SCHOOL OF ADVANCED EDUCATION PROGRAMS

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GROUP PRESENTATION

TOPIC: ANALYZE THE CAUSE OF INFLATION IN VIETNAM

(IN THE RELATION WITH THEORY)

GROUP H
Nguyen Thi Ha Trang (leader) 11196306
Duong Thi Lua 11193184
Pham Thu Hien 11191876
Nguyen Gia Khanh 11192570
Nguyen Thi Kim Oanh 11194126

CLASS: CORPORATE FINANCE EEP 61A

Hanoi, 2021

Table of Content

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I. INTRODUCTION...................................................................................................3

II. THEORETICAL FRAMEWORK......................................................................3

1. DEFINITION OF INFLATION............................................................................3

2. CAUSES OF INFLATION................................................................................... 3

2.1. Demand-Pull Inflation.....................................................................................4

2.2. Cost-Push Inflation..........................................................................................6

III. THE CAUSES OF INFLATION IN VIETNAM.............................................. 7

1. OVERVIEW ABOUT INFLATION IN VIETNAM OVER THE PERIOD 2000-

2020............................................................................................................................7

1.1. The period 2000 - 2010...................................................................................7

1.2. The period 2011 - 2020...................................................................................8

2. CAUSES OF VIETNAM’S INFLATION............................................................ 9

2.1. Theorical causes applied in the case of Vietnam............................................ 9

2.2. Empirical causes of Vietnam’s inflation.......................................................11

IV. CONCLUSION...................................................................................................13

V. REFERENCES.................................................................................................... 14

I. INTRODUCTION

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For more than two decades now, inflation, especially its determinants and evolution, has been
one of the most debatable topics in Vietnam. The reason is obvious: Vietnam underwent
hyperinflation during the 1980s and early 1990. The persistent hyperinflation was one of the
reasons that triggered the economic reforms in Vietnam since late 1980s. In this study, we
use an evidence-based approach to identify and analyze the key drivers of inflation in
Vietnam in recent years.

II. THEORETICAL FRAMEWORK

1. DEFINITION OF INFLATION

Inflation is defined as an increase in the overall level of prices in the economy. It is not
because goods become more valuable but otherwise because the money becomes less
valuable. In other words, a same amount of money at a certain time can purchase fewer
goods or services than at the previous time. Alternatively, inflation can be described as a
decrease in the value, or the purchasing power, of money. (Mankiw 2011, 643.)

2. CAUSES OF INFLATION

Historically, there has been a great concern of the economists on causes and effects of
inflation. Causes of inflation have been a debate among various schools of economists.
Generally, there were two major categories of opinions: quantity theories of inflation and
quality theories of inflation. Currently, the quantity theory of inflation, which was introduced
by Adam Smith, is broadly accepted as the model for inflation in the long run. (Economics of
Inflation 2010.)

In 1983, Robert J. Gordon introduced the Triangle Model which defines the causes of
inflation. The model consists of three factors: demand-pull, cost-push, and built-in inflation

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(Economics of Inflation 2010). In this paper, we mention about the first two factor: demand-
pull and cost-push, since they are more relevant to Vietnam.

Triangle model of inflation’s causes (Moffatt 2012; Built in Inflation 2010)

2.1. Demand-Pull Inflation

Demand-pull inflation is a result of constant rises in aggregate demand. When aggregate

demand surpasses aggregate supply of goods and services, it pushes up prices, causing
inflation. Aggregate demand is made up of all spending in the economy.

AD = C + I + G + (X-M)

Where:

AD stands for Aggregate Demand

C stands for consumer expenditures.

I stands for investments.

G stands for the government expenditures.

X and M respectively stand for exports and imports.

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Considering the above equation, an increase in aggregate demand can be caused by any
individual factor, such as:
1. A growing economy: When consumers feel confident, they spend more and take on more
debt. This leads to a steady increase in demand, which means higher prices.  
2. Increasing export demand: A sudden rise in exports forces an undervaluation of the
currencies involved.
3. Government spending: When the government spends more freely, prices go up.
4. Inflation expectations: Companies may increase their prices in expectation of inflation in
the near future.
5. More money in the system: An expansion of the money supply with too few goods to buy
makes prices increase.

