# **VI.  OBSTACLES TO PRIVATE SECTOR GROWTH**

_62._ A continued growth of the formal private sector and its contribution to employment generation in the coming decade will ultimately depend on the extent to which existing barriers to private sector activities are removed. But removing barriers will not be enough; the government will need to establish an enabling and supportive environment for private enterprise.

# **Main Obstacles Identified in Earlier Studies**

_63._ A number of studies have looked at constraints to private sector development.<sup>_37_</sup> Analysts seem to be broadly in agreement about the following five constraints.<sup>_38_</sup>

- _Institutional weaknesses._ Vietnam is in the process of a transition from a centrally planned to a market economy. At present, however the institutional framework to support this newly emerging market economy does not exist, is incomplete or is ineffective. Regularly mentioned institutional barriers are complicated  entry and exit procedures, tax regulations, trade barriers, regulations on land markets, and unequal treatment of SMEs (compared to SOEs). In the past few years, the government has taken a number of measures to address these issues. Perhaps the most important measure so far was the introduction of the Enterprise Law. Some analysts have argued however that many new measures have been ineffective due to a lack of sound implementation procedures. Also as barriers to enterprise development are being removed, more attention needs to be given to positive ways of supporting private sector development. At this stage, for example, institutions supporting market transactions, such as contract laws and contract enforcement mechanisms, are weak or non-existent.

- _Capital shortage._ Even though credit flows to the non-state sector have increased in recent years, capital is still considered a major constraint to private sector development. The shortage of bank credit is based on both supply and demand side constraints. Banks resist making loans to private enterprises for several reasons. It is hard for bankers to conduct a good risk appraisal –due to lack of training and experience- and even if the risk is assessed accurately, bankers have not been able to price the risk into their loans due to restrictions in interest rates. Lack of incentives for bank officers at state banks to take initiative or calculated risks is also a problem for non-traditional borrowers like newly established SMEs. Lack of collateral and the absence of an effective bankruptcy law cause private SMEs further troubles. On the demand side, some analysts claim that private enterprises are reluctant to access bank credit because the procedures require a high level of transparency with respect to their business activities.

- _Limited access to markets._ The lack of knowledge about and the limited access to markets has left many enterprises competing for a fairly small often local market. Moreover, Vietnamese enterprises have often poor quality and low value adding products which make it hard to compete in international markets.

> 37 The most comprehensive studies include MPI-UNIDO (1999), Mallon (1997 and 1999), Riedel et al. (1997) and Riedel (1999), Webster & Taussig (1999) and Webster (1999). 38 Le Cong Luyen Viet (2001).

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