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Here is an essay that I wrote last spring of 1999 for  my political economy class. Generally, this paper made a macro economic recommendation for Vietnam to revive from the effects of the Asian Crisis in 1997. Please feel free to send me your comments!


       Economic Policy in Vietnam

(May 3, 1999 by Thanh Tran)





          The year and many days of 1997 were the most difficult for Vietnam. That was when the Asian Crisis began to spread its wide wings-of economic recession, bankruptcy, and currency devaluation into other nearby regions. It was a special hard hit for Vietnam. The country was easily affected because of its vulnerable geographic location. And also the country has been learning the ways and means in recuperating from the longest war in any country history. True, the Vietnam war had affected the country's politics and economics.

      For this paper, the current economic policy of Vietnam will be discussed. And we will look at its successes and failures. This paper also make suggestion on what the country can do to improve or even change their economic policies so that the country can meet up with others countries once the Asian Crisis is recovered. Lastly, this paper will present the positive and the negative consequences of the already-implemented- economic policy in Vietnam versus the not yet-implemented-economic policy in my recommendations.

      The following economic data varies from year to year, 1996 through 1999. Here are my assumptions to the years variation: that one, the country's economy has not yet received any drastic sudden (positive and negative) changes since the Crisis and so there are no good sense of publishing nearly the same data every year-since the beginning of the Asian Crisis. And two, Vietnam is a small developing country that has not been fortunate at grasping foreign attention into the country.

       Vietnam's overall income is very low (i). All in 1998, the rate of growth was 6%, the lowest in 7 years (ii); the rate of unemployment was 6.85% (iii); the gross domestic product, the GDP, was 6% (iv). Also in the same year, the country devaluated its currency, dong, to 15% and it had 12% of commercial and joint stock banks overdue (v). This is a trouble to the banks because the devaluation and the overdue dropped the currency popularity and of public bank deposits. 
Along that same line, Vietnam's exports in 1993 was estimated to be 2,500 of US dollars in millions to an estimated 7,000 of US dollars in millions in 1997. Its import rate had incremented from an estimated 4,500 of US dollars in millions in 1993 to close to 15,000 US dollars in millions in 1997 (vi)! Apparently the rate of exports did not increase in an equal pace as imports. Thus in 1997, the country has a balance of trade deficit (an estimated 7,000 of US dollars in millions) of 50% low. This clearly is a huge change and difference. Why?

        Certainly, the answer would be because of the drastic Asian Crisis that began in Thailand and Korea in summer of 1997 (vii). It had slowed down Vietnam exports and increased its imports instead. This is because of lack of foreign investments in the surrounding countries and regionally Vietnam was affected. Yes, Vietnam sure did receive a piece of the rotten pie. Thus, this forced the country to import productions and services more than the country affords and needs. Vietnam exchanges rate, in comparison to1996 of 10,962.1 Vietnamese dong to one US dollar decreased to 13,850.0 in 1999 (viii). Its private consumption in 1998 was 86% from the overall GDP (ix). The Vietnamese were fearful, and they still are, of the Crisis. They tended to save more in preparing for the worst-the possible devastation and prolonging of the Crisis.
In short, the country has been saving more than spending. The saving approach is understandable, but moreover in mainstream Macro theory, saving would not help the economic growth enough in order to compete with other countries. From this, it is suggested that Vietnam needs to spend more in building its economic credibility at foreign investment attractions to the country.

           The Crisis in summer of 1997 has threatened the economic stability of Vietnam, making it worse everyday. It affected both the country and the people. The effects yield low income, high unemployment, and 7 years lowest of GDP growth (x). There were no signs of economic improvement despite current aids from the IMF and the World Bank. In 1998, at Washington DC 53rd annual World Bank/International Monetary Fund meeting, the deputy Prime Minister Nguyen Tan Dung pleaded for more financial aids from the Bank, the Fund, and possibly others countries. With more aids, he hopes to keep and improve the "Doi Moi" reform (xi). It had drifted slowly away since the Crisis.

        Eleven years after the longest war, the government in Vietnam showed their enthusiasm and attempt to restructure their economic policy. They proposed a reform program called "Doi Moi" in 1986. Its literal translation means "New Life". Since then, the program has it up and down, like a roller coaster ride. At the start of the reform (between the 1986-1993), the working pace was good (xiii). The program of "Doi Moi" did improve farm production for the country and contained a suitable inflation rate. Along with that, it had a stabilized price level. On the other hand, from 1994 to the present, the "Doi Moi" program brought in high jobless rate, increases social problems, and worst, a "chronic current account deficit" (xiv). This is due to the regional effect of the Crisis and of the inconsistent political ideology of Vietnam-capitalism versus communism (xv). Does this sound confusing and chaotic? Yes it does! Therefore, the Vietnamese government needs to either improve the current program or create another and change their political ideology so that Vietnam can prosper properly at a stable rate along with other country.

        At the present, Vietnam's monetary policy is "fairly conservative" (xvi). One can assume that it had been restrictive since the end of the war in 1975, the beginning of the Communist government. In 1996, under the Prime Minister Vo Van Kiet's determined preference for the supply of money in the economy was to have a tight monetary policy. This preference is suitable in Macro theory when containing the inflation rate of a country-which Vietnam has a nice low one. But tight monetary policy will increase interests rate, which decrease domestic investment. And at the end, the disposable income will decrease and soon that generates a decrease in consumption function. This explained the reason of the low spending rate in Vietnam.