Causes of demand-pull inflation (Parkin, et al. 2005; Le T.T.H. 2011)

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 Demand-Pull Inflation with an Activist Policy to Promote High Employment

Point 1 : Potential output ( Y n ), natural unemployment rate, Price P1

Point 1’: Y(T) > Y(n), Unemployment rate fall, Price P1 > P1
'

Point 2 : Potential output ( Y n ), natural unemployment rate, Price P2 > P1

This process continues, the result will be a continuing increase in the price level-a persistent
demand-pull inflation

2.2. Cost-Push Inflation

2. Cost-push inflation is caused by the decrease in aggregate supply. Aggregate supply is de-
fined as the total amount of goods and services produced in a country. There could be two
main reasons for such decrease in aggregate supply:
 An increase in wage rates

 An increase in the prices of raw materials

On the other hand, the higher the cost of production, the smaller the amount of goods could
be produced, as a result the higher prices of goods in the market (Moffatt 2012).

Contrary to demand-pull inflation, in cost-push inflation, the employment and production

output tend to fall. There are various factors that can drive the costs, such as increases in

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international goods prices, monopolies raise their prices to increase their profits, or trade
unions require raising wages. In recent years, cost-push pressures tend to decrease due to the
trends of globalization and increased international competition (Sloman 2007, 320.)

Cost-Push Inflation with an Activist Policy to Promote High Employment

Point 1 : Potential output ( Y n ), natural unemployment rate, Price P1

Point 1’: Y’ < Y n , unemployment rate rise, Price P1

' > P1

Point 2 : Potential output ( Y ), natural unemployment rate, Price P2 > P1

n

This process continues, the result will be a continuing increase in the price
level-a persistent cost-push inflation 

A supply-shock makes the aggregate supply curve shift to the left, this will increase the un-
employment rate and decrease the output. The government (and central bank) want a high
employment, so they increase government expenditure (money supply) to increase the aggre-
gate demand, therefore, lower the unemployment rate. The new equilibrium is point 2 (natu-
ral unemployment rate, potential output) with P2 > P1. Another shock makes the supply
curve move to the left will continue this process and increase the price level, then create in-
flation.

III. THE CAUSES OF INFLATION IN VIETNAM

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 1. OVERVIEW ABOUT INFLATION IN VIETNAM OVER THE
PERIOD 2000-2020
1.1. The period 2000-2010
In comparison with the previous decade, Vietnam witnessed a period of low economic
growth in the first decade of the 21st century. In the late 1990s, Vietnam’s economic growth
slowed down due to Vietnam’s sign of hesitation in the process of economic reform from
1996. Concurrently, Vietnam was negatively affected by the spread of the 1997 Asian finan-
cial crisis. Consequently, the economy experienced a period of both declining growth rate
and deflation in the years 1999-2000. Under these circumstances, an economic stimulus plan
of loosening credit and expanding State investment began to be implemented from 2000. And
inflation stayed at the modest levels during 2000-2003, starting with the rate of -1.71% in
2000.

Vietnam’s inflation rate , 2000-2010(%)

After this modest period, inflation started to pick up again, with annual inflation rate of
7.75% in 2004. In the following years, the relatively uninterrupted maintenance of the stimu-
lus policy and the participation in WTO (11/2006) have somewhat helped the economy re-
gain its growth on one hand, but has also agglomerated seeds of high inflation, which have
been disclosure since mid-2007. Inflation rate after going down slightly in 2006, peaked at
8.34% in 2007 and soared to 23.12% in 2008. Overall, macro-control in this period proved
embarrassing. These factors, together with the tremendous impact of the world economic cri-
sis made the economy suffer a period of low economic growth and high inflation from 2008-
2010.
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 1.2. The period 2011-2020

Vietnam’s inflation rate, 2011-2020(%)

In 2011, the inflation rate was 18.68%, the highest in the 2010-2020 period and the second
highest (only after 2008) in the 2000-2020 period. From 2012 to 2015, economic develop-
ment policies were implemented synchronously from the central government by management
agencies. As a result, inflation control in these years has achieved the set target, when contin-
uing to remain low, from 9.09% in 2012 to decrease and hit a record low of 0.63% in 2015.
This is a good thing because inflation increased lower economic growth, contributing to im-
proving people's quality of life and the value of the local currency, creating conditions for the
State Bank to loosen monetary policy by reducing lending interest rates in the coming time. 

Since 2016, with the gradual recovery of Vietnam's economy, inflation has tended to increase
again. However, Vietnam’s inflation rate always kept stable at around 4%. Especially in
2020, the COVID-19 epidemic is complicated and unpredictable, causing growth in most in-
dustries and fields to slow down. However, by the end of 2020, Vietnam's economy had a
bright spot that controlling inflation was less than 4% as set out by the National Assembly at
the beginning of the year.

