally “institution intensive”, requiring institutions/organizations that have both the capability and the incentive to implement such reforms. Therefore a key challenge in designing feasible reforms is to assess the institutional requirements for implementation, and to ensure that the necessary organizational capabilities are in place, in time (see Abonyi 2002 on this issue). Unless there is an appreciation of the institutional feasibility of planned reforms at the design stage, there is a high risk that reforms may not be feasible, and/ or that an organizationally overambitious reform program may result. If institutional analysis reveals significant gaps between existing and required capacity, then either the program design needs to be adjusted, or the capacity of implementing agencies needs to be strengthened. In the case of SOE reforms and the SCPL, examples of institutional constraints relate to the capabilities and intentions of individual enterprises to implement planned reforms such as equitization, and to make the transition to market-driven organizations; and the capabilities of NSCERD to manage the implementation of the SOE reforms at the enterprise level. Therefore policy reform is fundamentally about ensuring that the requisite institutional capacity is in place in time, which in turn, may require considerable time and resources, particularly if it involves significant changes to existing organizations and/or the creation of new institutions. 2. Participation of Key Central and Implementing Agencies in Program Design Reform is ultimately about implementation. In this context, it is essential to ensure that key central agencies with the power to influence outcomes are part of the design process. Furthermore, the institutional feasibility of program design can be significantly strengthened through participation of key implementing agencies that must ultimately undertake the proposed actions. In the case of the SCPL, the primary participants in the program design process involved SBV and the ADB team. Powerful central agencies—the Ministry of Finance, Ministry of Planning and Investment; line ministries that controlled particular SOEs; as well as key enterprises responsible for implementing specific reforms, although consulted, were generally not core participants in the program design process. As a consequence, the likelihood of effective and timely implementation of core reforms particularly corporatization targets at the enterprise level was uncertain. There was clear evidence of resistance to change based in part on insufficient understanding of planned reforms or reluctance to participate in pre-corporatization audits. Considerable time and resources, to a large extent not sufficiently anticipated at the program design stage, were needed to enlist the necessary cooperation of individual enterprises and related agencies to obtain necessary enterprise-level information and undertake required enterprise-level change. The implication is that it is important to involve organizations with key roles in the implementation of policy reforms early in the design process to ensure that the planned reforms are feasible and that the implementing organizations understand and do not block such reforms. SECTION V CONCLUSION: IMPROVING THE ODDS 42 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI EPILOGUE “RETHINKING CONDITIONALITY”: AN ALTERNATIVE PERSPECTIVE The effectiveness of policy-based lending has been the subject of on-going debate since its origins in the early 1980s.58 The discussion has often focused on the nature and role of conditionalities that set out the policy measures that must be implemented by a country borrowing from IFIs to support policy reform. As a consequence, the approach to policy-based lending and associated conditionalities has evolved over time. For example, there is an extensive review of conditionality under way by the World Bank (World Bank 2005); and the British government’s Department for International Development (DFID) recently issued a fundamentally revised approach to conditionality