Vietnam: Mobilize the People to Sustain Boom

SPP 556 MacroeconomicsCountry Analysis Paper

Ayako Ariga & Chih Chia Lin

Socialist Republic of Vietnam

GDP (2004): US$45.2 billions(about 1/250 that of the US)

Currency: Vietnamese Dong (VD)

“Doi Moi” Policy and Its Outcome

Vietnam’s Growth Pattern

period Policy environment Per annum per capita GDP growth (%)

1976-81 War communism -0.67

1981-86 Some relaxations of control 5.86

1986-88 Launching of Doi Moi policy 1.97

1988-97 Doi Moi policy starts to take effect

5.85

1997-99 Spillover effects of Asia crisis

3.40

1999- Steady growth 6.60

GDP Growth

Graph (1991-2004)

0

2

4

6

8

10

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Per

cent

of R

eal G

DP

Gro

wth

“Quality” of Growth: Not Linked

GDP per capita= US$ 2,490 In the world ranking, GDP is the 40th vs. GDP per capita the 160th

Poverty rate=28.9% (2002) Income disparity E.g. ratio of income of the richest 10% to

that of the poorest 10% is 9.4

Saving & Investment

Consumption, investment and saving growth

0

1020

3040

50

6070

8090

100

1990 1995 2000 2005

Years

% o

f Inv

estm

ent,

Sav

ing

and

Con

sum

ptio

n Consumption

Investment

Saving

指數 (Saving)

Lack of Sound Financial System

Presence of crony capitalism/favortism Bank mismanagement Fledgling securities market CorruptionWhich leads to…=>Large component of savings goes to

cross-generational investment within families

=>Opportunity for individual decisions between money and interest-bearing assets is not there

Explanation by Keynesian Cross

Actual expenditure E1=C1+I1+G

Income, output, Y

Planned expenditure, E

Planned expenditure Y=E

Y1Y2

Actual expenditure E2=C2+I2+G

High tax rate: T2 >T1

C2=C(Y-T2) < C1=C(Y-T1)Limited money for investment: I2 < I1

Expected

Explanation by IS-LM Model

IS1, Y=C(Y-T1) +I(r)1+G

Income, output, Y

Interest rate

Y2Y1

LM1, limited money supply

IS2, Y=C(Y-T2) +I(r)2+G

LM2

Expected

Vietnam Tax System

0

10

20

30

40

50

60

70

0 20 40 60 80 100 120 140

Income (millions Dong)

Tax

rat

es Citizens

Foreingers

Capital Inflows

FDI: average 15.6% per annum growth since 1999

ODA +Remittances: average 18.4% per annum growth since 1999

2004 Foreign Reserves: US$5.6 billion=10 weeks worth of imports

Explanation by Solow Model

graphOutput f (k)

Saving s*f (k)

Investment i*f (k)

Capital per worker

Output per worker

Gap filled by:FDIODARemittances

Recommendations

1. Strengthen the banking sector Restructure the inefficient state-owned banks Eliminate incentives for banks to prefer lendings to

Party-related companies Build bank management capacity

2. Further improve friendly environment for foreign investments, trade, and new businesses

3. Tax system reform Broad-base income tax system-increase tax revenue Moderately progressive tax rate-encourage consumption

Potential Weakness in Recommendation (2): Further attract foreign investments and new businesses

Linkage between the FDI and indigenous manufacturing becomes more crucial

Assure this by improving management capability to absorb technology, effective government policies to support innovative, domestic firms

Thank You