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To conclude, the inflation rate in Vietnam fluctuated dramatically in such 21 years (2000-
2020). At the first decade, the rate volatized, however, with upward trend, from the lowest
inflation of -1.71% in 2000 to reach the peak of 23.12% in 2008 – these are also the lowest
and highest inflation rate that Vietnam ever has at that period. The latter decade’s rate turned
out to be more stable, as since 2011, the Government had implemented some Resolutions to
peg the market. Although in 2011 Vietnam saw the second highest inflation rate of 18.68%,
the rate in the four following years decreased well. From 2016 to 2020, the rate performed
stably and was kept under 4%.

2. CAUSES OF VIETNAM’S INFLATION

2.1. Theorical causes applied in the case of Vietnam

• Cost-push inflation
Labor market rigidities and changes in the cost of labor are believed as a major cause of
inflation in developed countries. But it is not considered as a major cause of inflation in most
developing countries. Chhibber and Shafik (1990) argued that “wage-push inflation” is rare
in developing countries because wages constitute only a small part of national income. In the
case of Vietnam, a large pool of underemployment in agriculture sector makes the price of
labor extremely cheap, especially for unskilled labor. Therefore, the wage-price spiral cannot
hold true. Similarly, the trade-off between unemployment and inflation suggested by Phillips
curve is not applicable for Vietnam case.

In Vietnam, bargain power of the labor is extremely weak because of inefficient labor unions
as well as the high rate of underemployment. Requests for wage increase from the employee
in private sectors are therefore rarely satisfied. Meanwhile, wage in state sectors is controlled
by the government and sluggishly response to the raise of price. Thus, wage has little power
in term of determination inflation. Hence, the cost-push inflation caused by inflationary
expectation is also rare.

Lending rate remained significantly higher than inflation over the period 1996- 2007. In that
period, the economy experienced rapid expansion in private enterprises that required huge
amount of credit. The lending rate declined from 1996 to 2002, accompanying with inflation

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decrease trend. Then, it has grown slightly from 2003, when inflation took off. Based on
theoretical expectation, it is lending rate that gives influence on inflation through cost-push.

Lending rate and inflation in Vietnam, 1990-2007 (B.T.K.T, 2008)

• Demand-pull inflation

In the other hand, inflationary expectation in Vietnam can lead to demand-pull inflation
because of hoarding behavior which sees households buying more than their actual need. The
wholesaler and retailers also do the same actions . And, inflation seems keeping in line with
real GDP growth. Over the period, growth rate of real GDP fluctuated slightly before 2002
and became steadier after 2002. The fairly high growth rate of output was the result of
industrialization from 1990. Vietnam’s industrialization has reduced the agriculture area and
increased demand on labor.

Nominal wage has increased but not much. The rate of underemployment was high in this
period. Therefore, the relationship between real GDP growth and inflation is likely to be
explained as demand-pull rather than cost-push.

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 Real GDP growth and inflation in Vietnam, 1990-2007 (B.T.K.T, 2008)

2.2. Empirical causes of Vietnam’s inflation

a. Subjective reasons

• High but inefficient credit growth rate

The first cause of inflation is the government’s policy to maintain a high-level growth rate at
all cost. The development targets are unrealistically planned: the GDP growth rate of 7 to 7.5
percent per year in the next five years and 7 to 8 percent in the next ten years. Meanwhile,
Vietnam experienced the highest inflation rate in the region in 2010, at 11.8 percent. The
economic development should not be targeted at such high rates in a context of high
inflation. However, to achieve these development goals, the government increased the public
investment in state-owned enterprises, consequently raised the demand for credit. Therefore
it could be argued that inflation in Vietnam is mostly due to demandpull factors.

In the period from 2007 to 2009, the credit growth rate was on average 25 to 30 percent,
especially in 2009 when the government implemented the stimulus package worth nearly 8
billion U.S. dollars to deal with the global financial crisis, 42 of which the highlight is the
loans subsidy worth 17,000 VND, approximately 1 billion U.S dollars at that time. This
package alone drastically increased the money supply in the economy by 400,000 billion
VND. Despite the credit growth and social investments at high levels compared to other
countries, Vietnam’s economic growth rate during this period was just on average 6 to 7
percent.

