Despite a fall in optimism in the aftermath of a slump in 2011, business communities still highly appraised improvement in provincial governance. The weighted 2011 PCI score for a median province is 59.15, the highest in the past three years.

The notable trend is that the gap between the bottom of the index and that on top has reduced significantly. At the bottom, although Cao Bang was unable to improve its position and remained at the lowest point, its score rose almost five points versus 2009. Meanwhile, Lao Cai, scoring 2.5 points less than the top place did two years ago, was successful to displace Danang to lead the whole index.

Since its first introduction in 2005, this is the first time neither Danang nor Binh Duong was in the top place. In lieu of them were Lao Cai and Bac Ninh. The incredible improvement, said the PCI research team, belongs to Binh Phuoc and Ha Tinh which climbed to the top-10. At the same time, Binh Dinh and Vinh Long, the two provinces often occupying high ranks in previous editions, continued their sharp decline.

The above trend shows that reform policies, applied previously by several provinces and able to create positive responses from respondents, have permeated nationwide. The bulk of them are easy areas where no substantial institutional changes or difficult compromises among local elites are required. This has enabled some provinces to catch up with high-ranking counterparts that had enacted these reforms earlier.

The index shows that leading provinces in the previous years began to decelerate and took little initiatives in the more difficult areas. The PCI 2011 remarks that few improvements have been seen in more challenging areas, such as improvement of confidence in the judicial system, or improvement of the quality of the local work force. It seems that provinces that were successful during the initial phase of Vietnam’s reform are facing the average income trap before other provinces which scored higher thanks to easy reforms. Provinces previously known for their creative initiatives in the backdrop of a lack of central regulations, such as Binh Duong, Danang and Vinh Long, have slid due to declines in proactivity.

In concrete terms, in 2011, provinces in the middle of the index significantly improved in sub-indices, such as entry costs, land access and security of tenure, transparency, time costs, informal charges and legal institutions. Previous higher-ranked provinces scored slightly higher in entry costs, informal charges and legal institutions; however, they saw declines in other sub-indices. Meanwhile, previous lower-ranked provinces made substantial improvement across the board, except for business support services.

Transparency remains a source of worry

The improvements which have been hailed by businesses in general include: entry costs, land access and security of tenure, time costs, informal charges and infrastructure assessment.

Meanwhile, transparency remains the most disappointing development. In 2011, the gap between the most transparent province and the least doubled to nearly 1.3 points. The most worrisome is that personal relationships continue to play a vital role in access to business documentation. The PCI 2011 remarks that up to 75% of the respondents (versus 52% in 2007) contended that having friends or relatives in the provincial government apparatus is crucial for access to planning and legal documents.

According to the index, greater importance attached to personal relationships “will dampen the morale of entrepreneurs and likely affects the efficiency of businesses in two ways. First, by favoring those with connections instead of those with the best ideas and talent, local governments negatively influence the quality of businesses in their province. Second, all investors must invest time and resources into developing connections that might be better spent on their operations.”

Furthermore, although businesses said despite a drop in petty bribes for local administrative agencies in the form of small payments to officials, the final indicator in informal charges, however, sends out a greater warning. The PCI 2011 remarks, “while petty corruption is frustrating for businesses and its decrease should be celebrated, ultimately, grand corruption is more dangerous because it contributes to increasing inequality between regime insiders and the rest of the country while undermining confidence in government.”

Continued pessimism with growth prospects

The PCI 2011 saw both foreign and domestic respondents’ business pessimism tumble down to a record low, with only 47.4% showing optimism about their business plans for the next two years. In 2006, this figure was 76%.

The optimism of private businesses fell to the bottom when only 35.69% said they had plans to expand business. The most formidable challenges to encounter include rising input costs and declining access to credits.

Another worrying indicator emerges in the PCI 2011. According to statistics by the General Department of Taxation, of the 6,139 businesses taking part in the PCI 2006, only 1,800 are still using the same tax codes in 2011. After further research, the PCI research team was able to identify 396 businesses which have been disbanded or cannot be located. The team maintains that others might have been closed, merged, moved to other provinces, or made changes in products or services so drastically that they have had to register again.

(*) PCI 2011 presents the latest views of 6,922 Vietnamese enterprises on economic governance and the business environment across 63 provinces and cities in Vietnam in 2011. This project is carried out by the Vietnam Competitiveness Initiative (VNCI) in partnership with the Vietnam Chamber of Commerce and Industry under the support of the U.S. Agency for International Development

Source: Saigon Times