VNU Journal of Science - Current development state ò Vietnamese service sector - Nguyen Hong Son

VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 1 Current development state of Vietnamese service sector Assoc. Prof. Dr. Nguyen Hong Son* Faculty of Development Economics,University of Economics and Business, Vietnam National University, Hanoi, 144 Xuan Thuy, Cau Giay, Hanoi, Vietnam Received 7 March 2009 Abstract. Service sector has proved to be an important source of economic growth and social development of Vietnam over the past two decades. However, it is also subjected to numerous criticisms for a lack of facilities, monopoly, insufficient qualified service workers, poor quality, corruption, non-transparency, favoritism, and discrimination. At present, liberalization is expected to bring about significant changes to the Vietnamese services in terms of number of service providers, service structure, supply mode, governance, and regulations as well as service price and quality. This article will describe the current state of development of the Vietnamese service sector and identify the service gaps that need to be bridged in the coming years as Vietnam will implement the new socio-economic development strategy from now to the year 2020. 1. The Role of Service Sector in the Economy * In 2008, the service sector accounted for 38.1% of the GDP and 26.7% of the employment. Since the beginning of the Doi Moi, the share of services in the GDP has gone through different stages of change: i) it declined in the 1986 - 1988 period when Vietnam was still in the social- economic crisis and when agricultural development was given priority to ensure food security; ii) it increased during 1988 - 1990 as the market economy policy became more effective, and threat of food insecurity was relieved; iii) it fell down sharply in 1991 when the entire economy experienced a shock because the traditional markets in the former socialist blocs collapsed; and iv) it increased during 1991 - 1995 as the economy gradually escaped from the economic crisis, stepped up its transition to the market economy and conducted industrialization ______ * Tel.: 84-912257733 E-mail: nhson@vnu.edu.vn and modernization which created a higher demand for services. Although since 1996 the service sector has been expanding considerably, its share in the GDP has declined because manufacturing and mining sectors grew rapidly, and because skewed resources were given to industrialization and modernization priority at the expense of service development. Indeed, the annual growth target of 12 - 13% for service sector set in the 1996 - 2000 Five Year Plan was not achieved. Neither was the target to increase the share of service sector in GDP to 45 - 46% by 2000. Service share in the GDP declined during 1996 - 2004 and it was not until 2005 has the growth rate of the service sector been higher than the average growth of the economy. ”With the launching of the Doi Moi, service industries however have been quickly transformed to become important facilitators of economic growth”. N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 2 Figure 1. Share of service sector in the GDP of the economy (%) 33 38.6 44.1 38.7 38 38.1 38.1 38.1 38.5 0 5 10 15 20 25 30 35 40 45 50 1986 1990 1995 2000 2005 2006 2007 2008 Prel 2009 Figure 1. Share of service sector in the GDP of the economy (%). Sources: GSO (2000), Socio-economic Statistics of Vietnam 1975 - 2000, Hanoi: Statistical Publishing House; GSO (2004), Vietnam 20 Years of Reforms and Development (1986 - 2005), Hanoi: Statistical Publishing House; GSO (2009), Statistical Yearbook 2008, Hanoi: Statistical Publishing House; GSO (2008 and 2009), Annual Report 2008, Quarterly Report I/2009, and Half Year Report I/2009. 2.3 4.6 8.77 7.86 10.19 7.38 7.58 8.64 9.56 9.83 8.8 7.14 5.08 2.25 5.32 6.1 6.54 6.45 7.26 8.48 8.29 8.68 7.18 5.5 0 2 4 6 8 10 12 198 6 198 7 198 8 198 9 199 0 199 1 199 2 199 3 199 4 199 5 199 6 199 7 199 8 199 9 200 0 200 1 200 2 200 3 200 4 200 5 200 6 200 7 200 8 Fir st H alf of 200 9 Figure 2. Growth Rate of the Service Sector, 1986 - first half 2009 (%). Sources: GSO (2000), Socio-economic Statistics of Vietnam 1975 - 2000, Hanoi: Statistical Publishing House; GSO (2004), Vietnam 20 Years of Reforms and Development (1986 - 2005), Hanoi: Statistical Publishing House; GSO (2009), Statistical Yearbook 2008, Hanoi: Statistical Publishing House; GSO (2008 and 2009), Annual Report 2008, Quarterly Report I/2009, and Half Year Report I/2009. Under the command economic system, service industries in Vietnam, like in most former socialist countries, did not enjoyed favorable conditions to develop because of the view that these are not productive sectors of the economy. In 1985, services accounted for only 32.5% of the GDP whereas the share of agricultural, aquaculture and forestry sector was 40.2%. With the launching of the Doi Moi, service industries however have been quickly transformed to become