The Power of the Policy Burden: Empirical evidence on Employment after Trade Liberalization for State Owned Enterprises in Vietnam

Around the world, state owned enterprises (SOEs) are an important part of many economies. Various studies (e.g., Harrison et al. (2019), Boardman and Vining(1989)) on the profitability and efficiency of public ownership versus private ownership find that public ownership suffers from inefficiencies related directly to its inherent structure. However, SOEs appear to serve goals other than profit maximization which might explain some of the inefficiencies observed. These goals, known as policy burdens, include fulfilling certain socio- economic objectives such as maintaining employment and livelihood for a significant portion of the labor force. To accomplish these goals, SOEs have beneficial access to credit, subsidies, and most importantly, a soft budget constraint. This paper examines how these aspects of public ownership might be beneficial through times of lower demand or higher supply. Using a difference in difference in difference model to analyze the event of a trade-liberalizing effect of Vietnam’s entrance into the WTO in 2007 on industries that see a drop in import tariffs in order to compare performance between SOEs and private enterprises, this paper finds that entering the WTO caused an increase in employment in private enterprises in Vietnam. SOEs, which have significantly higher employment, saw a decrease in employment after 2007 in tariff-affected and non-tariff-affected industries, though this might be a result of public sector reform undertaken in 2007. Since private enterprises in tariff-affected industries saw gains in employment after 2007, these firms are capitalizing on gains of trade and expanding production, unlike the Vietnamese SOEs, which decreased employment.