Informal economic sector put under microscope

Under the latest government’s instruction, the Ministry of Finance will have to build a plan to fight against loss of revenue in tax collection from non-state economic sectors, especially the underground sector. 

Meanwhile, it is still unclear about the support of the Ministry of Planning and Investment because the ministry is only drafting a plan on the unobserved economic sector.

However, the task cannot be delayed any longer as public debt and expenditures have been increasing rapidly. If the value created by the informal economic sector can be counted, the real GDP would be much higher. If so, the government could lift the public debt ceiling and have more money for investment and development.

A team of scholars from Fulbright University estimates that the unobserved economy makes up 25-30 percent of Vietnam’s GDP.

Economists still argue about how to identify the ‘informal economic sector’. Some believe that it means ‘unobserved economy’, where economic achievements have not been taken into account. 

 This includes ‘underground economy’, i.e the business activities undeclared and hidden to avoid tax, and the ‘illegal economy’, or the trading of illegal goods and services.

 If so, the household-run business sector will be taken into consideration and become the focus of the anti-tax loss plan. Meanwhile, household run businesses are a very ‘sensitive’ sector.

 Tran Dinh Thien, head of the Vietnam Economics Institute, said at a workshop in December 2018, pointed out some ‘abnormal’ characteristics of the economic sector.

 He said of the 40 percent of GDP contributed by the private economic sector in the last 30 years, 30 percent was from from the household run business sector.

 The vitality of the household-run economy lies in the flexibility in production and business operation. The simple model allows business households to quickly adapt to new circumstances and sudden changes, thus allowing them to grow. 

 Meanwhile, with bigger operation scale, private enterprises do not have such flexibility. The number of enterprises that suspended operation or were dissolved in 2018 increased by 49.7 percent and 34.7 percent, respectively, compared with the year before, despite the record high GDP growth rate of 7.08 percent.

 The figures show that the household-run business sector, which does not receive any preferences, can create higher value than the foreign-invested economic sector, which makes up 27 percent of GDP, and the state-owned economic sector, which makes up 20 percent.

 Business households have been encouraged to develop into private enterprises so they can make appropriate contributions to the state budget.