Vietnam’s new Land Law tied land prices to the market, driving sharp increases in fees and taxes. This has not been popular, and the backlash has spurred calls to return to state-set valuations. This would, however, not bode well for Vietnam’s market-orientated reform agenda.
Last year, a new Land Law in Vietnam kicked in that shifted responsibility for determining land values from the national government, once every five years, to local governments every year, adding a clause that they were to be based on “market principles”.
The initial changes had been made to bring land prices more in line with their actual market value, from which they had become significantly detached — when Ho Chi Minh City announced its land values under the new scheme, some had jumped by as much as 38 times.
These higher prices have subsequently carried over into land use tax and land use fee calculations, the latter paid when land owners apply to rezone their land.
This has not proved popular, with broad dissatisfaction reported by the local press.
The Ministry of Agriculture, in response, is now pushing for revisions to the law that would remove the “market-principles” requirement.
Notably, nothing is yet set in stone; however, that a reversal has been tabled raises an interesting predicament for the Government of Vietnam in its quest to move toward a market-orientated economy: removing price controls is necessary but also costly.
With this in mind, this article looks at the challenges price controls create, why there are price controls in the first place, and other approaches that can be taken to achieve the same ends.
What’s the problem?
Firstly, it’s not just in land values that price controls have created friction.
Petrol shortages in 2022 were the result of wholesale prices skyrocketing, but retail prices remaining fixed. This led to some petrol retailers simply refusing to open, and, subsequently, lengthy queues at those that did, with some running out of petrol altogether.
Similarly, retail electricity prices for the four years to 2023 were left unchanged, despite the rapidly rising price of key inputs — between January and August of 2022 world coal prices almost doubled.
With electricity sold below cost, the state power provider had less money to invest in new infrastructure and power generation, which in part contributed to power shortages in northern Vietnam in 2023.
Moreover, low returns deter private investment, and by extension deprive industry of competition that has been known to drive down prices.
And price controls also leave business owners few options to increase profit margins other than to cut costs and/or corners.
Finally, unique to Vietnam, they were also cited by the US Department of Commerce as a key reason why it is still considered a non-market economy for trade remedies purposes.
Why have price controls to begin with?
Price increases are not popular and can pose a threat to social order.
Thousands of Europeans took to the streets in 2022, for example, to protest against rising living costs, after energy prices spiked in the wake of Russia’s invasion of Ukraine.
Moreover, price controls make sure goods remain accessible, particularly for low income households.
They can also prevent profiteering in the event a company has a monopoly on a market, and they keep overall inflation numbers low which is often presented as evidence of shrewd economic management.
All of that said, there are more efficient and effective ways of achieving the same goals.
What’s the alternative?
For one, allow prices to move with the market and then provide targeted subsidies to low-income households.
Strategic reserves can also be used to level out price fluctuations
The United States Strategic Petroleum Reserve, for example, currently holds about 403 million barrels of crude oil to be used to do just that.
(Notably, Vietnam has the price stabilisation fund for petrol, with a similar goal, whereby retailers pay into the fund in the course of general business and then can draw from it to cover any shortfall if wholesale prices spike.
In practice, however, retailers have argued the fund is inadequate and that it actually makes supply problems worse.)
Allowing greater market access to private enterprises can also increase competition, and in turn drive up efficiency which should lower costs.
The privatisation of Chile’s power sector in 1982, for example, led to significant improvements in installed capacity, generation, labor productivity, and a reduction in distribution losses.
The bigger picture
All of that said, the problem right now isn’t so much that there are price controls, but that controlled prices have become so far detached from their real market value, that removing them is creating market shocks and this is making people unhappy.
Not removing them, however, risks creating bigger shocks down the track.
It’s a predicament, to be sure, and whether or not Vietnam’s reformists can convince disgruntled land owners that the short term pain is necessary, will be worth paying attention to.
That is to say, if they can’t, Vietnam’s private sector focused reform agenda could find itself on rocky ground.