The challenges of the transition to market economies for post-communist East Asian countries

1. Introduction

The twentieth century witnessed both the emergence of the communist economic model and its fall 70 years later. ‘Communism’ traditionally evokes an economic system based on Marxist criticism, if not entirely aligned, certainly based on its principles. Enforced by Lenin, this system saw the light of day at the beginning of the 20th century in the Soviet Union before being generalised in almost all countries where the ruling party was the sole ‘Communist Party.’ Given its origin, communism is often equated with the original system, that of the Soviet Union, hence the popular name of the Soviet economy. Communism is based on two fundamental principles: collective ownership of all means of production and centralised planning of the economy.

According to expert economists in transition, the root causes of the failure of the centrally planned economy model lies within the resource-scarce economy. This failure could be explained by the bureaucratic budgetary allocation mechanism of the socialist state, by the absence of any competition, which is why the poor performance of the key players in the economy, which are mainly state-owned and run enterprises (SOEs). The collective ownership of all the means of production of the national economy, the hierarchical model of governance of the State and the redistribution of social surplus in an egalitarian and centralised manner are all identified as failing points of the centralised and planned economy (Andreff, 2004).

As such, the ‘market economy’ prevails as the unquestionable choice for these former communist economies. The term ‘economic transition’ describes the shift from the communist economic model to a form of ‘market economy’ – a name for the post-socialist period model in the former centralised and planned economies. Studies on the economic transition process have specifically highlighted the economic reforms initiated in the countries concerned. The authors are unanimous on the disparities in the process between countries, which are usually explained by contingent national characteristics making each of these countries a case in its own right. But they all aspire to straighten out their national economies to catch up with the global economy.

Similarities could be identified in any transitional process to a market economy: withdrawal of the State from the economic sphere, price liberalisation, the birth of a ‘regulated’ market, the privatisation of state-owned enterprises, the emergence and development of the private sector, international openness and integration, etc. However, they do not follow a predetermined order and the reform processes are not comparable in terms of method or tempo, nor in terms of result. While each of the reforms has a specific purpose (reform of state-owned enterprises, price reform, administrative reform, land law reform, tax reform, reform of accounting regulations, drafting of new laws, the integration of international legislation and commercial practices, etc.), they are not independent of each other. The advancement of one calls for that of another and so on. Redefining the State’s role entails redefining other actors’ role, implies new social relations, new forms of organisation, new operating rules, and therefore different ways of thinking and behaving.

Divorce from the old economic system could be considered as a move in this direction. Nevertheless, the primary concern resides in the market economy transformation path and output. Some countries have decided to adopt a kind of shock therapy and embark on the path of Western liberalism, hoping to save time (this is true of the ex-USSR and Hungary)? and, perhaps, as a result, others have opted for a gradual, progressive, evolutionary, heuristic but perhaps longer approach (for example, China or Vietnam) (Phan et al., 2006).

Three decades later, the market economy model appears to be an appropriate choice. These transitional economies are recovering and are displaying promising results through economic growth, economic and social development, and poverty reduction. While transition in Eastern European countries concerns all aspects of the society – political, economic, and social, some countries, such as China and Vietnam, decided to change only economic aspects for the market economy. Under Communist Party leadership, urgency focused on cleaning up the State sector, revitalising SOEs that had been given autonomy to exist without any support from the State, and learning to survive within a competitive environment (Fforde, 2014). The managers have had to learn by doing. The institutional infrastructure has been created simultaneously with trade and market liberalisation. All efforts were concentrated on making the market economy emerge in compliance with international standards – legal framework, international practices – as these are the prerequisites for joining the global trade arena.

However, what is at stake in studying transitional phenomena resides in what Andreff (1996) underlined in his analysis of the privatisation process in transitional economies ‘[…]privatization in transitional economies could not afford to use Western techniques [… .]’.

The roadmap towards a market economy followed by these transitional economies, drawing on western concepts, would not effectively reflect the same realities observed in western developed mature economy markets.

Therefore, the transition towards a market economy undertaken by the Communist Party in China and Vietnam cases could prevail as interesting empirical fields for critics of the centralised planned economy model often assimilated to the communist ideology.

Indeed Kornai (2000) explained that economic ideology guides the choice of the mode of coordination (plan versus market) of the national economy and corporate governance modes (see figure 1). Political ideology, modes of coordination, and corporate governance modes are all variables that explain the economic fallout observed in the former centralised and planned economies of the communist bloc.

Figure 1. Model of socialist and capitalist systems (Kornai, 2000) model of the socialist system model of the capitalist system.