and policy based lending (DFID 2005). The purpose of this concluding section is to suggest the implications of this and related case studies (Abonyi 2005a and 2005b) for the ongoing debate. In this, it ventures beyond the confines of the particular case study to make more general observations. At the risk of caricaturing the very rich discussion on policy-based lending and conditionalities, some of the emerging lessons are as follows: (i) Policy reform, and therefore policy-based lending is a difficult and uncertain undertaking for both governments and supporting IFIs (ii) In this, policy reform is fundamentally a domestic process of change. (iii) Country ownership is critical to the success of reforms. (iv) Emphasis is increasingly on customizing reforms to the local country contexts as distinct from a uniform focus on generic “best practice” as the basis for policy reform in very different settings. The conclusion increasingly drawn from these lessons (Dollar and Svensson 1998, World Bank 2003, DFID 2005) is that policy-based lending should focus on outcomes and/or completed prior actions, not on reform-related intentions or promises of future action. The implication is that countries with good policies should receive support; those that have not demonstrated good policies should not. The results of this and related case studies are consistent with the above lessons; however the implications for policy-based lending are seen somewhat differently. The stated assumption in focusing policy-based lending on countries that have demonstrated good policies is that “donors cannot ‘buy’ or induce reforms”: countries have to own reforms, which is demonstrated either through the selection of “good policies” (World Bank 2003) or by achieving “good outcomes” (DFID 2005). Therefore according to this perspective, policy-based lending will/should be given if and only if the recipient country is already implementing donor-approved reforms. The implication is that countries that do not already have key domestic factors and a certain level of capabilities in place for formulating and implementing effective policy reform will not be helped by policy-based lending. That is, such lending and associated technical assistance can play little useful role in bringing 58 Examples in the literature include Jayarajah and Branson (1995); Schadler et al. (1995); Dollar and Svensson (1998); ADB (1999 and 2000); World Bank (2003, 2004, 2005); and DFID (2005). See Abonyi (2002) for additional references and discussion of this issue. 43ERD WORKING PAPER SERIES NO. 70 about the transition to “good” from “bad” or problematic policies: it cannot induce change, only help in maintaining what are good (donor-approved) policies already in place. This and related cases suggest a different perspective. It is not at all clear that there is an agreed upon standard for “good policies and institutions” in a variety of settings and circumstances, even if tailored or redesigned for local contexts. As experience of a diversity of developed economies shows, there is no one-to-one correspondence between a well-functioning market economy and a corresponding set of policies and institutions such as labor markets and state/public enterprises. Although there is a growing stock of knowledge about characteristics of well-functioning economies, and “international best practice” in selected policy areas, there is significant uncertainty and room for choice in the relationship between economies, policies, and institutions in particular settings (see for example Rodrik 2004, Nelson et al. 1997). For example, there were fundamental differences in perspective between the IFIs and the Government of Viet Nam about how to proceed with SOE reform within the particular context of Viet Nam. As the reform process evolved, the IFIs adjusted their perspective and approach, as did the government through acceptance and implementation of “corporatization” as part of the SOE reform process. In this context, the perspective reflected in the case studies is that policy-based lending can indeed be more