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ASEAN Economic Bulletin Vol.26, No.1, April 2009 - Vietnam.. Sustaining Growth in Difficult Times

ASEAN Economic Bulletin Vol.26, No.1, April 2009 - Vietnam.. Sustaining Growth in Difficult Times

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Published by: intasma on Jun 17, 2009
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ASEAN Economic Bulletin11Vol. 26, No. 1, April 2009
 ASEAN Economic Bulletin Vol. 26, No. 1 (2009), pp. 11–24
ISSN 0217-4472 print / ISSN 1793-2831 electronic© 2009 ISEASDOI: 10.1355/ae26-1b
Sustaining Growth in Difficult Times
Jonathan Pincus
Vietnam has achieved high rates of economic growth for a period of two decades. Growthslowed in 2008 as the government was forced to tighten credit in order to slow down priceinflation. With the advent of the global recession, the government must now reverse courseand find ways to support demand in the face of declining exports and foreign investment. However, as a small, open economy with a fixed exchange rate and large fiscal and tradedeficits, Vietnam’s options are limited. The most effective response would be to graduallydepreciate the Vietnamese dong to slow the flood of imports and boost export prospects, whileredirecting the public investment towards labour rather than import-intensive projects. Thegovernment must also find ways to impose discipline on the large state-owned enterprises and control their diversification into financial sector activities.
Vietnam, macroeconomic policy, economic growth, state-owned enterprises.
In its final press release of the year, Vietnam’sGeneral Statistics Office announced that in 2008the country’s gross domestic product (GDP) hadcrossed the symbolically important threshold of US$1,000 per capita.
Although still low byASEAN and wider Asian standards, averageincomes have risen nearly fourfold since 1989 atcurrent exchange rates and three times atpurchasing power parity exchange rates.According to official figures, the percentage of thepopulation living on less than US$1 per day hadfallen from more than 60 to less than 12 per centover the same period.
Despite the attainment of this importantmilestone, 2008 was a gloomy year for Vietnam’seconomy. Although output grew by a respectable6.2 per cent, domestic commentators focused onthe drop in performance relative to the 8.5 per centrate recorded in 2007 and the failure to reach eventhe government’s adjusted growth target of 6.7 per cent. Massive capital inflows in 2007 and early2008 contributed to economic overheating, whichwas evident in high and rising inflation and amounting current account deficit. Consumer priceinflation peaked at 28 per cent in August, amongthe highest in the region, and the trade deficitended the year at a remarkable US$17 billion or 19 per cent of GDP. The government was forcedto rein in credit growth to slow down inflationand defend the Vietnam dong (VND), whicheffectively burst the stock market and land price
ASEAN Economic Bulletin12Vol. 26, No. 1, April 2009
bubbles. The Ho Chi Minh City Stock Exchangewas one of the worst performers in the world in2008, losing 66 per cent of its value. Prices for commercial and residential properties were alsodown by as much as half in the major urbanmarkets. In a cruel twist of fate, the global creditcrunch struck just as Vietnam appeared to beemerging from its domestically generated financialinstability.Growth is almost certain to slow further in 2009as the global recession weakens export demandand inward investment, both of which are likely tocontract in real terms. The government hasattempted to stimulate the economy by loweringinterest rates and injecting liquidity into thebanking system, and also plans to increase publicinvestment and provide loan guarantees for small-and medium-scale enterprises (SMEs). Theseremedies are unlikely to succeed in stimulatinggrowth, and may in fact contribute to a renewedbout of price inflation and a widening of the tradedeficit.High-profile requests for assistance from largestate-owned enterprises (SOEs) have focusedattention on the government’s state-ledindustrialization strategy.
The debate over the roleof the conglomerates is likely to grow moreintense over the coming year. While someinfluential leaders of the Communist Party see theconglomerates as a vital tool in the fight againstinflation and in the provision of basic necessitieslike food and power, others argue that the SOEshave leveraged their privileged access to statecredit and land to build corporate empires gearedmore to money making than social progress.Despite tight control over the media, the role of the state conglomerates is debated openly in thenewspapers, on the Internet, and even on state-runtelevision.The main argument of this paper is that as asmall, relatively open economy with a fixedexchange rate, Vietnam’s options in the face of aglobal recession are rather limited. However, thegovernment could ease the pain of the inevitableslowdown by redirecting public spending awayfrom capital-intensive, import-using investmentsand towards labour-intensive projects that do notadd to the trade deficit. The government will haveto go beyond public investment in infrastructureand impose discipline on large SOEs if it is toachieve these objectives.The rest of this paper consists of three sections.Section II reviews the likely impact of the globalrecession on Vietnam, and suggests a set of policies to reduce the negative effects of slower export growth, falling export prices and areduction in foreign direct investment (FDI). Thepaper then turns to the specific problems facingthe large SOEs, and argues that more rigorousdisclosure requirements and separation betweenfinancial and industrial interests are needed toensure that public investment is directed towardsprojects that create jobs, profits and foreignexchange. The final section concludes.
II.The Impact of Global Recession onVietnam
It is now clear that the global credit crunch hasdeveloped into a recession that is likely to be, inthe words of IMF Chief Economist Olivier Blanchard, “the worst crisis in sixty years.”
As asmall, export-oriented economy, Vietnamesegrowth will suffer from a recession that isoccurring simultaneously in North America,Europe, and Japan.The global crisis will affect Vietnam’smacroeconomy in five ways. First, demand for some Vietnamese exports will weaken. To dateVietnam’s export performance has remainedremarkably strong, but by the end of 2008 exportsvalues had already begun to contract. As shown inFigure 1, Vietnamese trade data indicate thatexports fell by 7 per cent in November, largely asa result of lower oil prices. Prices of other commodities produced in Vietnam are also falling(Figure 2). Anecdotal evidence suggests thatorders for manufactured exports includinggarments, footwear, and furniture are droppingquickly, and seafood producers are also under pressure.
According to the Ho Chi Minh Citybranch of the Vietnam General Conferation of Labor, 30,000 jobs have already been lost in thecity in these industries.
With exports equal to
ASEAN Economic Bulletin13Vol. 26, No. 1, April 2009
FIGURE 1Exports, November 2007, November 2008
: General Statistics Office (GSO).
FIGURE 2Commodity price trends (2007=100)
: World Bank.
   U   S   d  o   l   l  a  r  s
Jan-Mar 2008Apr-Jun 2008Jul-Sep 2008Oct-Dec 2008
   U   S   d  o   l   l  a  r  s ,  m   i   l   l   i  o  n  s
Otherwood productsseafoodshoesgarmentsOil and gas

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