in those sectors a situation close to perfect competition has been established.

However, the situation of the industrial sector is far from perfect competition. Monopoly of state enterprises is commonplace, which brings about distortions in price structure, which imply inefficiency of resource allocation. The division of monopolistic state enterprises and the promotion of new private enterprises in such monopolistic markets are suggested.

## (2) Stable Macroeconomy

Stable macroeconomy is one basis for rational economic transactions. In Vietnam, the macroeconomic situation has been largely improved. Inflation has settled to one digit, the exchange rate has stabilized, the fiscal balance and the trade balance is improving, and the GDP shows steady growth. The macroeconomic situation in Vietnam can be evaluated as favorable for the market mechanisms.

## (3) Rationality of Economic Actors

In the theory of modern economics, economic actors -- both households and firms -- are assumed to act in an economically rational fashion; they maximize their individual utilities or profits subject to their budget constraints through market transactions under given market prices. As a consequence of such individual rationality, maximization of the total utility of the economy is achieved (the “invisible hand of God”).

The question is whether the economic actors in Vietnam are acting in an economically rational way. In other words, have the Vietnamese people adopted their way of thinking to a market economy? Though a market economy itself contains a mechanism which motivates such rational activity of economic actors (the “incentive mechanism”), after the lengthy experience of a planned economy, people in Vietnam are not used to this kind of economic thinking.

However, in some sectors, economically rational actors have already emerged. In the agricultural sector, farming households have begun to act according to profit incentives. In the trade and service sectors, small private agents are quite active. In addition, on the demand side, households are acting according to economic rationality.

But in the industrial sector, the state enterprises -- the main actor in each market -- have not fully adapted their behavior to the market economy. The monopolistic situation prevents the state enterprises from acting as price takers. Ad hoc tax concessions and subsidiary credits prevent them from facing hard budget constraints. In addition, state enterprises are still expected, not only to maximize their profit as economic actors, but also to play a social role like a provider of social benefits to employees.

It is worth mentioning that the southern part of Vietnam has some advantage in this field, since it has less experience with a planned economy.

## (4) Factor Mobility

To achieve efficient resource allocation, it is necessary that the factor market be established and production factors move smoothly in response to market prices. However, in Vietnam, both the labor and financial markets remain undeveloped; thus the mobility of labor and capital remains low.

## (5) Perfect Information

Perfect information on the market, which includes information on prices, quality of goods, etc, is a basis for a person to behave rationally in an economic sense.