useful in supporting policy reform—even in countries that are not yet implementing “good policies” or that as yet have not achieved “good outcomes”—if it were approached differently. That is, policy-based lending can be more effective in contributing to a process of inducing policy change if the design and implementation of such programs better reflected the role of politics and institutions that condition the policy reform process. Therefore the focus of this and related cases is on how to better understand and accommodate political economy factors in the program design process in order to support policy reform more effectively. This is the thrust of the earlier section on “lessons learned.” In sum, launching reform is a bit like a “local earthquake”: it upsets not only the existing policy mix, but sets in motion over an extended time horizon, often unpredictable and unanticipated changes in structures, systems, processes, incentives, expectations, behaviors, relationships, power alignments, and institutions. This is further complicated in times of crisis. Therefore policy reform requires a high tolerance for uncertainty and risk by both governments and donors. In this context, programs cannot be designed up front with any certainty, however extensive the preparations. Good applied research is essential, including effective use of local knowledge to provide an appreciation of the realities of the reform environment. However, policy reform and associated programs are ultimately more in the nature of an unfolding experiment, where expected outcomes or conditionalities are best seen as “working hypotheses.” In this context, the implication of the cases is that a better appreciation of the role of political economy factors in particular settings can perhaps help improve the odds for reform. EPILOGUE “RETHINKING CONDITIONALITY”: AN ALTERNATIVE PERSPECTIVE 44 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI APPENDIX POLICY MATRIX (VIE: STATE-OWNED ENTERPRISE AND CORPORATE GOVERNANCE PROGRAM) FOCUS OF REFORM POLICY ACTIONS TO BE TAKEN POLICY ACTIONS TO BE TAKEN PRIOR TO FIRST TRANCHE RELEASE A. Facilitate Foreign Direct Investment 1. Create a More Conducive Ministry of Planning and Investment (MPI) MPI to implement a transparent Environment for FDI and to establish a “one stop shop” for foreign system of approvals for foreign Improve Incentives investment approval and licensing at the investment projects that require no for Efficient Investment national level.* investment privileges, meet domestic regulations (for example, zoning, environmental, and safely regulations) and are not in areas explicitly prohibited for foreign investment.** MPI to extend the “one stop shop: to all MPI to remove restrictions on foreign 61 provinces.* and domestic investors’ purchase of additional shares in joint ventures.** Government to issue a decision allowing MPI to submit a draft legal foreign investment in equalized state-owned instrument to the Prime Minister enterprise.* to eliminate the minimum wage differential between domestic and foreign invested enterprises.** MPI and Ministry of Labor, Invalids, and Social Affairs (MOLISA) to allow foreign invested enterprises to denominate labor contracts in Vietnamese dong.* B. Private Sector Development 1. Facilitate Private Enterprise Access to Credit Market a. Summary Judgment People’s Supreme Court in Procedure cooperation with Ministry of Justice to submit the draft Civil Procedure Code, including the procedure to obtain summary judgment for collection of uncontested debt, to National Assembly for public consultation.** b. Bankruptcy People’s Supreme Court to establish a drafting The People’s Supreme Court to committee to amend the Bankruptcy Law.* submit the revised Bankruptcy Law, consistent with the legal framework of Viet Nam and satisfactory for the Asian Development Bank and National Assembly.