To Huy Rua

Communist Review, No.107/2006

The equitization of State-owned enterprises (SOEs) is one of the important directions of the reform process for SOEs which are an indispensable part of the State economic sector. In economic reforms, one major issue arising is to strongly develop productive forces and step-by-step promote a production relationship compatible with the development level of productive forces. To free up productive forces, the objective necessity is to develop a multi-sector commodity economy, remove the centralized, bureaucratic and State-subsidized mechanism and move to a market mechanism and build the institutional setting of the market economy, diversify the forms of ownership, in which the State sector plays the dominant role. In order to do this, swiftly reforming SOEs is a must. Following this direction, after a number of years of piloting and experiment, the Vietnamese Communist Party has recognized that equitization is an effective approach to rejuvenate SOEs, as stated in the resolutions the 3^rd Plenum session and the 9^th Plenum session of the Central Committee of the Communist Party (IX Tenure).

Up to now, under the direction and execution of the Government and initiative spirit of authorities at various levels, the equitization of SOEs has attained initial impressive results proving the correct decision of the Party and State. However, some civil servants and Party members are still anxious about the equitization. Some mistakes have happened during the equitization process of some SOEs, and people are concerned about the risks of appropriating public property. Equitization can be seen as an avoidance of the term "privatization", which will abolish or undermine the regulatory capacity of the State towards the economy in the socialist-oriented market economy.

In essence, these are true thought of people who are used to the former economic model, which claims that the number of SOEs decides the level of socialism.

Expediting equitization of SOEs has become a critical issue in the economic reform process, the construction and development of the socialist-oriented market economy is associated with industrialization and modernization in order to drive Vietnam out of its less-developed state. The failure of overcoming this challenge will be harmful to the State economic sector in particular and the whole economy as a whole.

According to the statistics of relevant agencies, by the end of 2005 there were 5,000 SOEs producing about 30% of GDP and providing 15% of non-agricultural employment, while it accounted for 50% of total outstanding debts of the domestic commercial banks. Considering the effectiveness and efficiency, this is a noteworthy concern. This sector’s bad debt ratio was increasing (in the first 8 months of 2005, its bad debts was 3.08% compared with 2.41% of 2004 and 2.72% of 2003)⁽¹⁾. The difficulties in recovering outstanding debts from SOEs is a critical problem in the renewal process. It is noteworthy that by the standards of profit and debt level of all enterprises including large, medium and small sizes, the least viable enterprise group is the SOEs. Clearly, size is not the main reason causing such a state in the SOE sector.

In the transitional process to socialism in Vietnam, the decisive issue is to pursue sustainable socio-economic development. Lessons from countries with fast but non-sustainable development are apparent and should be seriously studied. If we develop fast in several decades like new tigers and dragons in East Asia and then suffer a 1997-like financial crisis, having to accept the conditions of the IMF as a last resort is a dangerous approach. Conducting massive privatization in order to be recognized as a market economy in East European and SNG countries may means that we have to accept a socio-economic collapse, the impoverishment of a large part of the population and the quick enrichment of a small number of people. By the end of 2005 in Russia, 2% of the richest people held 30% of all social assets, while 10% of the poorest people held only 2.4% social assets. The survey results showed that 74% of population missed the Soviet Union era⁽²⁾. In China, during the open and reform process, especially in reforming the economy and building the institutions of the socialist market economy, special attention was given to the experiments and theoretical studies on equitization, which is noteworthy for our reference.

In the initial period of industrialization, in most countries, GDP growth was considered a pressing demand and the first priority in the development strategy. But along with the development process, it was found that GDP growth was not the unique path of development. Nowadays, people are increasingly aware of the vital importance of sustainable socio-economic development. Common practices in the world show that the highest quality of life does not exist in the richest capitalist market economies. A number of practical research works on different aspects of different economies showed a common conclusion that the mixed ownership commonly existing in the form of joint-stock companies has the highest competitiveness and produces the highest quality of growth.

It is not accidentally that Chinese reformists proposed using stock holding as the main vehicle to implement the public ownership regime.

Equitizing a major part of SOEs in Vietnam is to form a stock-holding regime in our economy in order to diversify the categories of ownership and develop the mixed-ownership form so as to step-by-step promote the economic capacity of the public ownership regime.

In the historical and theoretical aspects, stock holding regime (a product of the equitization of SOEs) came into existence several centuries ago in the development process of capitalist economies. The development of production and business required the accumulation and concentration of capital. Stock-based ownership satisfied this demand. It was a form of pooling capital for production and business and capital contributors received their profits or losses according to the amount of stocks they held. The British company East India incorporated in India during the period when the British colonialists dominated India was a form of joint-stock company. In America in late 19^th century, joint-stock companies were also established to pool capital for railway construction.

Creating stock holding regime via the equitization of enterprises will help pooling capital and production means from individual owners and channeling them into the stream of social capital for production and investment. This issue is drawn from the practice of socializing capitalist production in the 19^th century and scholars of Marxism have specially studied it.

K. Marx saw that the stock holding regime was a strong leverage for the development of the productive forces in a modern society. Ph. Angel also pointed out that capitalist production carried out by joint stock companies was no longer the private production form. The transformation of private individual capital into social capital strongly boosted the socialization of production and the development of productive forces.

