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Ownership Bias in Government Policy : A Legacy to Potentially Trap Vietnam ’ s Transition

In the 1980s, centrally planned economies started to transform themselves into market economies. In comparison to the shock therapy of Eastern Europe, the gradual transition in China is argued to have certain advantages by Stiglitz (1994). According to Stiglitz, gradualism, including the avoidance of massive absolute privatization, has not only reduced the number of losers but also given time to build, develop and adapt to a new essential institutional framework and norms of the market economy. As in China, Vietnam has adopted the gradual transition to a market economy. This paper argues that Vietnam’s gradual transition for the last 25 years has led to a built-in ownership bias against the indigenous private sector. The Vietnamese Communist Party (VCP) has avoided political reform and has only implemented partial economic reform when it still commits to the leading role of the state economic sector. The VCP claims that by retaining the leading role of the economic sector, it ensures its adherence to socialism. Investigating the reasons behind the launch of economic reform by the VCP, however, reveals that the leading role of the state economic sector is more particularly aimed to consolidate the VCP’s authoritarian power. This commitment prevents the VCP from implementing radical economic reform to develop a private sectororiented economy. Instead, it applies a four-pronged strategy to consolidate the power of the state economic sector. This strategy includes consolidating the state-owned conglomerates, refraining from absolute privatization of these conglomerates, attracting foreign direct investment into these conglomerates and only releasing the entry of indigenous private companies but not facilitating their capital accumulation and growth. The VCP’s intention is to attract private capital into the state sector where the state can benefit from private capital without losing its economic power. The unexpected result is that the principle and agent problem emerges as the state cannot control company managers’ abuse and stripping of the state assets and capital and manipulating the privileges for their personal interests. Meanwhile, the true indigenous private companies cannot develop to their fullest capacity due to the built-in ownership bias in the government policy. FIEs have an unnecessary dominant role. Therefore, gradualism can turn into a transition trap.