A brief overview of Vietnam’s economic evolution brings us further back to 1984 when the first economic reform trials were decided.¹ The State opted to withdraw from the management of State-Owned Enterprises (SOEs) by giving them more autonomy and redefining its power as owner and as manager of SOEs.²

The sixth national congress of Vietnam’s Communist Party, held in December 1986, adopted an overall economic renovation policy. Popularly known as ‘Doi Moi’ the policy initially aimed to shift economic priority from heavy industry to three major economic programmes, namely production of food, production of consumer goods and production of exports; reduction of State intervention in business; and encouragement of foreign and domestic private investment. The seventh and eighth national congresses of the Party, held in 1991 and 1996 respectively, reiterated its commitment to a socialist-oriented multi-sectorial economy operating under the market mechanism and State management and called for more structural reforms.

The concept of equitization was created from the idea of delimiting the firm’s boundaries via its financial responsibility. A new constitution was established in April 1992, reaffirming the central role of the Communist Party in politics and society, and outlining government reorganisation and increased economic freedom. The amendments introduced in the supreme legal document triggered a new vision of the firm, public or private (joint-venture company, stock company, etc.)

The constitutional amendments represent a powerful consensus between the political leadership and the people to establish market rules and the sympathy of political circles with the private sector. In parallel, the legal framework was developed, drawing on private property law from western countries.

The transition towards a market economy means private sector development (Kornai, 2000). To facilitate access of Vietnamese private firms to financing resources, the first Stock Exchange Center in Ho Chi Minh City (HOSE) was inaugurated on July 20^th, 2000, and the first transactions were launched on July 28^th, 2000 with only two types of shares (REE and SAM – two Vietnamese manufacturing firms participating at the very early stage of the Vietnamese equitization process). The HOSE Stock Exchange is the most important financial market in Vietnam, with a market capitalisation in 2014 representing 88% of the country’s global market capitalisation, and it is equivalent to 25.5% of Vietnamese GDP (Table 1). Listed on the HOSE Stock Exchange are important companies in terms of size and sector, and many of them have a record of a very stable growth trend. More than 300 shares are marketed on the HOSE. The second stock exchange was launched in Hanoi (HNX) capital a few years later. These stock exchanges play a key role in making financing resources available and creating conditions for international investors and funds to participate in national economic development. The Hanoi Stock Exchange (HNX) also has the task of organising State bond auctions to collect financing resources for governmental infrastructure projects. Like other transitional economies, Vietnam is learning through doing, with assistance from various international institutions.

Nevertheless, strategic economic sectors remain under State control. The companies listed on the stock exchanges are not representative and represent only a tiny part of the national economy. As State surveillance over the national economy is overriding, particularly regarding companies in strategic sectors such as Banking, Commodities, Infrastructure Industry, Pharmaceutical Industry, etc., the market economy as it is understood in the western world is still far from being a reality.

Vietnam – as one of the major frontier emerging market economies – having started from nothing, has so far demonstrated very satisfying economic and social outputs. The private sector has grown quite fast in terms of quantities enabling private investments to flow into the development of the national economy. The variables explaining the Vietnamese economic development and its sustainable GDP growth of around 7% are national demand and the country’s cheap and under-qualified labour force. This is one of the challenging issues that the Vietnamese government has been thriving to overcome to provide the country of more than 90 million inhabitants with skills to compete globally.

For example, since the economic reforms initiated in 1986 (under the name Doi Moi) to create a ‘socialist-oriented market economy,’ Vietnam’s economic growth has expanded by on average nearly 7% annually. As a result, per capita income has increased almost fivefold. Vietnam today has emerged as a thriving lower-middle-income economy and export powerhouse. Growth has also been inclusive, with poverty falling just below 7%, compared to more than 60% in the late 1980s (Dione, 2019). These countries’ reforms have introduced a more significant role for market forces for coordinating economic activity between enterprises and government agencies. The country has also started rethinking its economic growth model by focusing more on the growth quality through training high-skilled labour, digitalisation, innovation, and technology. A recent report by Google, Temasek, and Bain & Company projected that Vietnam’s digital economy sector (e-commerce, online media, transport & food, online travel, digital financial services, HealthTech, and EdTech) would likely reach 52 USD billion in 2025, with an average growth rate of 35% over the period from 2015 to 2018.³

Despite all the reforms, these countries are still committed to a market economy without having obtained the status because the conditions to be met are hardly achievable in the context of international competition and the macroeconomic equilibrium to maintain. Indeed, these reforms have shown the difficulties of macroeconomic stabilisation in the context of an economy in transition. In particular, China had until 15 June 2020, to relaunch its complaint lodged against the European Union with the World Trade Organization. It has abstained, thus lending creed to the idea that it is not considered a market economy. For this, it had to comply with specific conditions, such as a court case regarding commercial dumping, which consists of exporting for a price lower than that practiced by the competitors in the country of destination. Given the challenges in this transition period to the market economy, Vietnam, like many other developing countries, has actively encouraged foreign investors’ entry to facilitate industrialisation and the country’s economic modernisation.