important facilitators of economic growth. The growth of the service sector has jumped from merely 2.3% in 1986 to 10.19% in 1990 N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 3 (Table 1) during the first phase of unbundling and re-structure of the economy toward market orientation. In the 1986 - 1990 period service sector grew at 5.77% annually which was higher than the growth rates of the manufacturing and agriculture. Service sector grew at 6.92% on average in the 1986 - 2008 periods whereas the entire economy grew at 6.87%. For specific phases, service sector grew faster the entire economy during 1991 - 1995, peaking at 9.83% in 1995 when the economy was said of escaping from a decade prolonged socio-economic crisis. Then it grew more slowly than the economy from 1996 to 2004, as priority, hence resources, was given to industrialization and modernization. However, service sector has recovered, growing faster than the entire economy since 2005 and faster than the manufacturing sector in 2008. Table 1. Average Growth Rates of Three Sectors and the Economy, 1986 - 2008 Quinquennia Economy By sectors Agriculture, Forestry and Aquaculture Industry and Construction Services 1986 - 2008 6.87 3.75 9.39 6.92 1986 - 1990 4.43 2.67 4.71 5.77 1991 - 1995 8.18 4.03 12.00 8.57 1996 - 2000 6.95 4.42 10.60 5.69 2001 - 2005 7.51 3.82 10.18 6.97 2006 - 2008 7.63 3.72 7.48 8.05 Sources: GSO (2000), Socio-economic Statistics of Vietnam 1975 - 2000, Hanoi: Statistical Publishing House; GSO (2004), Vietnam 20 Years of Reforms and Development (1986 - 2005), Hanoi: Statistical Publishing House; GSO (2009), Statistical Yearbook 2008, Hanoi: Statistical Publishing House; GSO (2008 and 2009), Annual Report 2008, Quarterly Report I/2009, and Half Year Report I/ 2009. Table 2. Contribution of service sector to GDP growth (% age points) 2000 2001 2002 2003 2004 2005 2006 2007 2008 GDP Growth of the Economy 6.79 6.89 7.08 7.34 7.79 8.44 8.23 8.48 6.18 Contribution of Agriculture, Aquaculture, and Forestry 1.58 1.55 1.54 1.55 1.59 1.65 1.54 1.51 1.06 Contribution of Manufacturing and construction 2.40 2.52 2.65 2.83 3.07 3.39 3.37 3.54 2.57 Contribution of Services 2.80 2.83 2.89 2.97 3.14 3.40 3.32 3.42 2.55 Sources: Author calculated from: GSO (2000), Socio-economic Statistics of Vietnam (1975 - 2000), Hanoi: Statistical Publishing House; GSO (2004), Vietnam 20 Years of Reforms and Development (1986 - 2005), Hanoi: Statistical Publishing House; GSO (2009), Statistical Yearbook (2008), Hanoi: Statistical Publishing House. Service growth was the largest contributor to the growth of the economy during the 1986 - 2005 periods even though it was lower than that of the manufacturing and construction sector (1) N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 4 because the service sector accounts for a larger share in the GDP in constant prices. Service sub-sectors that contribute the largest parts to the growth of the entire service sector are trade and repair of motor vehicles, transport, storage and communication, hotel and restaurants, business services, and education and training. Service sector growth is associated with the development of infrastructures needed by industrialization and modernization. These infrastructures, for example, include new and upgraded highways, railway, seaports and airports serving as the artery for the transportation activities; extensive telecommunication and internet network; increased number of domestic and foreign banks and two stock exchanges channeling capitals into industrial production; and higher educational institutions which produce almost a quarter of million graduated students for the labor market each year. Although these outputs are still modest, this is a marked success for a relatively poor country with limited resources and large population. Service development has been crucial factor for Vietnam to attract new foreign investments not only to the industries but also to the services to provide capital and technology to the industrialization and modernization processes. Total registered foreign investments increased from 6.8 billions USD in 2005 to 12 billions USD in 2006, 21.3 billions USD in 2007, 71 billions USD in 2008, and 8.78 billions USD in the first half of 2009. By 2008, registered FDI into the service sector reached 62 billions USD, or 39% of total registered FDI. In terms of number of licensed projects, service FDI accounts for 45.4% of the total FDI. Current FDI flows into hotel and restaurant sectors and real estate and business activities because of their booms, followed by the distribution and transport sectors. However, in the long run, FDI flows into other services such as financial intermediation, health and education are also (1) Except the year 1995. expected to rise because these sectors are opened up for competitions. VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 1 Table 3. FDI in service sector by July 2009 (Effective projects) Sector