• Spreading and inefficient public investments

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 According to statistics, Vietnam spends from 15 to 20 percent of its GDP on public
investments each year, while that percentages of other countries in the region are just below 5
percent. A recent research of Vu Anh Tuan, from Vietnam Economic Institute, reveals that
the scale of public investments has increased 3.2 times in the past ten years, which means on
average 13.9 percent every year. However, the efficiency of those investment is still very
poor

• Budget deficit and trade deficit in the long run

During the past period (2000-2020), the government’s budget deficit and trade deficit
increased continuously. If this condition continues, it will be an obstacle for planning the
exchange rate implementation, and for the sustainable growth of the economy. These figures
expose that state expenditures are higher than incomes and demands for import are higher
than exporting values. These two deficits pressurize the prices by both demand-pull and cost-
push factors. However in case of budget deficit, the government’s spending increases GDP in
short-term, but the trade deficit otherwise reduces GDP. To ensure such a sustainable growth
of the economy, the government has to resolve the budget deficit, and in parallel with the
credit, credit flows need to be driven by improving the monitoring system and the credit
management. Moreover, the trade deficit also needs to be reduced by stimulating domestic
demand, while expanding exports.

• Escalation of prices

The increase in prices is one of the causes of inflation. The domestic fuel price is allowed to
increase to correspond with the international price and the electricity price in the market
mechanism. The rise of electricity and fuel prices directly affects many aspects of the
economy, leading to higher inflation. This is a cost-push phenomenon. Although the price
was pressurized by the budget deficits and losses of the state-owned Vietnam Electricity
Corporation, this was an improper decision as the country is dealing with high inflation.

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Indeed, the leaders or the Ministry of Technology and Commerce revealed that the main
purpose of the increase in electricity prices is to minimize the losses of the corporation.

b. Objective reasons

During the economic crisis in the late 1980s and early 1990s and 2012, inflation reached a
"galloping" rate, but thanks to effective and timely solutions, a short time later, general prices
in Vietnam remained stable with an average inflation rate of just over 3% in the years 1996-
2003 and around 4%since 2016. However, the inflation turned out to be higher in the other
years.

In terms of total supply of goods, it is true that food and food prices increased sharply in
high-inflation year, but when assessing the supply factor of this commodity group, there are
many non-monetary causes. It is epidemics and natural disasters occurring in the country and
in the world continuously; unfavorable weather, floods, cold, drought... make the supply
decrease significantly, while the demand for this commodity group has not decreased, even
increased day by day. World oil prices rose sharply in these years. This is definitely one of
the reasons for the high CPI price increase in Vietnam during the past time.

IV. CONCLUSION

In this paper, we've analyzed the causes of inflation in VN in the relation with theory, by
reviewing the dynamics of inflation over the past 20 years. We have found that along with
thoery framework, inflation in Vietnam has strong relation with various changes in economic
environment. That makes it sometimes differ from theory.

V. REFERENCES

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 Frederic S. Mishkin, 9th edition, The Economics of Money, Banking & Financial
Markets

 Bui Thi Kim Thanh, 2008, Inflation in Vietnam over the period 1990-2007, Graduate
School of Development Studies, ISS

 Nguyen Thi Thu Hang, Nguyen Duc Thanh, 2010, Macroeconomic Determinants of
Vietnam’s Inflation 2000-2010: Evidence and Analysis, VEPR

 Vietnam’s Socio-Economic Development Strategy for the period of 2011-2020 ,

www.economica.vn

 Nguyen Xuan Phuc, 2021, Reviewing 10 years implementing the Socio-Economic

Development Strategy 2011-2020: Results, lessons learned and future orientations,
Tap chi Cong san

 Trinh Anh Khoa, 2012, Inflation in Vietnam and its effects on Small and Medium-
sized Enterprises, Lahti University of Applied Sciences

 Nguyen Tri Hung, 1999, The inflation of Vietnam in transition, Centre of ASEAN
Studies

 Nguyen, Q.K, 2011, Nguyen nhan va hau qua cua lam phat o Viet Nam, Dan Chim
Viet

 Nguyen, N.V, 2011, Nguyen nhan lam phat tai Viet Nam, Thi truong Viet Nam

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 ASKS ACHIEVEMENT EFFICIENCY BOARD

Student Tasks
Full name Tasks receipt
Code achievement
Leader
1 Nguyen Thi Ha Trang  11196306 Presenter 10/10
Content synthesis

Duong Thi Lua 11193184 Part III

2 10/10
Content synthesis

3 Pham Thu Hien 11191876 Part II 10/10

Presenter
4 Nguyen Gia Khanh 11192570 Part I+IV 10/10
Slides outline

5 Nguyen Thi Kim Oanh 11194126 Slides 10/10

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