** 45ERD WORKING PAPER SERIES NO. 70 The purposes of the amendment will be, among other things, to provide procedure leading to bankruptcy, where undisputed debts are unpaid for a specific number of days and restructuring is not approved by the majority of creditors; remove the requirement for support by unsecured creditors representing two thirds of the total unsecured debt for bankruptcy proceeding to continue; make explicit the ability of secured creditors to stand outside a reorganization or bankruptcy and enforce the security rights; and streamline administration of bankruptcy by allowing creditors to appoint an expert to carry out dayto-day management of liquidation. Government issues a revised implementing decree within six months of passing the revised Bankruptcy Law. 2. Facilitate Private Government to issue a decree allowing Government to issue a decree to unify Enterprises Access to nonstate enterprises to use land use rights tax treatment of transfer of foreign Foreign Direct Investment as equity contribution in joint ventures.* equity to domestic enterprises regardless of ownership.** C. Industrial SOE Restructuring 1. Improve the Institutional and Policy Framework a. Institutional Framework Government to establish a National Enterprise Reform Committee (NERC), integrating the steering committees on enterprise reform and on equitization. Government to empower the NERC to (i) formulate a national integrated reform strategy and specific measures for the restructuring, corporatization, equitization, and divestiture of SOEs as well as for other reforms; (ii) publicize and mobilize public support for the government’s reform plans and measures; (iii) issue and enforce regulations and instructions to line ministries, state APPENDIX POLICY MATRIX (VIE: STATE-OWNED ENTERPRISE AND CORPORATE GOVERNANCE PROGRAM) FOCUS OF REFORM POLICY ACTIONS TO BE TAKEN POLICY ACTIONS TO BE TAKEN PRIOR TO FIRST TRANCHE RELEASE APPENDIX. CONTINUED. 46 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI corporations, and government departments to implement reform policies, measures, and targets; and (iv) undertake pilot experiments in reform.* b. Policy Framework NERC to formulate and publicize provisional guidelines on procedures and options for transparent modalities and methods for sale of shares and assets of SOEs to the public under equitization and divestiture program.* National Assembly to enact the Enterprise Law.* The Law will contain provisions for (i) regulating domestic enterprises, including limited liability enterprises, joint-stock (shareholding) companies, partnerships, and private enterprises; and (ii) transformation of an SOE to a limited liability or shareholding company. 2. Accelerate Industrial Government to issue a policy direction aiming NERC to draft and publicize SOE Reform to corporatize 60 percent of all medium comprehensive 5-year SOE reform civilianindustrial SOEs by 2005. strategy with indicative quantitative Corporatization refers to the conversion of annual targets of SOEs to be SOEs into corporate entities defined in the corporatized, equitized, and Enterprise Law. All corporatized SOEs to divested. operate according to commercial principles and under the new Enterprise Law.* NERC to classify and publicize annual list of NERC to develop a program to (i) all industrial SOEs in Hanoi and Ho Chi Minh corporatize medium and large City for (i) corporatization, (ii) equitization, industrial SOAs into limited liability or (iii) divestiture, and (iv) majority and joint-stock (shareholding) companies, minority state ownership.* (ii) equitize medium and large industrial SOEs, and (iii) divest small local industrial SOEs with less than D1 billion in capital. State Security Commission to allow trading of NERC to complete the corporatization shares of prequalified equitized enterprises of at least 50 large and medium on a pilot basis.* industrial SOEs (based on the size of fixed assets) into limited liability or joint stock (shareholding) companies.** FOCUS OF REFORM POLICY ACTIONS TO BE TAKEN POLICY ACTIONS TO BE TAKEN PRIOR TO FIRST TRANCHE RELEASE APPENDIX. CONTINUED. 47ERD WORKING PAPER SERIES NO. 70 SSC to allow the formation of securities investment funds for participation in equitization program on a pilot basis.