Number of projects Total registered capitals (USD) Chattered capital (USD) Real estates 299 34 318 699 373 9 111 219 289 Hotel and Restaurants 247 10 772 027 712 2 325 997 243 Communication 526 4 644 523 917 2 891 673 564 Arts and Entertainment 116 3 741 202 178 1 103 142 799 Transportation and storage 269 2 127 690 039 794 886 012 Financial intermediation 71 1 181 625 080 1 084 338 000 Trade and repair service 225 1 037 210 781 475 392 995 Health and social works 62 951 775 273 234 151 705 Others 56 603 612 000 129 737 644 Professional services and science and technology 688 550 125 923 246 785 786 Education and training 121 243 503 203 97 149 497 Public administration 86 177 212 926 80 592 516 Water supply and garbage collection 14 48 323 000 31 523 000 Total 2 780 60 397 531 405 18 606 590 050 Source: Department of Foreign Investment, MPI. Database (July 24th 2009). Services are major source of employment. Since many service enterprises can be started with very little capital, service industries provide opportunities for persons with minimal resources to become self-employed and economically productive. In Vietnam, the number of employees in the service sector has increased steadily since 1985. As of 2008, the number of service workers was already 2.8 times higher than that of 1985, growing at an annual rate of 4.56%. In the same period, total employment of the economy only increased 1.73 times, rising at a pace of 2.41% each year. Financial intermediation, transport, storage and communication are those services that generate the largest portion of employment in service sector. Table 4. Labors in the service sector 2000 - 2008 Year Number of employees (thousands) Changes (%) Share of service workers in total workers of the economy (%) 2000 8199.8 25.42 21.8 2005 10504.6 28.11 24.7 2006 11008.4 4.80 25.4 2007 11535.8 4.79 26.1 2008 12026.9 4.26 26.7 Sources: GSO (2000), Socio-economic Statistics of Vietnam 1975 - 2000. Hanoi: Statistical Publishing House; GSO (2004), Vietnam 20 Years of Reforms and Development (1986 - 2005), Hanoi: Statistical N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 6 Publishing House; GSO (2009). Statistical Yearbook 2008. Hanoi: Statistical Publishing House; GSO (2008 and 2009), Annual Report 2008, Quarterly Report I/2009, and Half Year Report I/2009. Latest Human Development Report of the United Nations Development Program (UNDP) in 2005 ranked Vietnam Human Development Index 105 within 177 countries with data with a score of 0.733 (UNDP, 2007). Within a ten- year period, from 1993 to 2004, the number of population who lived below the national poverty line in Vietnam was brought down from 40.4 millions to 19.7 millions, or 60% of the number of poor households (MDGs Report, 2005: 14). In 2008, the proportion of poor household declined to about 13.1% comparing with 20.2% in 2005 (MPI, 2009: 69). The pre- school enrolment rate of children under five years old was 92.5% in 2008 and the primary net enrolment rate has been increasing steadily since 2005, reaching 96 % in 2008 (MPI, 2009: 55). National level malnutrition rate in children under five years old decreased from 25.2% in 2005 to about 21.0 % in 2008. Under-five mortality rate decreased from 28% in 2005 to 25% in 2008 whereas under-one-year-old child mortality decreased from 18% in 2005 to 15.5% in 2008 (MPI, 2009: 61). These remarkable achievements are attributed in the large part to service development, especially the development of basic public services such as education, and health which are regarded as engines for sustained growth and opportunities for the poor to escape from the porverty trap. 2. Structure of the Service Industry The biggest service sector is the distributive trade sector, which accounted for almost 14% of the GDP in 2008, whereas the next three biggest service groups are transport, post and tourism (4.53%), hotel and restaurant (4.38%), and real estate and consultancy (3.63%). Their shares in the GDP of the service sector are 36.28%, 11.89%, 11.50% and 9.53% respectively. These are also the sectors which have experienced rapid growth. Table 5. Share in GDP of service groups (%) 2008 Service sector 38.10 Trade 13.82 Hotels and restaurants 4.38 Transport, post, tourism 4.53 Financial intermediation 1.84 Science and technology 0.62 Real estate and consultancy 3.63 State management 2.77 Educations and training 2.60 Health and social works 1.25 Sports and culture 0.41 Activities of party and membership organizations 0.13 Community, social and personal services 1.94 Private household with employed persons 0.17 N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 7 Sources: GSO (2008 and 2009). Annual Report 2008, Quarterly Report I/2009, and Half Year Report I/2009. Table 6. Average Growth Rate of Service Groups (%) Service sector groups 1996 - 2000 2001 - 2005 2006 2007 2008 5.70 6.96 8.29 8.68 7.18 Trade 5.85 7.45 8.55 8.67 6.34 Hotels and restaurants 5.63 8.74 12.42 12.72 8.54 