Overview of the SOE Reform in Vietnam

The first state-owned enterprises (SOEs) in Vietnam were established by nationalization of privately owned enterprises and development of new SOEs from the 1950s. Given the backward state of its agrarian economy, these SOEs were constructed according to the Soviet model as this model, at that time, was perceived to be the quickest way to develop the economy. Generous investment in the SOE sector during this period brought about impressive economic results. The high rate of growth of industrial production, however, had masked the underlying defects of the SOEs: inefficiency and dependence on foreign aid. In spite of these defects, this model was again applied to the SOEs in the south of Vietnam after the unification of the country in 1975. As a result, despite a large amount of investment and the rapid expansion of the SOE sector, the economy experienced a crisis in the second half of the 1970s.

The threat of economic collapse forced the Vietnamese Government to review the economic strategy it was pursuing. Consequently, different policies were introduced from the early 1980s, which relaxed the rigidity of compulsory state plans. The SOEs were allowed to produce some non-planned products, sell them in the free market and enjoy a share of the realized profits. The changes had a strong impact on the behavior of SOEs towards production efficiency. However, the positive impact was short-lived as reform measures were partial in nature and were carried out within the frame of a centrally planned economy with the ultimate aim of strengthening that mechanism. These partial reform measures contributed to inflation during this period. The failure of the subsequent price, wage, and money reform in September 1985 directly caused hyperinflation with prices increasing by nearly 800 per cent in 1986 alone. The negative macroeconomic impact of this hyperinflation induced the next wave of reform in the second half of the 1980s.