If we look at the microeconomic level, it is clear that Southeast Asian companies, especially in Vietnam, have undergone a first wave of transformations introducing the market economy’s principles. Indeed, openness to the outside led them to cope with an intensification of competition in their internal markets but also on the external markets to export their products. It followed restructuring with dismissals that led to redundancies, strikes, and bankruptcies (Fforde, 2016). So, productivity is the first challenge for firms. According to Nobel Laureate Paul Krugman, ‘Productivity isn’t everything, but in the long run, it is almost everything.’

In a continually changing environment, future growth must be productivity-driven – obtaining more and higher quality output from firms, infrastructure, workers, and natural resources. ‘An asset-based perspective is helpful. The wealth of a nation is determined by how well it manages its portfolio of assets – its produced capital embedded in firms (private capital) and infrastructure (public capital); its human capital shaped by education, skills, health, and opportunity; and its natural capital including land, water, forests, and the ecological services on which life depends. Countries which augment their stock and continuously improve the quality of their capital endowments reap long-term growth that is widely shared and sustainable through generations’ (Vibrant Vietnam, World Bank Group report, World Bank Group, 2020).

Modernising the economy and increasing the resources available for businesses also means changing the shareholding and the governance of state-owned enterprises, especially for technological firms, as this impacts their financing capacity and performance (Sahut et al., 2021). In particular, the Vietnamese government is trying to accelerate the pace of privatisation with its 2018 State directives, but without much success. Of a total of 127 state-run firms, only about 30 of these have been sold, mainly because of the nesting of political elites in the economic system.⁴ Indeed, the financial returns from these privatisations are likely to dry out channels that nourish political power.

Another cause of the difficulty for firms to leave the State’s fold is access to other financing sources and credit more specifically. The ‘Doing Business 2020’ (World Bank Group, 2020) report revealed that Vietnamese national companies consider access to credit as the most serious constraint for doing business, more than taxes, corruption, and skilled workforce. The situation is similar in China, which represents the second-largest bond market in the world. Since November 2020, the Chinese bond market has been the subject of an unprecedented series of defaults by Chinese companies supported by the Chinese state. The Yongcheng Coal & Electricity Energy Group, belonging to the province of Henan and rated AAA, has not been able to deal with a bond maturity of 1 billion yuan.At the same time, Brilliance Auto Group, an automotive giant and BMW partner in China, and Tsinghua Unigroup, two state-owned enterprises, respectively defaulted 6.5 billion yuan and 1.3 billion yuan in debt. Even if the amounts at stake are considerable, they still have little effect on the overall bond default rate, which does not exceed 1.8% of outstanding loans issued, i.e., a level comparable to banks’ non-performing loans.

These defaults, however, slowed issuance, as more than 20 billion yuan of bond issues were cancelled the week following the default of Yongcheng Coal & Electricity.⁵ In fact, for investors, the debt of most state-owned enterprises (SOEs) was assumed to be safe because it enjoyed the unwavering support of Beijing or local governments. This explains their reluctance to invest in the bonds of private firms. Thus, this reorganisation of the Chinese bond market will perhaps have the merit of improving the rating system (the firms with the best ranking, i.e., AAA, should never fail) and allowing private companies to no longer be neglected by investors because they are considered too risky.

The financing of firms in Southeast Asia countries must therefore leave the bosom of the State, and this raises the question of the ability of financial institutions to collect savings and then make them available to firms via loans or capital markets. Their long-term capacity to fulfill this mission lies in savers’ confidence and, consequently, their resistance to banking and currency crises. Indeed, currency crises in emerging countries have often been accompanied by very costly financial crises with significant repercussions, going as far as bankruptcy, for domestic banks (Chomsisengphet & Kandil, 2007). Detecting currency and banking crises is, therefore, a major issue for all emerging countries. Research in this area has focused on different econometric approaches to develop early warning systems (EWS). But no integrated approach exists for EWS in the context of emerging and frontier markets such as Vietnam. This is precisely the subject of the article by Ha et al. in this special section.