Transport, post, tourism 6.45 7.38 10.13 10.42 13.84 Financial intermediation 7.48 7.73 8.18 8.82 6.63 Science and technology 5.69 8.55 7.38 7.67 6.14 Real estate and consultancy 4.66 3.91 2.94 4.07 2.49 State management 2.58 5.49 7.57 8.22 6.38 Educations and training 5.63 7.46 8.42 8.68 8.04 Health and social works 5.57 7.40 7.84 7.99 7.67 Sports and culture 7.80 6.20 7.68 7.98 7.83 Activities of party and membership organizations 12.49 5.94 7.42 8.05 6.92 Community, social and personal services 8.02 5.95 7.25 7.91 6.31 Private household with employed persons 5.84 3.39 7.45 8.49 7.94 Sources: GSO (2000). Socio-economic Statistics of Vietnam 1975 - 2000. Hanoi: Statistical Publishing House; GSO (2004). Vietnam 20 Years of Reforms and Development (1986 - 2005). Hanoi: Statistical Publishing House; GSO (2008). Statistical Yearbook 2007. Hanoi: Statistical Publishing House; GSO (2008 and 2009). Annual Report 2008, Quarterly Report I/2009, and Half Year Report I/2009. Large shares and relatively high growth rates of final demand services such as hotel and restaurant, and part of real estate and distribution occur as the economy has grown fast, brought wealth to the society and stimulate consumption which was discouraged in the centralized distribution system. Because of the impact of the recent global economic recession, growth of those sectors appears slowing down but it will certainly bounce back as the economy recovers. Recent expansion of transport and real estate are taking place in the process of liberalization of those sectors, especially with the participation of the private sector into the business, and as greater resources are channeled into the infrastructure development of the economy. Nonetheless, shares of backbone services of the economy such as financial intermediation, science and technology and education are small even though these are rather fast growing sectors. Share of science and technology service has been almost unchanged at the level of 0.62% of the total GDP or 1.63% of the service GDP in the past few years, whereas that of education and training service has been declining since the year 2000 to 2.60% of the total GDP or 6.83% of the service GDP in 2007. New services such as securities, paid household services, and different kinds of business service activities associated with the market economy (e.g. consultancy, auditing, accounting, market research, etc) are emerging fast and “Nonetheless, shares of backbone services of the economy such as financial intermediation, science and technology and education are small even though these are rather fast growing sectors”. N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 8 contributing to the dynamic and diversification of the service sector though their shares are still small. At the same time, old services which accounted for the large share in the command economic system such as state management are shrinking in relative term. Share of state management service fell down from 3.34 % of the GDP in the beginning of the Doi Moi to 2.77% in 2008. Low GDP shares of a number of service sub-sectors are resulted from a small size of the service sector in the economy. However, there is a sharp skew in terms of distribution within the service sector as final demand services take a major share and leave small portion to be owned by intermediate services such as education which is the source for long-term and sustained growth or financial service which is a stipulator of rapid growth. In comparison, shares of distribution and catering services, finance and insurance services and health and social services in the GDP of the service sector were less than 20%, almost 14% and 13% for China in 2002 when service sector accounts for around 40 % of the GDP even though construction is added into the service sector (ADFAT, 2005: 14). In India, where services account for around 48% of the GDP, banking and insurance services accounts for more than 14.5% of the service GDP in 2001. Regarding the shares of each service sub- sector in the GDP and total employment, there are clearly two categories of services. Those which stipulate growth and contribute to GDP increase are science and technology, financial intermediation, hotels and restaurants, real estate and consultancy and to a lesser extent transport, post and tourism. Those which generate employment are trade, education, sport and culture, party and organization services, community, social and personal services. Science and technology is most effective in terms of growth stipulation whereas party and organization services are most effective in terms of employment generation. Sectors such as distribution service which remains more the source of employment so far just because it is still underdeveloped and the forms of modern distribution have not fully grown. Table 7. Share of employment of service sectors in 2007 Thousands people Share in entire economy Share in the entire service sector Share of GDP