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Authorities in Vietnam’s business hub of Ho Chi Minh City said recently they will not be investing in the economy directly anymore, signaling the latest move in the communist nation’s ongoing transition away from a centrally planned economy.

The secretary of Ho Chi Minh City's Vietnam Communist Party Central Committee, Nguyen Thien Nhan, noted that state investment, frequently in the form of state-owned enterprises, has decreased in recent years. By 2020, he reckons state investment will account for about 16% of the city’s economy, just half of the 32% figure seen in 2005.

“Up to a later stage, in terms of production and business investment, our state will basically not invest anymore,” Nhan, who serves a position similar to a mayor of the city, said. “So the engine for economic growth lies in the private sector and foreign investment.”

The communist party has ruled the nation since the end of the Vietnam War in 1975, including with state-issued production quotas and price controls. However, the economy has been transitioning toward more private enterprise since the 1980s. That has meant that foreign corporations, domestic enterprises, and, most recently, startup enterprises have been playing an increasing role in the economy. That has also meant the government has been divesting and allowing more private shares in state owned enterprises, a process it refers to as equitization.

A cafe in Ho Chi Minh City is decorated with an image of international communist icon Che Guevara.

Role of the state is changing

Instead of investment, the state will be focusing on the investment environment, according to Nhan. Its role is to have dialogue with stakeholders and work on tax, land, and other public policies that encourage the private sector to invest in the areas that people need, he said.

“The environment is also important,” Nhan said last month in one of his regular updates to the public on the state of the economy. “What is the quality of the air, when investors ask, we have to have an answer. It is not only land, but also with a clean environment, good traffic, and good air quality that investors will come.”

He referred to farmers as an example. In keeping with the communist system all land is collectively owned but individuals are able to lease it for decades. It appears some farmers, such as those in the outlying areas of Ho Chi Minh City, have been transitioning from agriculture into other kinds of work. However, that transition has created confusion about land zoning and what usage rights people have on various types of land. About two thirds of Vietnam is rural but urbanization is increasing.

Some farmers in Vietnam are transitioning from agriculture to other kinds of work, creating questions about use of land, which is technically owned collectively in the communist nation.

Economic outlook ‘positive’

Equitization has also been a big part of Vietnam’s transition. It has a goal to open 403 state owned enterprises to private investors in the 2017 to 2020 period, but has reached only about one fifth of its goal.

However, the Fitch Ratings company changed its official outlook on Vietnam’s economy from “stable” to “positive” in May, saying that equitization has raised funds that has contributed to a reduction in the government’s level of debt.

“The reduction has also been aided by stable receipts from privatization of state-owned enterprises [known in Vietnam as equitization], high nominal GDP [gross domestic product] growth and lower fiscal deficits,” Fitch Ratings in Hong Kong said in its explanatory note. “The overall pace of equitization has slowed, but the process has nevertheless continued to advance, with 28 state-owned enterprises being equitized [in 2018] compared with 69 in 2017.”