Repositioning the role of growth drivers of economic sectors

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Reducing the cost of access to production factors and the cost of performing obligations to the State will contribute significantly to the development of the business sector. Photo: H.A.

Challenges for the economy

According to Prof. Dr. Tran Tho Dat, Rector of National Economics University, Vietnam economy in 2017 achieved positive results. Economic growth was 6.81%, higher than the planned 6.7%, the highest increase in 7 years.

The main driver of economy growth in terms of production is the role of the FDI sector in the manufacturing industry and the growth of the service sector. The demand side is driven by stable domestic spending and private investment. Accordingly, improved business environment has facilitated the development of the private sector.

In the past year, the foreign economic sector achieved impressive figures. Imports and exports increased sharply, leading to a trade surplus of $US 2.7 billion. FDI disbursement reached a record $US 17.5 billion. Inflation in 2017 is controlled at a low level and the exchange rate is stable. With the advantages of the world, the dynamics of the FDI sector, the rise of the private sector, the service and manufacturing industries, and increased domestic demand, Vietnam's economy in 2018 could grow at 6.6-6.8% with inflation remaining below 4%.

However, the economy is also facing many shortcomings and challenges. According to Assoc. Prof. Dr. To Trung Thanh, member of the research team, the National Economics University, the quality of growth has not improved, the economy still relies mainly on increasing total investment and credit growth while the quality of resources is still low. The current pattern of growth has diminished the resilience of policy. Currently the monetary and financial system is still dealing with bad debt and capital adequacy.

In addition, an increase in the budget deficit and public debt continues to be the macroeconomic risks of the economy. FDI is now seen as a major growth engine, but its production is largely offshoring and polluting, and the dynamics of this sector contribute to unsustainable growth and economic development of Vietnam. Thus, it is easy to push the economy into the "low income trap".

The National Economics University's specialists also point out that the biggest weakness of the Vietnamese economy today is that it relies mainly on the contribution of the FDI sector, while the sector has been exposed to shortcomings, such as lackof high technology and inefficient technology transfer; production mainly in the manufacturing industry which is causing environmental pollution; and the behavior of transfer pricing.

According to experts, in that context, Vietnam needs to re-position driving forces for growth of all economic sectors. In particular, repositioning plays an important role for the private sector in the country.

Economic expert Vo Tri Thanh also said that the growth in 2017 achieved good results, of which, the processing industry growth of 28% was very good. The result of economic growth partly contributed to exports, especially from the FDI sector. However, the expert said that the contribution of FDI to the growth rate was large, while the private economy was weak.

Essential to remove barriers

Commenting onVietnam’s private sector, experts also said that for this sector to develop, it is faced with and has to overcome many barriers.

Specifically, access to credit is still considered one of the biggest obstacles that makes it difficult for businesses to develop. In addition to the complexity of loan procedures, the problem of insufficient collateral is a major problem for private firms. High interest rates and unofficial costs are also major barriers to limit access to loans, which increases production costs for enterprises, especially private enterprises. In the process of processing applications for loans from credit institutions, there is still discrimination between SMEs and large enterprises, between the type of privately owned enterprises and state owned enterprises.

The cost of labor use in enterprises tends to increase slightly over time. The proportion of costs for social insurance, health care, unemployment and trade union funds tends to increase significantly. The expected impact of increasing the level of social security coverage from total wages and contractual payments to salaries, allowances and other supplements in contracts from 2018 indicates that the cost of labor for companies will increase to 6.8%.

According to the research team, the increase in costs will reduce the profit of enterprises by 11.4%. The rate of profitable enterprises decreased significantly from 63.2% to 40.6%. Low-profit enterprises such as private companies, limited liability companies will suffer the most.

In spite of its relatively adequate quantity, logistics infrastructure is not efficient in terms of quality and connectivity, which makes transportation time and costs increase, becoming a "congestion point" to trade facilitation instead of being one of the pillars to develop, which is a barrier for the development of enterprises.

Transportation costs make up a large proportion of the cost structure of Vietnamese enterprises, leading to ineffective logistics, greatly affecting the efficiency of production enterprises. There is a serious imbalance among modes of transport in which road transport is under heavy pressure in terms of volume with low quality of traffic, frequent congestion and high costs.

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According to experts, in the context that enterprises, especially private enterprises and SMEs face high production costs, increasing access to reduce costs to access factors of production will contribute significantly to the development of the Vietnamese business sector.