of service sector Entire economy 44915.8 100.00 -- -- Entire service sector 11925.1 26.55 100 100 Trade 5371.9 11.96 45.05 36.30 Hotels and restaurants 830.9 1.85 6.97 11.49 Transport, post, tourism 1221.7 2.72 10.24 11.90 Financial intermediation 220.1 0.49 1.85 4.82 Science and technology 26.9 0.06 0.23 1.63 Real estate and consultancy 251.5 0.56 2.11 9.53 N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 9 State management 866.9 1.93 7.27 7.27 Educations and training 1401.4 3.12 11.75 6.83 Health and social works 399.8 0.89 3.35 3.30 Sports and culture 134.7 0.3 1.13 1.06 Activities of party and membership organizations 220.1 0.49 1.85 0.33 Community, social and personal services and hired household services 979.2 2.18 8.21 5.54 Source: GSO (2009), Statistical Yearbook 2008, Hanoi: Statistical Publishing House. 3. Profiles of Service Firms Service enterprises account for 61.19% of the total enterprises in the Vietnamese economy. The number of service enterprise also grows faster than the number of enterprise in the economy. Health, education, business services and science and technology are those sectors which have experienced most rapid increase in the number of enterprises thanks to the opening of the economy which allows for greater participation of private sector in the delivery of both old and newly emerged services. In terms of shares, commercial sector owns the largest portion of the total service enterprise (65.35%), followed by real estate and consultancy (13.75%), transport, post and tourism (9.58%), and hotels and restaurants (6.37%). Thus, the shares of other service sectors are negligible. For example, despite its rapid growth in terms of number, companies operating in the field of science and technology still account for less than 0.01% of the total service enterprises. The majority of service enterprises in Vietnam are small both in terms of employees and capital. Most service enterprises have less than 9 employees and very few enterprises employ more than 200 staffs. For example, around 70% of enterprises in trade and repair of motor vehicles and household goods and community, social, personal services and hired household services employ less than 9 persons. Sport and culture activities have highest proportion of enterprises with more than 200 staffs, at 7.52%, whereas the groups of commerce and repair services, and community, social, personal and hired household services have lowest share, at 0.53% and virtually none, for each. Table 8. Share of service enterprise in terms of number of employees in 2007 (%) Sectors Size of employees 200 Total Trade and repair of motor vehicles and household goods 34.17 37.34 25.08 2.87 0.53 100 Hotels and restaurants 20.32 37.59 33.80 6.85 1.44 100 Transport, and storage 18.68 32.76 36.74 8.96 2.87 100 Post and telecommunication 9.50 45.11 34.54 7.03 3.82 100 N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 10 Financial intermediation 27.78 20.37 44.44 5.56 1.85 100 Science and technology 28.20 37.80 28.15 4.67 1.18 100 Real estate and consultancy 22.05 39.53 30.93 5.83 1.66 100 Educations and training 13.37 27.62 43.02 14.24 1.74 100 Health and social works 24.49 39.21 25.17 6.34 4.79 100 Sports and culture 19.48 33.60 33.60 5.81 7.52 100 Community, social, personal services and hired household services 33.33 33.33 33.33 0.00 0.00 100 Source: Author calculated from GSO (2009), Statistical Yearbook 2008, Hanoi: Statistical Publishing House. Table 9. Share of service enterprises in terms of size of capital in 2007 Sectors Amount of Capital (billion VND) 10.0 Total Trade and repair of motor vehicles and household goods 8.98 16.71 53.42 11.80 9.10 100 Hotels and restaurants 23.80 21.58 40.32 5.89 8.41 100 Transport, storage, post and telecommunication 13.66 14.68 50.13 8.37 13.16 100 Financial intermediation 8.30 4.22 13.39 24.23 49.87 100 Science and technology 22.22 7.41 44.44 11.11 14.81 100 Real estate and consultancy 16.98 16.58 44.34 7.60 14.50 100 Educations and training 27.32 20.67 39.53 5.41 7.07 100 Health and social works 13.08 13.95 43.02 11.05 18.90 100 Sports and culture 21.06 19.86 32.53 9.08 17.47 100 Community, social, personal services and hired household services 43.47 20.77 21.45 3.52 10.78 100 Source: Author calculated from GSO (2009), Statistical Yearbook 2008, Hanoi: Statistical Publishing House. Except in the financial sector, more than half of service enterprises have the capital of 5 billions VND or less. However, there is a positive trend in the increase of capital by service enterprises over the past years, as evidenced in the science and technology, sport and culture and trade sectors. In many service sectors, state-owned enterprises (or state agencies) are still the main and biggest providers. In some cases, they enjoy N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 11 monopoly such as Vietnam Social Insurance in pension for public sector, Vietnam Railway Corporation in rail transport service, and