THE BUSINESS INFORMATION CENTER AT THE VIETNAM CHAMBER OF COMMERCE AND INDUSTRY

No.5 (8) December 2004

THE BUSINESS ENVIRONMENT IN VIETNAM
AN OVERVIEW OF THE YEAR 2004

With the goal of maximizing local resources for socio-economic development and strengthening the competitiveness of the economy for international integration, during 2004 the Vietnamese Government has made continuous efforts to improve the business environment. Results have been encouraging; one indication is the record-high FDI commitment of an estimated 4.0 billion USD by year-end, which ranks 3rd in the region after Singapore and Malaysia, and is comparable with Thailand.¹ However, Vietnam recently dropped 17 points in the World Economic Forum's Growth Competitiveness Index, a record drop from year 2003 among all countries surveyed.² This suggests that despite recent improvements, Vietnam's business environment is still not as conducive as it needs to be in order to compete in the region.
This year-end bulletin raises a few of the most commonly cited issues that are negatively impacting the environment for doing business in Vietnam. These include the limitations of the legal system, administrative red tape, corruption and high input costs. It hopes to provide background information on some of the key issues that reforms need to focus on in the coming year.

Weak legal systems are still a hindrance to economic growth

In the 2004 Annual Business Sentiment Survey of the Vietnam Business Forum (VBF),³ most businesses said they are not yet satisfied with the legal and regulatory framework, with an average score of 2.09 out of a possible 4. The system of business laws and policies contains various conflicts and inconsistencies, which become even more complicated when new laws and policies, which do not supersede old ones, are promulgated.
Legal enforcement is the weakest link of the Vietnam legal system. In the same VBF survey, businesses gave an average rating of 1.85 out of a possible 4 in terms of their level of satisfaction on the issue of legal enforcement. One specific example is Vietnam's contract enforcement regime, which is considered to be the least efficient in the region. It costs a business on average 404 days with 37 procedures and expenses up to 30% of GDP per capita in Vietnam to enforce a contract, while the comparative figures in Thailand are 390 days, 26 procedures and expenses of 13.4%.⁴

Administrative red tape increases costs of doing business

Vietnam has made considerable progress in terms of public administration reform over the last year. As of October 2004, the "one door-one stamp" model relating to administrative procedures had been implemented in 40% of provinces, 86% of districts and 12% of communes.⁵ However, public administration is still considered by many to hinder and negatively impact the business environment. Some of the most often-cited problems include:⁶
(i) Excessive administrative procedures for business operations, which in some cases are redundant;
(ii) Arbitrary interventions of governmental administrative bodies in business activities;
(iii) Government offices harassing and creating difficulties for businesses; and
(iv) Lack of transparency and accountability of government administrative agencies.
Another specific example of weak public administration is in the process of business registration. Although the Enterprise Law has helped to significantly improve this process, it still takes a business on average 56 days with 11 procedures and a financial cost of 29% per capita GDP to formalize its establishment. The comparative numbers in Singapore are only 8 days, 7 procedures and cost of only 1% GDP per capita.⁷

Corruption is a threat to social stability and economic development

Companies that responded to the VBF business sentiment survey felt that fighting corruption should be one of the top priorities for Government action for the coming year. Corruption increases business costs and distorts government policies regarding business and economic development. A recent diagnostic study of the Vietnamese Government's Central Committee for Internal Affairs revealed that corruption is pervasive in areas of infrastructure investment, land use administration and in some public services including education and health.⁸ Recent corruption scandals discovered in Ministries and large state-owned general corporations (including Vietnam Oil and Gas Corporation, Ministry of Trade, etc.) on one hand shows the Government's determination to fight corruption, but on the other hand indicates the seriousness of the problem as related to the economy and business environment as a whole.

High input costs impede business competitiveness

Both the foreign and domestic business community have repeatedly raised poor infrastructure and high costs of inputs as barriers that negatively affect their competitiveness; this was a key discussion topic at the November 2004 Vietnam Business Forum. These high costs include office rental, transportation, social security payments, accessing material goods and equipment, etc. The table below compares three types of business costs in Hanoi and other cities in Asia; it reveals that these costs in Vietnam are the highest among these competitors in the region.

Source: Japan External Trade Organization (JETRO), "Comparing investment costs among cities and regions in Asia," March 2004

(1) VN Express 16 November 2004. Interviews with Mr. Nguyen Anh Tuan, Deputy Head of the Foreign Investment Department, Ministry of Planning and Investment
(2) World Economic Forum, Global Competitiveness Report 2004-2005, http//:www.weforum.org
(3) An initiative of International Finance Corporation (IFC), with the co-operation of World Bank and Ministry of Planning and Investment.
(4) The World Bank and International Finance Corporation, Doing Business in 2004 Understanding regulations, Oxford Press, Washington DC, 2004.
(5) Joint Donors Report, Vietnam Consultative Group Meeting, December 2004, "Vietnam Development Report 2005 Governance."
(6) CIEM Magazine, February 2004, "Reform the functions, responsibilities and the operation directions of the Government and administrative agencies to meet the requirements of country development, joining and being a member of the WTO [sic]."
(7) The World Bank and IFC, Doing Business in 2004 Understanding regulations.
(8) Joint Donors Report, CG Meeting 2004, see above.

Publisher: Dao Tuan Dung - Director of BIZIC - VCCI
Office: 5th floor - International Trade Center - No. 9 Dao Duy Anh Str., Hanoi
Tel: (84-4) 574 3084 - Fax: (84-4) 574 2773 - E-mail: vcci@hn.vnn.vn