Long Waits Could Hurt Economy

Vietnam is a booming economy since 1990 and it’s growing even faster over the year. When compared to the region of South East Asia, Vietnam has been in the lead of GDP growth since 1995 until now. Despite the worldwide financial crisis of 2008, Vietnam is still among the highest growth economies in the area:

(source)

However, please note that highest growth rate DOES NOT mean that Vietnam economy is leading the region. Other countries are growing, too. Especially since they already had a head start with more peaceful years than Vietnam, their total GDP has been higher and Vietnam still has a lot of catch-up to do:

(source)

Now, everyone wants their country to do well. Many leaders have been looking for suitable frameworks & models from other advanced nation. This is part of the reason why poor countries have been trying to join international organization like World Trade Organization (WTO), International Monetary Fund (IMF), World Bank, etc. When joined, the member countries must adhere to much of the rules and regulations of advanced nations that lead those organizations.

Rules & regulations are good. They set up an even playing ground for people to compete. However, not all rules and regulations from the US can be applied to Vietnam because Vietnam is at different growing stage than the US. We also should keep in mind that regulations come with extra cost and extra benefit, and regulations are only worthy if the benefit is higher than the cost.

With that said, I want to talk about how lengthy legal processes can hurt a growing economy.

As we know, in recent decades, many people are pouring into the urban centers due to higher wages and convenience. When these people migrate to the cities, they will rent or try to own a property. Let’s say that a person has been living in one property for more than a year informally through renting, and he/she wants to legally owns this property. Let’s look at the procedures to “formalize the informal urban property” in the Philippines.

(source: Mystery of Capital, de Soto, pg. 22)

The left column lists all the offices that this person has to visit, and each bold point on the graph presents one procedures to be done. Assuming that the person does not have any connections and must spend 6 hours/day in lines at these public offices.

It takes at least 13 years for a person to formally own their home. This is an incredibly high cost.

The result? People will resort to informal contracts – a move to the underground economy. These informal transactions are not recorded as part of the official GDP.

However, the effect of informal contracts is much more damaging than a lower official GDP number.

Without official ownership of a property, the informal owners cannot take an equity loan to start their own businesses. This is similar to the case in Vietnam. Most citizens buy their homes with complete cash payment. And if they want to start a business, they need to have the extra cash to purchase all equipments and rentals. All of their assets are not productive because they don’t officially own the property. Imagine all the lost business opportunities that could boost everyone’s earnings and living standards. This is clearly a large loss for Vietnam.

My hope is, as it joins the global organizations, Vietnam will also reduce the unnecessary procedures to allow more people to have more assets to do trading with. This would be a significant boost to the Vietnamese entrepreneurs and it will surely greatly increase the standard of living in Vietnam in a shorter time span.

The trend is favorable as the time required to start a business in Vietnam is getting shorter. However, Vietnam still has a long way to go.

(source)