Transcript Maintaining macroeconomic stability

10. Avoiding crises:
macroeconomic management
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Contents
 Debt, institutions and vulnerability
 Stabilization or growth?
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Debt, institutions and vulnerability: lessons
from Thailand (Siamwalla article)
 Rapid economic growth over a decade or more creates
pr(over)confidence about future growth rates
 Vulnerability to a crisis: international borrowing in shortterms markets to make long-term loans in domestic
markets (especially nontradables like property dev’t)
 Problem of excess supply and falling property prices
 Problem of inflation due to rises in nontradables’ prices
 Current account deficit due to
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Big inflows of borrowed foreign capital
Shift in investment and labor from tradables to nontradables
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Debt, institutions and vulnerability
 Overconfidence extends to regulators such as Central Bank
– reluctance to “prick the bubble” (bring down growth rate
to stabilize economy)
 Reluctance to acknowledge crisis, even when banks and
other borrowers on int’l mkt are seen to be in deep trouble
 Bailouts using Gov’t money to prevent/disguise bankruptcy
 Institutional weaknesses made worse by diminished
institutional performance (“technocracy”)
 Central Bank (should act to stabilize, e.g. by raising interest
rates or restricting lending) not fully independent of political
demands
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Debt, institutions and vulnerability
 Central government unable/unwilling to act in national
interest (i.e. stabilize economy) largely due to political
dependence on support from provinces and large public
corporations  need to keep money tap flowing to them
 Provinces/corporations pursue own interests, not concerned
with national goals
 Corruption: political leaders benefit from preferential
treatment given to provinces/public corporations
 Summing up: neither private actors, not State regulators,
nor civil government are willing/able to act effectively for
stabilization as the economy overheats
 Vulnerability; with a trigger, we have macro crisis
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Why macro instability matters for develop’t
 Inflation creates uncertainty (exchange rate, future
growth) which discourages investment
 Perceptions of loss of regulatory/political control
undermine investor confidence – int’l borrowing rates rise
 Liquidity falls; projects cannot be funded
 Lower capital inflows make current account deficit worse
 Inflation erodes the real incomes of the poor
 Lower investment  fewer jobs created
 Real incomes eroded by higher cost of living
 Credit tightening may exclude marginal (poor) borrowers
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Do good times make for bad policies?
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Vietnam
 Main development policy task: create > 1m jobs/year
 WTO accession January 2007  flood of FDI inflows,
increased domestic borrowing in world markets
 Important borrowers: SOEs, provincial governments
 Projects: not all contribute to long-term productivity gain
 E.g.: Vinashin
 Borrowing to finance wide range of investments; total debt
$4.4bn
 Dec. 2010: default on interest due on $600m foreign loan
 Spillovers to entire economy (credit rating downgrade)
Foreign Investment
Vietnam: FDI inflows and stocks
9000
60000
8000
FDI inflow ($m)
7000
50000
FDI Stock ($m)
6000
40000
5000
30000
4000
3000
20000
2000
10000
1000
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0
Source: UNCTAD. Current prices
Increasing growth, greater vulnerability
 Much of VN’s growth has been funded by loans – initially
ODA (very cheap), but now at commercial rates
 Domestic credit growing at 30%/year
 Much (most?) into large dev projects and land
development
 Land sales support provincial revenues
 SOEs like land development: showcase projects funded with
cheap capital
 Private developers get quick returns on land deals
 But credit growth >> GDP growth fuels domestic inflation
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GDP by ownership, 1995-2009
100%
90%
80%
70%
60%
Foreign investment sector
50%
40%
Household
Private
30%
Collective
20%
10%
Non-State
State
0%
Source: GSO
http://www.gso.gov.vn/default_en.aspx?tabid=468&idmid=3&ItemID=9906
• Labor force grew by >1m workers/year in 2005-09
• State sector employs only 10% of total labor force.
Role of state-owned enterprises
 Favored for “leading role” in economic development
 Domestic monopolies, cheap land, cheap and easy credit,
government contracts, …
 Little direct supervision over their activities
 Do SOEs promote development?
 Receive about ½ of all enterprise capital increases
 Many projects of dubious value to long-term growth
 Account for only ¼ of GDP growth
 Almost zero employment growth

2005-08 growth rate of jobs: Private sector 18%; foreign-
invested sector 18%; state sector 0.6%
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Instability: causes and symptoms
 Excessive credit growth & chronic government deficit  high

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


inflation
(World food and fuel prices also contribute to inflation, but this
affects all countries equally)
Inflation means that savings in banks earn negative real rate of
interest
Inflation reduces tradable sector profits and competitiveness 
current account deficit
 VND is expected to depreciate
 Preference for gold and US Dollars over VND
 More pressure on currency (“free market rate” > official
exchange rate)
Defense of VND:USD exchange rate target depletes foreign
reserves
Currency reserves are critically low ($13bn; were $23 bn in 2008)
Stabilization vs. growth
 Much of Vietnam’s current growth is based on speculative
investment
 Susceptibility to uncontrolled capital inflows, sparking
monetary growth and demand-pull inflation
 Gov’t exhibits strong preference for growth over macro
stability
 Recent stabilizations have been brief and indecisive
 Provinces and SOEs have too much autonomy
 “One of our top priorities now is to stabilize the
macroeconomy in order to maintain the pace of growth”
 Contradiction! See: Thailand, 1996
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Summing up
 Vietnam’s growth has been very strong… until now
 Continued long-run growth of GDP and jobs depends on
vitality of non-State sectors
 Challenges they face:
 Crowding-out of investment by competition with SOEs
 Rising production costs due to land prices, inflation,
congestion in cities
 Reduced new investment due to exchange rate instability
 High cost of debt due to VN’s bad credit rating
 Fixing these problems is necessary is growth is to continue
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Could “bad times make for good policies”?
 In 2010-11, attempts to restrict credit growth (high bank
interest rates) have been unsuccessful


Biggest borrowers (SOEs) are largely outside banking system
High commercial interest rates merely penalize private
investors, including producers of globally competitive
tradables (which also generate many jobs)
 Stabilization requires a sacrifice of some short-run growth
 Not doing so risks crisis – maybe wipe out the economic
(and employment) gains of several years of growth
 What’s needed?
 Is there political will to reform the economy?
 Ask for an IMF loan with “structural adjustment” conditions?
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