Another problem of the rapid growth of Southeast Asian countries is the consequences of their industrialisation. Industrialisation brings about a process of rapid urbanisation – new cities emerge, and existing cities are developed. The exodus from the countryside to the cities means that the latter grow at a faster rate than their borders expand. The density of the big cities’ population puts the real estate market under pressure with prices that soar even if in some countries like China, real estate development in recent decades has contributed enormously to accelerating economic growth because it is a strong source of job creation.

But this growth has its setbacks. The Chinese real estate market generates many problems and risks (Chen et al., 2020): (1) waste of resources: this means that the real estate inventory leads to a waste of land, human, financial and material resources; (2) real estate bubbles; (3) pollution (air, water, noise, waste); (4) financial risk: it leads to an increase in the financing risk of banks and hinders the financing environment for real estate companies.

Here again, the transition from a planned economy to the market is not without its pitfalls. This is why, to ensure sustainable development of the housing market, the Chinese government established a long-term stable real estate development mechanism in 2018. But given the diversity of Chinese cities, this mechanism needs to be adjusted locally. Thus, designing a comprehensive appraisal system to provide a real estate policy benchmark to the regional government is a critical problem in real estate research. This is precisely the subject of the article by Liu et al. Vietnam is also facing the problem of real estate speculation. As land is scarce, many investors consider it more profitable not to carry out the projects promised to the authorities, complete them only partially, and resell the land divided into plots. Also, China’s experience in developing a sustainable housing market development policy could prove insightful for Vietnam.

We now introduce the contents of our special section.

2. Contents

Based on an innovative and future perspective, this special section of Post-Communist Economies (PCE) brings together relevant papers about the challenges faced by East Asian firms and markets. The accepted papers are classified according to the focus on giving form to the issue. The first two papers address firm financial and performance considerations, the third deals with the detection of currency and banking crises, and the final paper focuses on the regional efficiency of the real estate industry in China.

The link underpinning all these papers focuses on structuring and performance issues of firms and markets (banking and estate markets). From the start, we intended to focus particularly on the sustainable development of firms and markets in East Asia. Consequently, only submissions closely related to the theme are included in this section.

The articles were selected following a thematic open call for papers. Those that were positively assessed were subjected to the usual PCE review procedures. The contributions presented herein successfully navigated this process. Given this selection process, the four accepted articles contribute to a better understanding of firms’ sustainable development and markets in East Asia.

Two papers are related to the financing and performance of firms in Vietnam. In their investigation of trade credit, Boubaker, Cuong, and Tran show how the increase in conservative accounting arising from the government’s privatisation results in less trade credit and better accessibility to bank financing. They observe a shift in the nature of credit. More bank loans awarded lead to less trade credit in terms of payables. They also point out how improvements in financial report audits and corporate governance quality over the course of recent privatisation programs raise the effectiveness of the capital market in terms of debt contracting.

The paper by Dang, Hikkerova, Houanti, Le, and Vu studies the influence of age on firm performance. They highlight a U-shaped relationship between firm age and firm performance. After an initial negative effect of firm age on firm performance, age after that has a positive effect. Moreover, the quality of financial statements increases over time. This result is consistent with Hadlock and Pierce (2010), who explain that older firms face lower costs of capital. Lastly, contrary to the arguments set out by Phung and Mishra (2016), state ownership is not significantly correlated to financial performance.

The paper by Dao Ha, Phuong T. M. Nguyen, Duc Khuong Nguyen, and Ahmet Sensoy is about a new early warning system (EWS) for currency and systemic banking crises in emerging and frontier emerging markets. The development of EWS for currency crises and systemic banking crises has been systematically investigated, especially after the 1997–1998 Asian financial crisis, by many researchers, international financial institutions, and central banks with the purpose of prudential policymaking. The authors develop an innovative framework where they integrate four technical approaches: Logit/Probit, signal, Bayesian Model Averaging (BMA), and the Two-Stage Least Squares (2SLS) (Babecký et al., 2014; Rahman & Hasan, 2014). They apply their framework to detect systemic monetary and banking crises in Vietnam, a dynamic, fast-growing market that attracts FDI but with a high vulnerability level due to its macroeconomic instability. They fill a gap in the literature because no EWS exists for this type of emerging and frontier markets. Their results highlight 11 and 15 macroeconomic variables to detect the currency crisis and the banking crisis in Vietnam. But eight macroeconomic variables (stock composite indexes, real effective exchange rates, exports, M2/reserves, bank deposits, reserves, M2 multipliers, and the impact of the global financial crisis) are common for both types of crisis. This identification is crucial for policymakers and regulators and should help them develop a cautious approach to regularly monitor some variables which provide alerts on the currency and systemic banking crises. Moreover, this study further reinforces the argument that the relationship between the two types of crisis is bilateral, i.e., exchange market pressures significantly impact the likelihood of systemic banking crises.