Following the logic of awareness, in economic and economic development sense, the recognition of market economy will objectively lead to the recognition of a stock holding regime and equitization. Under the capitalist private ownership, a stock holding regime responds to the demands of pooling capital for capitalist production and business, which mainly produces profits for the bourgeoisies. Under social ownership (public), equitization of SOEs will serve the pooling of capital for production and business for the benefits of laborers.

In the equitization of SOEs, laborers have the right to purchase stock and assume the role of owners in the form of stockholders. They and the State co-own enterprises. Stockholders are representatives of private ownership and elements of social ownership. Laborers actually own capital and their means of production and become true owners of enterprises.

It is necessary to build an awareness of individual ownership as a means of production as this is the core economic element of the ownership of laborers. Without such individual ownership, social ownership does not have material substance and becomes abstract. Without ownership, individual laborer does not have a real motive in their work and laborers are only nominal owners.

In the past, following the dogmatism, we identified private ownership with individual ownership. Abolishing this preconception and respecting individual interests and ownership of laborers, we can see that equitization is the method of forming mixed ownership between private ownership (including individual ownership, smallholder ownership and private capitalist ownership) and collective and State ownerships. The strength of public ownership is formed from various types of ownerships in which SOEs play the dominant role.

The experience of the People Republic of China over the past 28 years showed that reforming the stock holding regime was considered an economic theoretical breakthrough step in the process of building the theory of a socialist market economy. China has attained impressive advances in this regard. From 1997 to 2001, joint stock companies (incorporated from equitized SOEs) increased from 7,200 to nearly 300,000. The number of laborers working in these businesses increased from 6.437 million people to 27.466 million people. Their turnover jumped from RMB 813.1 billion to RMB 5,673.3 billion. This development poses a true persuasion and brings about a correct awareness of the roles of stock holding regime and equitization in the construction of public ownership.

In Vietnam, shifting from an economic model in which SOEs account for a large number but operate at low socio-economic efficiency to a socialist-oriented market economy, the equitization of a large number of SOEs is an objective necessary step in order to increase the productivity and sustain socio-economic development. The contribution from the equitization of SOEs to sustainable socio-economic development is that it helps pool capital for production and investment, increase the profit, reduce bad debts, diversify risks and create a motive force for individual owners. All these elements will create economic resources to solve social and environmental matters. Equitization in Vietnam has proceeded slowly, but this results from various matters other than the efficiency and effectiveness of enterprises. Equitization in Vietnam is not a comprehensive retreat of SOEs or privatization, as some may think.

As of October 27, 2005, across the country 1,960 SOEs were equitized. Most of them have operated efficiently and effectively. Their chartered capital and turnover increased and laborers’ incomes have risen. In October 2005 alone, 400 enterprises were equitized. In Hanoi, the average turnover of 86 equitized enterprises increased by 1.5 times. State capital has been preserved and increased, and these enterprises have performed better than before, no longer need to rely on debt rescheduling or freezing by the State. The link between the enterprises and commercial banks was established on the basis of mutual benefit and risk sharing. It is noteworthy that few equitized enterprises in which the State does not hold any stocks have fared well. In reality, it is very difficult to equitize enterprises that the State planned to sell all the stocks issued. This matter should be duly studied.

When investing in equitized enterprises, individual investors are more confident when finding the State still holds a certain percentage of stocks issued. This is not a remnant of the old centralized bureaucratic regime. On the contrary, people do not see any individual or economic entities as more trustworthy than the State, despite its weakness in economic management. As far as the State economic sector is still capable of playing the dominant role in the economy, the State economic sector still remains the most important factor to sustain the development of other economic sectors. While holding a certain percentage of stocks issued, the State may guide equitized enterprises to serve the interests of stockholders and ensure the legitimate interests of laborers. Furthermore, in its capacity as an important stockholder, the State can ensure a better implementation of its policies in enterprises. With regard to SOEs, equitization creates possibilities for increasing State capital as it attracts more capital from society to develop production and business.

Equitization also facilitates the flows of State capital between enterprises and industries via the capital market and hence increases the effectiveness of capital utilization in production and business. For laborers, equitization provides them with opportunities to become stockholders and access investment profits.

Another matter is how to prevent fraud in inventorying and appraising the capital of enterprises, assessing enterprises assets, pricing the shares of stocks issues in the equitization process, and attracting laborers to purchase such stocks. To do so, it is inevitable that management, monitoring and supervision measures should be installed and the ownership role of laborers should be enhanced.

The sustainability of the socio-economic development is ensured by a number of factors, and equitization is only one of them. As mentioned earlier, equitization is one main solution to develop the State economic sector. The sustainability of a nation in the process of shifting to a new economic model, and carrying out industrialization and modernization, by and large depends on the firm and determined will of the people which, in turn, can only be built on the basis of immediate and long term interests of the laborers and the harmonization of interests between concerned parties involved in the equitization of SOEs. In this aspect, for the majority of laborers in our country, the equitization of SOEs where they work or the benefits from products and/or services produced by these enterprises, is a breakthrough measure in the process of reforming SOEs for sustainable socio-economic development and materialize the objective of "a rich people, a strong country, an equitable, democratic and civilized society".

* Phd, Associate Professor

(1) Source: The SOEs Renovation Committee of the Government and the Banking Journals issued in April 2005.

(2) The Independence (Russian), dated December 25, 2005.