** SSC to establish the Securities Trading Center and put it in operation.** 3. Improve Corporate Governance and Financial Discipline a. Strengthen Accounting and Ministry of Finance (MOF) to establish MOF to submit Accounting Law Auditing Standards National Council on Accounting responsible (incorporating international accounting for advising MOF on the issuing and adopting standards and practices), to National of auditing and accounting standards. MOF to Assembly.** issue a decision for the adopting of accounting, and auditing standards (based on international accounting and auditing standards) for all enterprises by 2003.* b. Improve Corporate NERC to create an interagency working group Government to issue guidelines on Governance on corporatization and corporate governance best practice in corporate applicable for all joint-stock (shareholding) governance.** companies.* Government to issue a decision requiring all joint-stock (shareholding) companies that meet criteria to be determined under the Equitization and Corporate Governance TA to comply with the Guideline on Best Practice in Corporate Governance over an 18month period.** SSC (???meaning???) to require compliance by enterprises with best practice in corporate governance as precondition for listing.** D. Improve Labor Markets and Social Protection System 1. Enhance Labor Mobility Government to issue a decree to allow and Social Protection voluntary insurance coverage by System previously compulsory insured persons. APPENDIX POLICY MATRIX (VIE: STATE-OWNED ENTERPRISE AND CORPORATE GOVERNANCE PROGRAM) FOCUS OF REFORM POLICY ACTIONS TO BE TAKEN POLICY ACTIONS TO BE TAKEN PRIOR TO FIRST TRANCHE RELEASE APPENDIX. CONTINUED. 48 AUGUST 2005 POLICY REFORM IN VIET NAM AND THE ASIAN DEVELOPMENT BANK’S STATE-OWNED ENTERPRISE REFORM AND CORPORATE GOVERNANCE PROGRAM LOAN GEORGE ABONYI The government to grant labor Supervisory Agency legal authority to penalize enterprises for noncompliance with insurance payment for workers.* MOLISA to submit Social Securities Act to the National Assembly. MOF to issue a decision for the adoption of accounting and auditing standards. Note: * First tranche conditions ** Second tranche conditions FOCUS OF REFORM POLICY ACTIONS TO BE TAKEN POLICY ACTIONS TO BE TAKEN PRIOR TO FIRST TRANCHE RELEASE APPENDIX. 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Quibria, October 1989 No. 45 A Review of the Economic Analysis of Power Projects in Asia and Identification of Areas of Improvement —I. Ali, November 1989 No. 46 Growth Perspective and Challenges for Asia: Areas for Policy Review and Research —I. Ali, November 1989 No. 47 An Approach to Estimating the Poverty Alleviation Impact of an Agricultural Project —I. Ali, January 1990 No. 48 Economic Growth Performance of Indonesia, the Philippines, and Thailand: The Human Resource Dimension —E.M. Pernia, January 1990 No. 49 Foreign Exchange and Fiscal Impact of a Project: A Methodological Framework for Estimation —I. Ali, February 1990 No. 50 Public Investment Criteria: Financial and Economic Internal Rates of Return —I. Ali, April 1990 No. 51 Evaluation of Water Supply Projects: An Economic Framework —Arlene M. Tadle, June 1990 No. 52 Interrelationship Between Shadow Prices, Project Investment, and Policy Reforms: An Analytical Framework —I. Ali, November 1990 No. 53 Issues in Assessing the Impact of Project and Sector Adjustment Lending —I. Ali, December 1990 No. 54 Some Aspects of Urbanization and the Environment in Southeast Asia —Ernesto M. Pernia, January 1991 No. 55 Financial Sector and Economic Development: A Survey —Jungsoo Lee, September 1991 No. 56 A Framework for Justifying Bank-Assisted Education Projects in Asia: A Review of the Socioeconomic Analysis and Identification of Areas of Improvement —Etienne Van De Walle, February 1992 No. 57 Medium-term Growth-Stabilization Relationship in Asian Developing Countries and Some Policy Considerations —Yun-Hwan Kim, February 1993 No. 58 Urbanization, Population Distribution, and Economic Development in Asia —Ernesto M. Pernia, February 1993 