According to IFC’s study, informal activities in the rural areas and cities were proportional to the time spent on paperwork and legal compliance. For example, a two days increase in time spent dealing with regulations results in a 1% decline in formal (above ground) entrepreneurship.
The IFC study’s findings were presented by Dau Anh Tuan, General Director of the Legal Department under the Vietnam Chamber of Commerce and Industry (VCCI) in the workshop “National competition policies” held on October 03 by the Central Institute for Economic Management (CIEM) and Deutsche Gesellschaft für Internationale Zusammenarbeit (German Agency for International Cooperation, or GIZ).
Citing the IFC study, Tuan stated that overly complicated and inappropriate paperwork may have contributed to the increase in “underground” activity in Vietnam’s economy.
"Inconsistent and overly rigorous regulations are creating dilemmas for entrepreneurs. Following the regulation properly is considered to be too difficult. Compliance with the law makes it hard for new firms to compete. Moreover, the risk of being abused by overbearing officials is always hovering over their heads. They are the hostages of many uncompassionate bureaucrats”, Tuan said.
Another risk to businessmen in the "forest of regulations" is more success leads to more risk. A survey by the IFC shows that large, fast-growing and well-capitalized companies are subject to frequent inspections, Tuan added.
The number of tax inspections is usually proportional to the pace of development of the company. Three large-scale surveys conducted by the VCCI in 2015 across the country have continued to show that the situation has not changed: large enterprises are subject to more inspection and administrative burden than small businesses.
This problem of "punishing success" is giving rise to a "double business" culture, where formal businesses devolve into informal businesses. The steady buildup of the underground economy, seriously entrepreneurs in particular and economy in general, Tuan emphasized.
For one thing, it restricts the opportunity due to the fact informal businesses rely primarily on relatives who lack the necessary resources to take advantage of scale. It also fosters a culture of bribery among officials.
In the long run, it creates an unequal, untrustworthy, unfavorable business environment for the honest businessman, disadvantageous to the regular sector and creates unstable factors and risks when deciding to invest also. It does not encourage and promote the spirit of innovation, long-term investment, large-scale investment, or investment in human resources development.
Finally, trading on a large and popular scale places the burden on the law-abiding rather than the law-breaker. That, in turn, contributes to widespread disregard for the law on among both officials and businessmen.
The underground economy will make businesses and products less competitive at national level, and it is difficult to integrate into the international trade to take full advantage of the opportunities offered by integration. This poses a risk that Vietnam will lag behind many countries economically.
