Promoting the private economy requires strong policies

Over the past four decades, the private economic sector in Vietnam has developed remarkably, transforming from a small, fragmented economic sector into an important pillar of the economy. In terms of scale, according to the General Statistics Office, the domestic private economic sector currently contributes approximately 50% of GDP; of which, the officially registered enterprise sector contributes more than 10% of GDP and the sector of individual business households, agricultural production households, farms and other economic establishments and individual businesses accounts for about 40% of GDP. This sector creates jobs for about 85% of the country's workforce.

Decisive role for high growth target

Thus, the private economy currently determines the quantity and quality of more than 50% of Vietnam's GDP. We cannot achieve high and sustainable growth rates and cannot shift to an economy based on technology and innovation if the private economic sector, which currently accounts for more than half of the economy, does not grow at a high rate and does not transform strongly to absorb and disseminate technology and innovation.

The private sector plays an important role in aggregate demand and thus plays a decisive role in the growth rate. This contribution is reflected in private investment, consumption by enterprises and economic establishments and the contribution of the private sector to imports and exports.

From the perspective of aggregate demand, the private economic sector is currently contributing nearly 30% of total export turnover. Also from the perspective of capital investment, which is an important component of aggregate demand, the private sector is playing an important role in investment. The private economy is currently contributing 56% of total social investment. This is a very high proportion compared to the 28% of the state economic sector and the 16% of the FDI sector. Of the total social investment capital expected to reach about 174 billion USD by 2025, private investment will contribute about 96 billion USD, or approximately 56%. Public investment will only contribute about 36 billion USD, the FDI sector about 28 billion USD and other investment about 14 billion USD.

Thus, a 1% increase in private economic investment will bring about an increase in absolute value equivalent to a 2.5% increase in public investment and a 3.5% increase in foreign investment. The impact of domestic private investment growth on aggregate demand is much larger than that of investment from the public sector and the foreign-invested enterprise sector.

Unlike public investment and foreign investment, which have limitations to expand in volume, such as limits on public debt ceilings, pressure on the state budget, or considerations on the proportion and quality of FDI investment in the overall investment problem of the economy, the potential for expanding investment from the domestic economic sector is huge if looking at the assets that people still hold in the form of gold, foreign currency, land, and savings in the banking system. Expanding private investment will enhance endogenous capacity, providing stronger support for GDP targets as well as the transition from the traditional growth model to a new growth model with higher quality and more sustainability.

Private enterprises have surpassed the state-owned sector, the FDI sector and the public administration sector in terms of income generation for workers, and this gap is widening. Currently, the private economic sector provides jobs and livelihoods for more than 80% of the workforce. Jobs created by private sector enterprises have helped millions of workers move from lower-paid jobs in the agricultural sector to higher-productivity, higher-paid jobs in industries.

Currently, a worker in a domestic private enterprise earns three times more than an average farmer. Private enterprises not only create livelihoods and jobs, but also create opportunities for better jobs, increase income, improve people's lives, and contribute to social development and progress.

Private enterprises also contribute significantly to the expansion of social insurance coverage and social security programs. With ongoing efforts to reform state-owned enterprises and the public sector, it is clear that the private sector will be the sector primarily responsible for achieving the target of having about 45% of the working-age workforce participating in social insurance by 2025 and about 60% of the working-age workforce participating in social insurance by 2030 in the spirit of Resolution 28-NQ/TW. This is the time when we need to maximize the internal strength of the economy. Therefore, the private sector must affirm its endogenous capacity, providing stronger support for the GDP target as well as the transition from the traditional growth model to a new growth model with higher quality and more sustainability.

The private economy is not just large private enterprises.

The structure of officially registered private enterprises is currently unbalanced. Of the 940,000 enterprises in operation, the majority are still small and micro enterprises, while the number of medium-sized enterprises is limited. Currently, approximately 97% of domestic private enterprises are micro and small in size, with large enterprises accounting for only 1.5% of the total, and medium-sized enterprises accounting for only 1.5%. This creates an “abnormal” enterprise structure when compared with Japan, Taiwan, and South Korea. The lack of medium-sized enterprises, that is, the very small number of medium-sized enterprises, is a cause for concern.

The lack of medium-sized enterprises is also a sign that very few small enterprises have grown to become medium-sized enterprises due to the limitations of small enterprises' operating efficiency and the difficulties of the external business environment. Small enterprises lack the capacity as well as the motivation and ambition to grow in size. The lack of medium-sized enterprises also shows that not many medium-sized enterprises will develop into large-sized enterprises in the medium term. This problem needs to be addressed, because the common principle is that larger companies are better able to take advantage of economies of scale to operate more efficiently and bring higher productivity to the economy. It also makes the economy lack the reserve force to become large enterprises, thereby affecting the competitiveness of the enterprise sector in particular and the economy in general.

