Privatization and Poverty Reduction in Vietnam Optimal choices and its potential impacts

Since its transition from a centrally planned economy to a market economy, Vietnam has been under pressure to reduce the size of the state-owned sector. In this process, the private sector has emerged. The objective of this paper is to examine how the privatization could contribute better to economic growth and hence further accelerate poverty reduction in Vietnam. We use the multi-sectorial integrated activity analysis model, and apply it to the data of the Vietnamese economy in 2007 to measure the impacts of ownership restructuring on economic growth. If labour and capital could reallocate across sectors and type of ownership, what would be the optimal allocation of activities and the feasible level of domestic final demand? Factor inputs are capital and four types of labour, namely technicians, high skilled, low skilled and unskilled workers. The model keeps track on asymmetric mobility of labour endowments by skill levels. Main contributions of this paper are fourfold. First, we demonstrate that that at the optimum, privatization does not mean to weaken the economic power of state sector. Second, we propose a specific pattern of SOE reform for Vietnam. Third, alternative experiments on the mobility of labour to shows that there is a trade-off between further privatization toward economic efficiency gain and job-creation in Vietnam, which means privatization does not contribute to job creation. Last, the paper shows that current skill situation of Vietnam’s labour force will be a ‘bottle neck’ for Vietnam economic growth in the near future.