Xiao-xiao Liu, Yao-yao Song, Hui-hui Liu, and Guo-liang Yang analyse the regional real estate efficiency of 35 large and medium-sized cities in China, and in particular the Chinese government’s housing strategy of ‘implementing real estate policies based on urban characteristics.’ Based on the dynamic three-stage DEA model, their methodology uses the meta-frontier concept to analyse regional real estate efficiency in 35 large and medium-sized cities by grouping. Their results highlight three main contributions: (1) the policies of destocking and purchase restriction play an essential role in the Chinese housing market; (2) the main stage affecting overall efficiency is the sales stage; (3) the evaluation of grouping efficiency measures the operating efficiency of first-tier cities and non-first-tier cities respectively, which can be used to propose some constructive suggestions to improve real estate development in China based on the reasonable results of real estate efficiency. Finally, they also demonstrate how government policy has a certain influence on China’s regional real estate sector.

From various perspectives and with different methodologies, all these papers contribute to research, practice, and society. Moreover, they complement each other, providing an important message. Although the scientific research underpinning the transition to market economies for post-communist countries has been gaining ground, it is still a relatively under-researched field for Southeast Asian countries; and each of these papers sheds some light on gaps in the research.

3. Avenues for future research

These articles highlight the challenges of the transition to market economies for post-communist East Asian countries. They are not without limitations but offer interesting avenues for future research. The first three articles focus on Vietnam, which is a particular country. Further research could investigate other ex-Communist countries to increase the generalisability of their results. Moreover, as suggested by Coad et al. (2018) or Sahut et al. (2021), initial conditions of the listing (i.e., initial size, governance, or ownership structure) might affect a firm’s financial structure and performance. In the first two articles of this special section, these points were not taken into account. This might be an interesting avenue for future research. Dang et al. show that more bank loans awarded lead to less trade credit in terms of payables. It might be interesting to analyse whether bank credit is an effective substitute for trade credit in transition economies like Vietnam.

The stability of the financial system is also fundamental to the development of these countries. So, the detection of currency and banking crises is a crucial challenge. Dao et al. show eight common macroeconomic variables that enable currency crises and banking crises in Vietnam to be detected. Unfortunately, the lack of updated macroeconomic data prevents them from providing timely forecasts to support policy decision-making. Moreover, due to the unavailability of some data with a higher frequency than annual updates, their model could not cover some interesting variables related to the macroeconomic and public sector (e.g., institutional quality, terms of trade, short-term external debt, GDP, and real estate price indexes), and the Banking sector (e.g., return on total assets, return on equity, profitability, and non-performing loan). Another limitation is related to the use of the threshold and noise-to-signal ratios suggested by previous studies when applying the signal model, which potentially reduces the accuracy of crisis predictions in Vietnam’s specific context. Therefore, future research could improve the quality of their proposed early warning systems based on the road map of data availability improvement. More precisely, it is useful to develop a more data-driven approach to establish a threshold and noise-to-signal ratios for each early warning indicator and then examine their effectiveness over an out-of-sample period.

The last paper concludes that China’s real estate sector’s efficiency evaluation is of great significance to high-quality real estate development. However, some potential limitations should be noted. First of all, considering the availability of the database, the samples in this study only contain the 35 large and medium-sized cities in China, without taking small cities into account, which may not fully reflect the development status of the entire city-level real estate industry in China. Secondly, the environmental factors which refer to the indicators of energy consumption and carbon emissions in the process of real estate development are not included in the research framework of this paper. Considering the fact that there is no official data on energy consumption and carbon emissions from real estate development, this may cause some estimation bias. Thus, such factors are absent from most existing literature. However, it is certain that the issue of energy conservation and emission reduction in real estate development will be a focus of research in the future. Therefore, to address this issue, further papers can try to overcome the problem of estimation bias and plan to conduct a green real estate efficiency assessment that takes energy conservation and emission reduction into account, based on a broader research sample, including the real estate sector in China’s large, medium, and small cities.

Notes

1. Decision n° 156/HDBT of November 30th,1984, published by the Council of Ministers, granted more autonomy to SOEs.

2. Decision n° 217/HDBT, published by the Council of Ministers, redefined the power of the State in its role as owner and manager of SOEs.

3. https://www.bain.com/insights/e-conomy-sea-2020/

4. https://www.vietnam-briefing.com/news/vietnams-equitization-opportunities-and-challenges.html/

5. https://www.lesechos.fr/finance-marches/marches-financiers/la-chine-secouee-par-une-serie-de-defauts-dans-ses-entreprises-detat-1266021