Vietnam News Agency in news agency sector. Or they have oligopoly and control large share of the market. For instance, VINALINES controls more than 53% of total shipping capacity of maritime transport. The airline services are dominated by Vietnam airline (in passenger services), Service Flight Corporation of Vietnam (SFC) (helicopter services), and Vietnam Air Service Company (VASCO) (air support services). In banking, five state-owned commercial banks (BIDV, Vietcombank, Agribank, Vietinbank, and MHB) owned 51% of total banking assets, and almost 57% of total deposits in 2008. In the telecommunication sector, Viettel Corporation, MobiFone and VinaPhone held 88% of the mobile market, whereas VNPT/VDC, Viettel and FPT Telecom possessed more than 90% of the ADSL market in 2008. Current step of SOEs reforms is the pilot establishment of the major state economic groups and special general state corporations in key economic sectors on the basis of 18 state- owned corporations (so-called the 91 general corporations). As of 2009, 8 state economic groups and 12 special general state corporations have been created, including such service providers as VNPT, Vietnam Railway and State Capital Investment Corporation. These economic organizations are put under the direct administrative management of the Prime Minister (2) . State Economic Groups are organized according to holding (parent) company - affiliated company models (3) . Holding company is state-owned and operates according to the SOE Law. Affiliated companies are limited liability companies or joint-stock companies. Although the aim of this restructure program is to increase the specialized capability and competitiveness of ______ (2) Except Bao Viet Financial Group which is put under the administrative management of Ministry of Finance. (3) Except Bao Viet Financial Group which is a joint-stock company. the important SOEs, some economic groups already took advantage of their capital scale to venture into their non-core business activities such as securities, banking and real estates more than on the expansion and improvement of their core services. Over the past years, the participation of the private sector, including foreign investors, into the service sector has significantly expanded. In the airline, Pacific Airlines (Jetstar Pacific) was established as the first joint venture. In November 2007, the government approved the establishment of the first privately-owned airline known as Vietjet Aviation Joint Stock Company, and in May 2008, the second company - Indochina Airlines. In maritime, GEMATRANS (Asia) Co., Ltd. and APM - Sai Gon Shipping are two joint-venture companies with significant roles in container transport. In banking sector, from 1997 to 2008, the share of joint stock commercial banks increased from 11.86% to 32.45% in terms of assets, and from 10.6 % to 31.23% in terms of deposit. In 2008, five foreign banks - HSBC and Standard Chartered (UK), ANZ Bank (Australia and New Zealand), Shinhan Bank (South Korea), and Hong Leong Bank (Malaysia) - were given permission to set up fully-owned subsidiaries which allow them to compete for market shares in earnest (BMI 2009, QIII: 29). In the telecom market, besides Vinaphone, MobiFone, and Viettel, there are also the joint ventures such as S-Fone, Hanoi Telecom (HT Mobile), Gtel Mobile in mobile service and FPT in fixed line. In the insurance sector, dominant service providers are joint stock and private companies such as PVI, Bao Minh, Bao Viet, AAA, and BIC, which account for 83% of the non-life insurance market. Distribution services are attracting major foreign distributors such as Metro Cash & Carry (Germany), Big C (France), and Parkson (Lion Group, Singapore). 4. Vietnam’s Trade in Services N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 12 Service trade volume has increased constantly during the 1991 - 2008 period (except the year 1999) at an annual rate of 24.1%. From 1991 to 2008, the annual growth rates of service export and import volumes are 22.6% and 25.9% whereas those of the total export and import volumes are 20.1% and 21% respectively. The share of service trade in total foreign trade turnover increased from 6% in 1990 to 30.4% in 1995 before falling to 19.8% in 2000, 11.5% in 2005 and 9.5% in 2008. During the 2001 - 2008 periods, the annual growth rate of service export is 12.15%, which is still lower than that of goods export (above 20%). By the end of 2008, the proportion of service exports in total exports of the economy is just 10.2% which is below the average world level (20.0%) and even below the average level of the transitional economies (14% - 15%) (Figure 3). At the same time, Vietnam’s service imports have increased considerably, from 2.304 billions USD in 1996 to 3.382 billions USD in 2001, 5.036 billions USD in 2005, and 7.931 billions USD in 2008. As a result, service trade deficit has been rising fast, from 61 millions USD in 1996, when it first occurred, to 