the end if it is unnecessarily prolonged. Microeconomic reform should proceed gradually but steadily.

Some progress can be observed in the agricultural sector and in trade and service sectors. In these sectors, a lot of small farming households and private economic actors are active, and they are aggressively responding to market opportunities.

However, in the industrial sector, although the transfer of management of state enterprises from the state to individual enterprises has progressed to some extent, there remains much to be done in this field. Ad hoc tax concession and subsidiary credit spoil the incentives of enterprises to improve efficiency. The monopolistic situation of the large state enterprises hampers proper market mechanisms, which secure efficient resource allocation. New entry of private enterprises to the market is also prevented.

The government should realize that the liberalization of prices and transactions and macroeconomic stability are not enough to secure the proper functioning of the market economy. To make the most of the reforms implemented so far, further microeconomic structural reform measures such as division of state enterprises, promotion of the private sector, abolition of remaining subsidiary measures, etc., are necessary.

## 3 -3 Shortage of Capital

Shortage of capital creates a serious bottleneck in the development of the Vietnamese economy. Gross domestic investment has moved around 11 percent to GDP, a rather low figure compared with other developing countries; gross domestic savings cannot afford even such a small amount of investment (see Tables 2-V-4, 5). Not only the shortage of capital but also its inefficient use -- such as subsidiary credit to inefficient state enterprises -- is a serious problem.

On the other hand, the need for investment is dire. The weak infrastructure of Vietnam is one of the biggest obstacles for economic development, and massive investment in this field is badly needed. With the large gap in capital equipment between state and private enterprise, a large amount of capital needs to be invested for the private-sector development.

In the long-term plan toward the year 2000 compiled by the Vietnamese government, the capital required over the planned period, 1991-2000, is estimated at 40 billion US dollars. Half of it is expected to be accommodated domestically, with the other half coming from overseas. Two thirds of the overseas capital is expected to be provided as FDI, and remaining one third as ODA.

To alleviate the shortage of capital, measures as outlined below to mobilize both domestic and foreign capital have to be taken.

The low level savings in Vietnam reflects the people’s distrust of financial institutions. The negative real interest rate also discouraged savings. It is quite important to attract “sleeping money” to bank deposits by establishing efficient and trustworthy banking institutions and raising real interest rates, since bank deposits bear the capital of several times of itself through credit creation. The establishment of efficient financial institutions also contributes to the improvement of the use of capital.

Considering the huge need for public investment to improve the infrastructure, it is also important to establish a sound tax system, and to increase tax revenue, as it works as a kind