to some extent favorable conditions for the market mechanism have been established. Households have emerged as economically rational consumers. Stabilized macroeconomic conditions served the rational behavior of households.

However, because of the stagnation of state enterprise reform, the situation on the supply side remains unfavorable for the market mechanism. The remaining state enterprise monopoly in most sectors implies that the prices determined in such a market are not reflecting competition. The monopolistic situation also spoils the incentives of state enterprises to respond to the market. Moreover, because of easy access to subsidiary loans provided by state banks, the behavior of state enterprises are not bounded by hard-budgeted constraints. Except for a few sectors like agriculture or trade goods, in which the prices are considered to reflect the competition due to the progress of reform in such sectors, in most sectors the price mechanism is not working properly. Further efforts in state enterprise reform or structural adjustment in the supply side are required to make the most of the merits of price liberalization or to make the market function properly.

## 2 -4 Enterprises Sector Reform

Major objectives of enterprises sector reform are; (i) to improve the efficiency of state enterprises by giving incentives, and (ii) to establish a competitive microeconomy on the supply side so that the market mechanism can function well.

To achieve such objectives, the following three directions are possible:

(a) state enterprise reform without transfer of ownership

(b) privatization of state enterprises, or transfer of ownership

(c) encouraging newly emerging private enterprises.

((a) includes the establishment of the autonomy of management, the division of monopolistic state enterprises, etc.)

In the process of the reforms that took place in Eastern Europe or in the former USSR, much stress was put on (b) privatization based on the assertion that the state enterprises would never change their behavior if there is no transfer of ownership. However, as you find several examples in the experiences of East Asian countries, even without (b) privatization, (i) improvement of efficiency of state enterprises can be achieved through (a) state enterprise reform, and (ii) establishment of a competitive microeconomy can be achieved through (a) enterprise reform and/or (c) encouragement of the private sector. Privatization is not the only way to reform the enterprise sector. Without a well-developed financial market, it is difficult to carry out transfer of ownership smoothly. Thus priority should be given to (a) state enterprise reform and (c) promotion of the private sector in the first stage of development.

Regarding the legal basis for enterprise in Vietnam, the government officially approved five types of ownership in 1989: state, collective, private, individual and family (“multisectoral commodity economy”). The Private Enterprises Law and the Stock Company Law came into effect in 1990; for foreign enterprises, the Foreign Investment Law was established in 1988. However, further development of a legal framework including laws on bankruptcy, accounting systems, intellectual property rights, etc, are required.