In addition, the informality of the private economic sector is still very high. In addition to 940,000 enterprises operating under the Enterprise Law, there are more than 5 million individual business households, hundreds of thousands of individuals doing business, trading, and small-scale production without registration. In terms of scale, according to the General Statistics Office, the domestic private economic sector currently contributes approximately 50% of GDP. Of which, the officially registered enterprises contribute more than 10% of GDP and the individual business households, agricultural production households, farms and other economic establishments and individual businesses account for about 40% of GDP. Although these entities in the private economic sector play such an important role, their legal status is unclear.

In fact, the Civil Code only maintains the subject status of individuals and legal entities. The subject status of households and cooperatives will be attributed to individuals and the representative relationship between those individuals. Under the current legal framework from 2015, business households are not recognized as a party to commercial transaction contracts and are not legal entities. For that reason, business households are also not allowed to participate in competitive bidding and face difficulties in concluding contracts.

On the basis of the Civil Code, regulations on finance, credit, banking, contracts and many other areas no longer recognize the legal status of business households as a party to civil contracts. Transactions with banks, credit institutions and financial companies are also classified as relationships with the individual business household owner rather than the business household itself. Therefore, bank loans cannot be made in the name of a business household. Instead, business households borrow capital in the form of a credit contract between a credit institution and the business household owner as an individual. Therefore, difficulties also arise when entering into civil contracts under the name of a business household.

To promote the development of private enterprises, there needs to be constructive policies for enterprises in the informal sector to transform into enterprises, for small and medium enterprises to transform into larger enterprises, and for large enterprises to improve their capacity and become the driving force and growth nucleus of an industry, a region or a cluster of enterprises.

The recent focus on the private sector seems to be mainly on officially registered private enterprises, especially large private business groups. Future private economic development policies need to pay more attention to small and micro enterprises, to the development of medium-sized enterprises and to the economic base, business entities that are still considered informal or semi-formal such as business households and individual businesses. Developing economic entities in this area is equally important to promoting the role of large enterprises and large private corporations.

The private economy currently determines the quantity and quality of more than 50% of GDP.

Strong policies are needed to promote the private economy.

To unleash the enormous potential of the private sector, we need policies to foster the entrepreneurial spirit, to further strengthen the freedom of enterprise and to allow enterprises to truly do what is not prohibited by law. Such policies will create a foundation for the property rights and freedom of enterprise of the people and enterprises to continue to be affirmed. The management method of the management agency is based more on market principles and tools than on administrative decisions.

Policies for the private economic sector need to provide guidance so that the legal system can be built in a way that not only serves the management goals of state agencies, but also plays a creative role in unlocking resources, building a favorable, safe, low-cost business environment that approaches international standards.

The legal system must skillfully use market tools and mechanisms to mobilize and allocate resources, and unlock resources to serve socio-economic development. The legal system will encourage businesses to promote research and development (R&D), invest in science and technology , and apply innovation. This means that it is necessary to establish legal mechanisms to support activities with high risks but bring breakthrough benefits in productivity and technology.

These decisions will be the foundation for the rapid introduction and application of regulatory sandboxes, policies for innovative enterprises, as well as measures to support the absorption and transfer of technology from abroad. The legal system needs to encourage the spirit of venture capital, risk-taking and form an ecosystem to support venture capital projects and business ideas of enterprises, whether large or small.

Along with that, the legal system also needs to be reformed in the direction of simplifying administrative procedures, reducing legal compliance costs, and minimizing legal risks for businesses. At the same time, organizations and institutions operating the policy enforcement apparatus will also be reformed. The process of streamlining the state administrative apparatus, improving the effectiveness and efficiency of public agencies will be promoted so that the state apparatus will be organized in the direction of serving businesses and people, instead of simply playing an administrative management role. This requires a shift from management thinking to development thinking, demonstrated through improving the quality of public services, speeding up the processing of administrative procedures, and enhancing transparency in the decision-making process.

Such decisions will help businesses feel that they are operating in a safe environment, protected by law and tolerated when they fail, and given the opportunity to start over. As a result, businesses will be excited and enthusiastic in production and business, enthusiastic about venture capital, investment in research and development activities, innovation, new ideas and business models, etc.; at the same time, it will further promote the entrepreneurial spirit, more strongly protect entrepreneurs and businesses when they implement business ideas that are unprecedented but not prohibited by law, thereby promoting the spirit of daring to accept risks, venture capital, investment in innovation through more controlled testing mechanisms in many legal documents.

Such policies will also affirm and strengthen the role of the domestic private economy as the main pillar and main driving force of the economy, especially in the effort to achieve high growth rates and to strongly and steadily transform the economy into a high-income economy, based on innovation, creativity, labor productivity, high added value and high knowledge content.

Considering the private economy as the main pillar and main driving force also contributes to enhancing endogenous capacity, consolidating the self-reliance and self-reliance of the economy. The ambition of a prosperous, prosperous, powerful and economically independent Vietnam will also be closer, more feasible, and easier to realize with the cooperation of the people and the domestic private economic sector.