Vietnam has fallen in business environment rankings and deeper analysis reveals in which respects, writes Professor Nguyen Quang Thai.

There has been good news for enterprises and investors in recent times: the government is promulgating decrees directing the new Corporate Law and Investment Law. Let’s consider the meaning of the new decrees by analysing the business environment rankings compiled by the World Bank and the IFC. The rankings are important because although Vietnam’s business environment has improved in recent years, its position internationally remains low. 

Improvements sound but unstable

According to the World Bank and IFC’s annual Doing Business 2007 Report, Vietnam’s position in the last two years has fallen five places but remains in the middle levels and was higher than 71 countries (15 countries higher than in the 2006 report). If we take out 10 newly-added countries with higher positions than Vietnam, and mention countries leaving Vietnam behind, such as Georgia and the Dominican Republic, Vietnam has actually risen a few places.

In 2005 it was ranked in 99th position out of 155 countries, which was higher than 56 countries. In 2006 it was in 104th position out of 175 countries, higher than 71 countries. If we make a comparison with the countries named in 2005, Vietnam increased seven places while, using the same method, Taiwan, for example, fell 15 places.

Although the results are different on a global scale, for analysis we can compare Vietnam with some neighbouring countries in East Asia such as China and Thailand. 

It can be seen that Vietnam’s business environment ranking has some “problems”, falling six places and in need of careful study, whereas the neighbouring countries recorded significant improvements, with China increasing 15 places and Thailand one. Let’s take a look at countries recording better performance to find solutions to improve Vietnam’s circumstances.  

- Vietnam improved in three of the 10 criteria, while falling in the remaining seven, for an overall decrease of six places. 

- Thailand improved in three of the 10 criteria and fell in the seven others, increasing overall by one place. 

- China improved in five of the 10 criteria and fell in the other five, increasing overall by 15 places.  .

We therefore need more detailed analysis to clarify exactly which areas improved and which went backwards. 

Improved areas

According to the assessment, the following three criteria improved or stayed the same:

- Employing and firing workers (increased 33 places)

- Licence granting (increased three places)

- Efforts to protect investors (unchanged)

As we can see, the best efforts are in creating jobs for workers and giving employers more convenience. So the business environment in this respect has clearly improved.

- Difficulty of employing workers index: With points ranked from 0 to 100, Vietnam was assessed at 0, meaning that there are no difficulties in employment. China received an assessment of 11 and Thailand 33. The reason, perhaps, might be that in Vietnam there is still high demand for jobs and salaries are low, while in Thailand and China the unemployment rate is low and salaries are quite high.

- Rigidity of working hours index: Also on a scale of 0-100, Vietnam was assessed at 40 while Thailand and China both stood at 20. This means that Vietnam requires more effort in the working discipline applied to workers

- Difficulty of firing index: Both Thailand and China have a regime to protect workers’ interests. On a scale of 0-100, Vietnam was assessed at 70 (unchanged), and China at 40.

The index for Thailand was 0, making it worthwhile for us to think about labour contracts and the issue of protecting workers’ interests. 

- Rigidity of employment index: On a scale of 0-100, Vietnam recorded 37, better than the 51 from last year, China had 24 and Thailand 18. Vietnam needs to worker harder in this regard.

- Non-wage labour costs (per cent of salary): Vietnam’s was 17 per cent (unchanged against 2005), China 44 per cent and Thailand 5.2 per cent. 

- Firing costs (weeks of salary): In Vietnam it was 86.7 weeks (against 98 weeks in 2005), China 91 weeks and Thailand 54.3 weeks.

So it can be seen that it is very difficult to improve the business environment.

Falling criteria

The remaining seven criteria decreased in Vietnam, as follows.

It is noteworthy that, in general, Vietnam has a weaker business environment than in China and dropped places in many criteria but was better than China in some criteria. The three criteria can be taken as examples:

- Tax payments are inconvenient, but Vietnam’s position was 46 places higher than China’s.

- The number of taxes is 32 in Vietnam and 29 in China (approximates).

- The time to pay tax in Vietnam is 1,050 hours, while in China it is 367 hours (the regional average is 290 hours).

- The total tax rate (as a percentage of profit) in Vietnam was 41.6, while that of China was 84 per cent, or twice as high as Vietnam.  

- Starting a business in Vietnam is 31 places higher than in China, in which:

- The number of procedures is 11 in Vietnam and 13 in China, just slightly higher than in Vietnam.

- Waiting time is 50 days in Vietnam and 35 days in China, 30 per cent longer than in Vietnam.

- Costs represent 44.5 per cent of income per capita while in China it is 9.3, much cheaper than Vietnam.

- There is no need for minimum capital in Vietnam, while it is equivalent to 213 per cent of average income in
China.

- In 2006, Vietnam’s credit index was 18 places higher than in China, in which:

- Extent of disclosure index (0–10): Vietnam stood at 4 and China at 2, lower than Vietnam.

- Depth of credit information index (0–6): Vietnam’s was 3 and China’s 4, slightly better.

- Public registry coverage (% of adults): Vietnam’s was at 2.7 and China 10.2.

- Private bureau coverage (% of adults): Neither country has this.

On track, but enforcement required

In many respects, Vietnam’s reform process has made many remarkable advances. However, we need to recognise certain weaknesses in a changing world. While the overall picture has a range of colours, the tendency towards reform cannot be reversed.