Feeding a market economy: The role of information and transparency

January 12, 2012

The theme of this VDR is market economy for a middle-income Vietnam. The report focuses on weak institutions, distorted incentives and inadequate information - labled as the three "I's" of the market economy - as the explanation for Vietnam's current tribulations. 

Vietnam has come a long way in the last 15 years in promoting the public availability of economic data and information. However, progress has been slower than expected due to the absence of a generalized law on access to information. The impact of weak transparency has been costly for Vietnam’s development. A 2011 study of corruption in land management identified lack of transparency as one of the core drivers of corruption in Vietnam, a finding that is borne out by the data (see figure 4.2).

Given its current low level of transparency, the marginal benefit to the Vietnamese economy from increased transparency can be huge. The amount of fiscal, financial, and economic information that the Government of Vietnam currently collects and releases to the public is inadequate for the smooth functioning of a middle-income country. Even basic statistics such as sectoral composition of state spending, off-budget expenditure, international reserves, and balance sheets of state-owned enterprises are either not collected, not disclosed, or disclosed only after a considerable lag. But market participants such as equity investors, exporters, importers, foreign exchange dealers, bondholders, banks, enterprises, and even farmers need information on almost a daily basis to operate in a market economy. And if such information is not available, market participants resort to speculation, rumors, and even unscrupulous means to obtain information. That is why it has been argued that one of the sources of the current economic turbulence in Vietnam can be traced to lack of credible and timely availability of economic data and poor communication of policy changes to the market.

Information is the lifeblood of markets

Public disclosure of information can mitigate market inefficiencies. Transparency reduces market uncertainty about policy makers’ preferences, resulting in more predictable monetary policy and more efficient financial markets. Transparency and accountability can also playa big role in reducing macroeconomic instability. Cross-country evidence on the benefits of fiscal transparency is growing. More transparent countries also seem to be more competitive in the global market.

Fiscal transparency in Vietnam

Fiscal transparency plays a particularly critical role in Vietnam’s economic transition, given the public sector’s relatively big role in the economy. Fiscal management in Vietnam has become more complex over time.

The government has made a good start in establishing the legal and institutional framework for fiscal transparency. Information available on the State Budget in the public domain has improved. Vietnam’s State Budget has a detailed classification structure, but it has yet to systematically publish information using the Government Finance Statistics standards. The budget released to the public is presented at a relatively aggregate level by functional and administrative categories, not economic categories, although it is broken down by central and subnational governments. Budget execution reports provide detailed reports on spending across economic, functional, and program categories. The absence of a clear connection between budgeting and accounting data makes it difficult to assess the execution of budget policies in detail. However, with increased decentralization in recent years, the transparency of intergovernmental fiscal relations has gradually been strengthened.

Greater compliance with fiscal transparency principles could further improve fiscal management and analysis. Some important management issues that could be better addressed by applying the principles of the fiscal transparency code:

  • The separation of the capital and recurrent budgets makes it difficult to estimate medium term recurrent implications of capital spending and to establish a sound long-term balance between the creation of public assets and their operations and maintenance.
  • A number of off-budget expenditures are not accounted for in the aggregate budget or deficit calculations.
  • With regard to assessment of broader fiscal risks, although there are detailed provisions on financial reporting by state enterprises, the capacity to analyze this information and inform government responses is still limited.
  • As one would expect with such high levels of decentralization, the quality of reporting is mixed.

The government is implementing public financial management reforms to address these challenges and to further improve the comprehensiveness, reliability, and timeliness of fiscal information. Another area that needs improvement is strengthening the capacity of the oversight institutions.