No. 59 The Need for Fiscal Consolidation in Nepal: The Results of a Simulation —Filippo di Mauro and Ronald Antonio Butiong, July 1993 No. 60 A Computable General Equilibrium Model of Nepal —Timothy Buehrer and Filippo di Mauro, October 1993 No. 61 The Role of Government in Export Expansion in the Republic of Korea: A Revisit —Yun-Hwan Kim, February 1994 No. 62 Rural Reforms, Structural Change, and Agricultural Growth in the People’s Republic of China —Bo Lin, August 1994 No. 63 Incentives and Regulation for Pollution Abatement with an Application to Waste Water Treatment —Sudipto Mundle, U. Shankar, and Shekhar Mehta, October 1995 No. 64 Saving Transitions in Southeast Asia —Frank Harrigan, February 1996 No. 65 Total Factor Productivity Growth in East Asia: A Critical Survey —Jesus Felipe, September 1997 No. 66 Foreign Direct Investment in Pakistan: Policy Issues and Operational Implications —Ashfaque H. Khan and Yun-Hwan Kim, July 1999 No. 67 Fiscal Policy, Income Distribution and Growth —Sailesh K. Jha, November 1999 —Ulrich Hiemenz, March 1982 No. 8 Petrodollar Recycling 1973-1980. Part 1: Regional Adjustments and the World Economy —Burnham Campbell, April 1982 No. 9 Developing Asia: The Importance of Domestic Policies —Economics Office Staff under the direction of Seiji Naya, May 1982 No. 10 Financial Development and Household Savings: Issues in Domestic Resource Mobilization in Asian Developing Countries —Wan-Soon Kim, July 1982 No. 11 Industrial Development: Role of Specialized Financial Institutions —Kedar N. Kohli, August 1982 No. 12 Petrodollar Recycling 1973-1980. Part II: Debt Problems and an Evaluation of Suggested Remedies —Burnham Campbell, September 1982 No. 13 Credit Rationing, Rural Savings, and Financial Policy in Developing Countries —William James, September 1982 No. 14 Small and Medium-Scale Manufacturing Establishments in ASEAN Countries: Perspectives and Policy Issues 58 —Mathias Bruch and Ulrich Hiemenz, March 1983 No. 15 Income Distribution and Economic Growth in Developing Asian Countries —J. Malcolm Dowling and David Soo, March 1983 No. 16 Long-Run Debt-Servicing Capacity of Asian Developing Countries: An Application of Critical Interest Rate Approach —Jungsoo Lee, June 1983 No. 17 External Shocks, Energy Policy, and Macroeconomic Performance of Asian Developing Countries: A Policy Analysis —William James, July 1983 No. 18 The Impact of the Current Exchange Rate System on Trade and Inflation of Selected Developing Member Countries —Pradumna Rana, September 1983 No. 19 Asian Agriculture in Transition: Key Policy Issues —William James, September 1983 No. 20 The Transition to an Industrial Economy in Monsoon Asia —Harry T. Oshima, October 1983 No. 21 The Significance of Off-Farm Employment and Incomes in Post-War East Asian Growth —Harry T. Oshima, January 1984 No. 22 Income Distribution and Poverty in Selected Asian Countries —John Malcolm Dowling, Jr., November 1984 No. 23 ASEAN Economies and ASEAN Economic Cooperation —Narongchai Akrasanee, November 1984 No. 24 Economic Analysis of Power Projects —Nitin Desai, January 1985 No. 25 Exports and Economic Growth in the Asian Region —Pradumna Rana, February 1985 No. 26 Patterns of External Financing of DMCs —E. Go, May 1985 No. 27 Industrial Technology Development the Republic of Korea —S.Y. Lo, July 1985 No. 28 Risk Analysis and Project Selection: A Review of Practical Issues —J.K. Johnson, August 1985 No. 29 Rice in Indonesia: Price Policy and Comparative Advantage —I. Ali, January 1986 No. 30 Effects of Foreign Capital Inflows on Developing Countries of Asia —Jungsoo Lee, Pradumna B. Rana, and Yoshihiro Iwasaki, April 1986 No. 31 Economic Analysis of the Environmental Impacts of Development Projects —John A. Dixon et al., EAPI, East-West Center, August 1986 No. 32 Science and Technology for Development: Role of the Bank —Kedar N. Kohli and Ifzal Ali, November 1986 No. 33 Satellite Remote Sensing in the Asian and Pacific Region —Mohan Sundara Rajan, December 1986 No. 34 Changes in the Export Patterns of Asian and Pacific Developing Countries: An Empirical