872 millions USD in 2004 at its peak, and to 819 millions USD in 2008 (Table 10). Tourism, airlines, maritime transport and finance are four largest export sectors, accounting for around 93.1% of total service export in 2008. During the 2005 - 2008 period, shares of tourism, airlines, and maritime transport increased from 53.9%, 15.4% and 12% to 56.7%, 18.6%, and 14.6% respectively. In contrast, the share of financial services decreased from 5.2% in 2005 to 3.2% in 2008. Tourism, airlines and the group of “other services” account for more than 37% of total service import in 2008. However, largest portion belongs to the cost of insurance and freight paid for transportation in foreign trade, accounting for almost 53% of total service import value in 2008. Figure 3ice trade volume of Vietnam, 1990 - 2008 (millions USD). 308 719 1136 4129 5683 5762 5533 5954 6192 6646 8606 1466 2547 7322 15011 13636 10892 8745 4547 0 2000 4000 6000 8000 10000 12000 14000 16000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Figure 3. Service trade volume of Vietnam, 1990 - 2008 (millions USD). Source: Author calculated from WTO Statistics. GSO (2009), Statistical Yearbook 2008. Hanoi: Statistical Publishing House; GSO (2008 and 2009). Annual Report 2008, Quarterly Report I/2009, and Half Year Report I/2009. Table 10. Service Exports and Imports of Viet Nam, 2005 - 2008 N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 13 Year Export Import Service exports minus imports (million USD) Turn-over (USD million) Change (%) Share in export (%) Turn-over (USD million) Change (%) Share in imports (%) 2005 4265 10.3 11.6 4480 -5.5 10.9 -215 2006 5100 19.6 11.4 5792 29.3 11.4 -692 2007 6460 26.7 11.7 7176 23.9 10.3 -716 2008 7096 9.8 10.2 7915 10.3 8.9 -819 Source: GSO (2009), Statistical Yearbook 2009, Hanoi: Statistical Publishing House; GSO (2008 and 2009). Annual Report 2008, Quarterly Report I/2009, and Half Year Report I/2009 . 5. Vietnamese service gap Although Vietnamese service sector has been an increasingly important source of economic growth, its GDP share is still modest and has remained almost constant over the past years. At present, the service sector accounts for 38.5% of the GDP, below the level of a number of transitional economies and the economies in Southeast Asia (e.g. Singapore, the Philippines, Thailand, Cambodia, Malaysia and Indonesia). In other transitional economies, whose GNI per capita exceeds 2000 USD (low medium income threshold) such as Romania, Bulgaria, and Russia, the service sector accounts for more than 50% of the GDP, and whose GNI per capita exceeds 4000 USD (high medium income threshold) such as Hungary, Latvia and Litva, the service sector accounts for more than 60% of the GDP (UNDP, 2006: 2). Even in the major cities of Vietnam, the GDP share of the service sector is still not high. For instance, service sector accounts for 57.5%, 50.4% 43.6%, 48.3% and 42.7% of the GDP of Hanoi, Ho Chi Minh city, Hai Phong, Da Nang and Can Tho respectively. To the same extent, the share of service employment in the total employment in Vietnam is low. Service sector accounts for merely 26.7% of total employment in 2008 whereas these shares were 36.5% and 40.9% in Southeast Asia and Asia-Pacific region respectively in 2007. Nonetheless, the GDP share of Vietnamese service sector may be underestimated because of the exclusion of the informal service activities and such sectors as construction and utilities supply from the official service statistics. This statistical gap needs to be bridged in order to have fuller assessment of the development state of the Vietnamese service sector. Within the service sector, final consumption services such as retail distribution, hotels and restaurants and tourism account for the major share, both in terms of the GDP and employment. For instance, the distributive trade sector accounted for more than 36% of the GDP and almost 46 % of the employment of the service sector in 2007. In contrast, the shares of backbone services such as financial intermediation, science and technology and education are small even though these are rather fast-growing sectors. Although new services such as securities, hired household services, and various kinds of business service activities are emerging fast, their shares are small. Part of the reason is the emergence of a wealthier and consuming economy. Another is a focus of the producers in the market and the policy on the development of consumer or final demand services. In this regard, the “prioritization” of services in the development strategy of Vietnam must take into account the overall development level of the country and its foothold in the international market to come up with realistic goals. For example, it is more realistic for Vietnam to choose to become a competitive service provider next to China which already N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 14 established its firm position as the world