       Vietnam's current fiscal policy is restrictive. Once again, the Prime Minister is more interest of keeping down the deficit than have an open economic policy to its neighboring countries-and even to the world. The idea is great for a country like Vietnam because its annual rate of growth is 6-9% in 1998 (xvii). (The rate is suitable for this developing country, but on the average of advanced country like the US, it is low.) This "happy high" change is due to the ambivalent "Doi Moi" program and the recent increase of native-born and foreign tourism back to the country. On that same lane, this policy bring enough satisfaction to the mainstream Macro theory because tight fiscal policy is pleasant to have in controlling the rate of growth due to its restriction on government spending.

         On a different lane, in the real world, tight fiscal will increase taxation (which the majority of the Vietnamese population can no longer afford paying more taxes when they do not have the world average living standards) and will decrease overall income. The latter then will increase the demand of money, decrease interest rate, and finally generate and increase in investments. Based on the mainstream Macro theory, it surely has a positive effect on Vietnamese domestic investment and not on foreign investment because of low interest rate.
 
 
 My immediate recommendations for Vietnam's economic policies are to have tight monetary and expansionary fiscal policy. Yes, I would do like to keep the current tight monetary policy because its high interest rate will offer attractive investments to foreign countries. 

In sum, what the country needs most is to deal and to focus on increasing their foreign inflow of capitals and investments.The current exports and imports rates are reversed of each other. The country has extreme low exports comparing to a high imports rate. One possible solution for this problem is for the Vietnamese to cut the production prices in order to generate more exports interests into the country.

         Another solution is to strengthen bank confidences to help ease the depreciation of the Vietnamese dong and to win back the public banking deposits by possibly proposing high return interest rate to lenders and depositors. A third solution is to build institutional infrastructure and increase industrial development (for example factory and facility for economic productions). Hopefully this solution will attract large amount of direct investments into the country. Lastly, the Vietnamese economy should work under the laissez faire structure. The communist government ideology has been too influential on the economy. Their restrictive and conservative approach has been pushing away foreign investments

          Based on the mainstream Macro theory, once again, the aftermath of tight monetary policy for Vietnam will: decrease in money supply, in income, and then decrease in money demand, which increase in interest rate, and decrease in domestic investments. This definitely brings a negative note to the goods market because a decrease in investments will decrease the aggregate expenditures. But a decrease in domestic investment means an increase in foreign investment, because of high attracting interest rate. This result is what Vietnam needs.

          Expansionary fiscal policy will increase government spending, increase in income; in money demand; and interest rate, but decrease in domestic investments. The last decrease is negative for Vietnam but, again, high interest rate is more likely to attract foreign investment. And that is all that matters at the moment-to get foreign investment into the country. The positive effect is an increase in household income. This would be another thing Vietnam needs to have right now because it can use some of the income to increase the consumption function (more spending).

         It is possible that expansionary fiscal policy and tight monetary policy would improve the current economy of Vietnam. Both policies will increase foreign investments that will attract capital inflows to the country and will help increase the household income, gradually. Certainly there will be reaction to my proposed recommendations. Most of us can predict that a reaction will mainly comes from the current government of Vietnam. They would conclude that my policies are liberal. They also would not like the approach in my recommendations of a laissez faire-less government involvement in the economy, because the government is constructed under communism.

          My recommendations do have the positive and negative effects on Vietnam, that I have already mentioned, just like any other economic policies. But I strongly think that it is a necessity for the country right now to take my recommendation under full consideration because of its extreme low exports rate and low foreign investments. I also think that my recommendation would help prepare the country in, possibly, competing with other foreign country in exports and investments when after the Asian Crisis recovers fully.

______________________________________

i "Vietnam at Glance". Online posting. 22 April 1999. http://www.worldbank.org.

ii World Bank/International Monetary Fund. Address of His Excellency Nguyen Tan Dung. Washington DC: 1998.

iii Lertecharoenchok, Yindee. "Cambodia, Laos, Vietnam Make Pleas for Assistance" 22 January 1999. Online posting. 19 April. http://wnc.fedworld.gov.

iv World Bank/Iinternational Monetary Fund. Address of His Excellency Nguyen Tan Dung. Washington DC: 1998.

v "Vietnam Banking Reform and Development." 15 September 1998. Online posting. 18 April 1999. http://www.worldbank.org.

vi "Vietnam at Glance". Online posting. 22 April 1999. http://www.worldbank.org.

vii Tabb, William K. "The East Asian Financial Crisis". The Monthly Review. June 1998, p. 26.

viii "Exchange rates update". Online posting. 21 April 1999. http://www.worldbank.org.

ix "Vietnam at Glance". Online posting. 22 April 1999. http://www.worldbank.org.

x Lertecharoenchok, Yindee. "Cambodia, Laos, Vietnam Make Pleas for Assistance" 22 January 1999. Online posting. 19 April. http://wnc.fedworld.gov.

xi World Bank/Iinternational Monetary Fund. Address of His Excellency Nguyen Tan Dung. Washington DC: 1998.

xii Gabriel, Satya. Personal interview. 22 April 1999.

xiii Gabriel, Satya. Personal interview. 22 April 1999.

xiv Kyodo, Tokyo. "Ministry to Extend 2 Billion Yen in Grants to Vietnam" 22 March 1999. Online posting. 19 April 1999. http://wnc.fedworld.gov.

xv Gabriel, Satya. Personal interview. 22 April 1999.

xvi Ibid.

xvii Ibid.



 
For more readings on the political economy of Vietnam, click here.
 

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