Overview —Pradumna B. Rana, January 1987 No. 35 Agricultural Price Policy in Nepal —Gerald C. Nelson, March 1987 No. 36 Implications of Falling Primary Commodity Prices for Agricultural Strategy in the Philippines —Ifzal Ali, September 1987 No. 37 Determining Irrigation Charges: A Framework —Prabhakar B. Ghate, October 1987 No. 38 The Role of Fertilizer Subsidies in Agricultural Production: A Review of Select Issues —M.G. Quibria, October 1987 No. 39 Domestic Adjustment to External Shocks in Developing Asia —Jungsoo Lee, October 1987 No. 40 Improving Domestic Resource Mobilization through Financial Development: Indonesia —Philip Erquiaga, November 1987 No. 41 Recent Trends and Issues on Foreign Direct Investment in Asian and Pacific Developing Countries —P.B. Rana, March 1988 No. 42 Manufactured Exports from the Philippines: A Sector Profile and an Agenda for Reform —I. Ali, September 1988 No. 43 A Framework for Evaluating the Economic Benefits of Power Projects —I. Ali, August 1989 No. 44 Promotion of Manufactured Exports in Pakistan —Jungsoo Lee and Yoshihiro Iwasaki, September 1989 No. 45 Education and Labor Markets in Indonesia: A Sector Survey —Ernesto M. Pernia and David N. Wilson, September 1989 No. 46 Industrial Technology Capabilities and Policies in Selected ADCs —Hiroshi Kakazu, June 1990 No. 47 Designing Strategies and Policies for Managing Structural Change in Asia —Ifzal Ali, June 1990 No. 48 The Completion of the Single European Community Market in 1992: A Tentative Assessment of its Impact on Asian Developing Countries —J.P. Verbiest and Min Tang, June 1991 No. 49 Economic Analysis of Investment in Power Systems —Ifzal Ali, June 1991 No. 50 External Finance and the Role of Multilateral Financial Institutions in South Asia: Changing Patterns, Prospects, and Challenges —Jungsoo Lee, November 1991 No. 51 The Gender and Poverty Nexus: Issues and Policies —M.G. Quibria, November 1993 No. 52 The Role of the State in Economic Development: Theory, the East Asian Experience, and the Malaysian Case —Jason Brown, December 1993 No. 53 The Economic Benefits of Potable Water Supply Projects to Households in Developing Countries —Dale Whittington and Venkateswarlu Swarna, January 1994 No. 54 Growth Triangles: Conceptual Issues and Operational Problems —Min Tang and Myo Thant, February 1994 No. 55 The Emerging Global Trading Environment and Developing Asia —Arvind Panagariya, M.G. Quibria, and Narhari Rao, July 1996 No. 56 Aspects of Urban Water and Sanitation in the Context of Rapid Urbanization in Developing Asia —Ernesto M. Pernia and Stella LF. Alabastro, September 1997 No. 57 Challenges for Asia’s Trade and Environment —Douglas H. Brooks, January 1998 No. 58 Economic Analysis of Health Sector ProjectsA Review of Issues, Methods, and Approaches —Ramesh Adhikari, Paul Gertler, and Anneli Lagman, March 1999 No. 59 The Asian Crisis: An Alternate View —Rajiv Kumar and Bibek Debroy, July 1999 No. 60 Social Consequences of the Financial Crisis in Asia —James C. Knowles, Ernesto M. Pernia, and Mary Racelis, November 1999 59 No. 1 Estimates of the Total External Debt of the Developing Member Countries of ADB: 1981-1983 —I.P. David, September 1984 No. 2 Multivariate Statistical and Graphical Classification Techniques Applied to the Problem of Grouping Countries —I.P. David and D.S. Maligalig, March 1985 No. 3 Gross National Product (GNP) Measurement Issues in South Pacific Developing Member Countries of ADB —S.G. Tiwari, September 1985 No. 4 Estimates of Comparable Savings in Selected DMCs —Hananto Sigit, December 1985 No. 5 Keeping Sample Survey Design and Analysis Simple —I.P. David, December 1985 No. 6 External Debt Situation in Asian Developing Countries —I.P. David and Jungsoo Lee, March 1986 No. 7 Study of GNP Measurement Issues in the South Pacific Developing Member Countries. Part I: Existing National Accounts of SPDMCs–Analysis of Methodology and Application of SNA Concepts —P. Hodgkinson, October 1986 No. 8 Study of GNP Measurement Issues in the South Pacific Developing Member Countries. Part II: Factors Affecting