manufacturer. In addition, the industry and services have a strong inter-linkage, which should be taken into account in the overall development strategy to ensure that both sectors grow side-by- side and are supportive to each other. The service structure also indicates that high value-added intermediate services which are critical for enhancing the competitiveness of the whole economy remain underdeveloped and are not capable of meeting the needs of the economy. Although services comprise over half of Vietnam’s enterprises (UNDP, 2006), the size of the majority of Vietnamese service firms is still small both in terms of capital and employment. In addition, there are a large number of very small and unregistered service providers including individuals and households who have their business in the informal sector. There are also a few big providers in the service sectors under the monopoly and oligopoly of the state such as telecommunication, airlines, rail transport, maritime transport, banking, insurance, and pension. Overall, competitiveness of the Vietnamese service sector is low and this is also true for sectors that have such comparative advantage as tourism. Productivity levels are comparatively low and caused by various reasons such as low skilled labor force, small economy of scale, low technology and outdated facilities. In addition, current competitive and marketing strategy among the service firms still focuses on the price rather than quality dimension. Recent establishment of the so- called economic groups in some service sectors is said to increase the competitiveness of Vietnamese companies in terms of scale and market share and to provide the regulatory mechanism of the state on the economy in the face of global economic integration. However, this may strengthen the monopolies of the state and distort competitiveness dynamics in the service sector. Overall, the share of Vietnamese trade in services in total foreign trade is still modest and on a trend of decline in 2008. In addition, Vietnamese service trade deficit is growing. Maritime transportation accounts for a large share of service trade deficit because of high cost of freight and insurance paid to foreign companies. Service exports concentrate on a few sectors such as tourism and computer and grow slower than goods exports. Vietnam’s service export strategy is an import substitution strategy rather than an export-growth strategy. In the long run, expectations for service exports are low given the limited competitiveness capability of potential export service sectors. Foreign investment in the Vietnamese service sector remains relatively low and this is contrasted to the trend of increased foreign investment in the service sector in the world. Moreover, executed foreign investment is often far below the total amount committed. The FDI flow may not be sustainable since it concentrates on the booming sectors of the economy such as real estates and hotels and restaurants. In this respect, the FDI sector has minor effect on the improvement of the competitive capability of Vietnamese service sector and while Vietnam wishes to diversify the investment capital, it is actually still relying heavily on the State budget. Finally, there exists a huge accessibility gap among the regions and among the social strata to basic services such as healthcare, education, and basic public utilities. Constraint on the government resources in investment and consumption subsidies serves as bottleneck in the improvement of the quality and delivery of public services and widens socio-economic gaps across the regions and social groups. Thus, Vietnamese socialist-market oriented economy requires the service development strategy to take into account “Vietnamese socialist-market oriented economy requires the service development strategy to take into account the needs of the low-income and most vulnerable segments of the population”. N.H. Son / VNU Journal of Science, Economics and Business 25, No. 5E (2009) 1-14 15 the needs of the low-income and most vulnerable segments of the population. References [1] ADFAT (Australian Department of Foreign Affairs and Trade) (2002), Economic Analytical Unit, Unlocking China’s Service Sector, Canberra, Australia. [2] GSO (2000), Socio-economic Statistics of Vietnam 1975 - 2000, Hanoi: Statistical Publishing House. [3] GSO (2004), Vietnam 20 Years of Reforms and Development (1986-2005). Hanoi: Statistical Publishing House. [4] GSO (2009), Statistical Yearbook 2008, Hanoi: Statistical Publishing House. [5] GSO (2008 and 2009), Annual Report 2008, Quarterly Report I/2009, and Half Year Report I/2009. [6] UNDP and MPI (2006), General Framework for Strategy for Service Sector in Vietnam to the year 2020, Hanoi. [7] Sectoral papers, Serv-2A (2009), Project “Formulation of the Draft Comprehensive Strategy for Services Sector Development to the Year 2020 and a Vision to 2025”. [8] WEF (2009), Global competitiveness report 2008 - 2009.