Intercountry Comparability of Per Capita GNP —P. Hodgkinson, October 1986 No. 9 Survey of the External Debt Situation STATISTICAL REPORT SERIES (SR) in Asian Developing Countries, 1985 —Jungsoo Lee and I.P. David, April 1987 No. 10 A Survey of the External Debt Situation in Asian Developing Countries, 1986 —Jungsoo Lee and I.P. David, April 1988 No. 11 Changing Pattern of Financial Flows to Asian and Pacific Developing Countries —Jungsoo Lee and I.P. David, March 1989 No. 12 The State of Agricultural Statistics in Southeast Asia —I.P. David, March 1989 No. 13 A Survey of the External Debt Situation in Asian and Pacific Developing Countries: 1987-1988 —Jungsoo Lee and I.P. David, July 1989 No. 14 A Survey of the External Debt Situation in Asian and Pacific Developing Countries: 1988-1989 —Jungsoo Lee, May 1990 No. 15 A Survey of the External Debt Situation in Asian and Pacific Developing Countries: 19891992 —Min Tang, June 1991 No. 16 Recent Trends and Prospects of External Debt Situation and Financial Flows to Asian and Pacific Developing Countries —Min Tang and Aludia Pardo, June 1992 No. 17 Purchasing Power Parity in Asian Developing Countries: A Co-Integration Test —Min Tang and Ronald Q. Butiong, April 1994 No. 18 Capital Flows to Asian and Pacific Developing Countries: Recent Trends and Future Prospects —Min Tang and James Villafuerte, October 1995 No. 1 Poverty in the People’s Republic of China: Recent Developments and Scope for Bank Assistance —K.H. Moinuddin, November 1992 No. 2 The Eastern Islands of Indonesia: An Overview of Development Needs and Potential —Brien K. Parkinson, January 1993 No. 3 Rural Institutional Finance in Bangladesh and Nepal: Review and Agenda for Reforms —A.H.M.N. Chowdhury and Marcelia C. Garcia, November 1993 No. 4 Fiscal Deficits and Current Account Imbalances of the South Pacific Countries: A Case Study of Vanuatu —T.K. Jayaraman, December 1993 No. 5 Reforms in the Transitional Economies of Asia —Pradumna B. Rana, December 1993 No. 6 Environmental Challenges in the People’s Republic of China and Scope for Bank Assistance —Elisabetta Capannelli and Omkar L. Shrestha, December 1993 No. 7 Sustainable Development Environment and Poverty Nexus —K.F. Jalal, December 1993 No. 8 Intermediate Services and Economic Development: The Malaysian Example —Sutanu Behuria and Rahul Khullar, May 1994 No. 9 Interest Rate Deregulation: A Brief Survey of the Policy Issues and the Asian Experience —Carlos J. Glower, July 1994 No. 10 Some Aspects of Land Administration in Indonesia: Implications for Bank Operations —Sutanu Behuria, July 1994 No. 11 Demographic and Socioeconomic Determinants of Contraceptive Use among Urban Women in the Melanesian Countries in the South Pacific: A Case Study of Port Vila Town in Vanuatu —T.K. Jayaraman, February 1995 No. 12 Managing Development through Institution Building — Hilton L. Root, October 1995 No. 13 Growth, Structural Change, and Optimal Poverty Interventions —Shiladitya Chatterjee, November 1995 No. 14 Private Investment and Macroeconomic Environment in the South Pacific Island Countries: A Cross-Country Analysis —T.K. Jayaraman, October 1996 No. 15 The Rural-Urban Transition in Viet Nam: Some Selected Issues —Sudipto Mundle and Brian Van Arkadie, October 1997 No. 16 A New Approach to Setting the Future Transport Agenda —Roger Allport, Geoff Key, and Charles Melhuish, June 1998 No. 17 Adjustment and Distribution: The Indian Experience —Sudipto Mundle and V.B. Tulasidhar, June 1998 No. 18 Tax Reforms in Viet Nam: A Selective Analysis —Sudipto Mundle, December 1998 No. 19 Surges and Volatility of Private Capital Flows to Asian Developing Countries: Implications for Multilateral Development Banks —Pradumna B. Rana, December 1998 No. 20 The Millennium Round and the Asian Economies: An Introduction —Dilip K. Das, October 1999 No. 21 Occupational Segregation and the Gender Earnings Gap —Joseph E. Zveglich, Jr. and Yana van der Meulen Rodgers, December 1999 No. 22 Information Technology: Next Locomotive of Growth? —Dilip K. 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