Transcript in 2007

VIETNAMESE TRADE AND
ECONOMIC DEVELOPMENT POST WTO ACCESSION
Philip Abbott
Finn Tarp
Ce Wu
Purdue University
CIEM, Hanoi
University of Copenhagen
July 2009
July 15, 2009
WTO Accession Impacts?


Fundamental (initial) Goal of Danida project was to predict
impacts of WTO Accession on Vietnam

Many existing models have badly predicted impacts of prior trade agreements

Controversy persists on the relationship between trade and development
Performance following past bilateral trade agreements
suggested trade matters, and Vietnam is an excellent case to
examine trade-growth linkages


Better models would include mechanisms that relate trade to
development – i.e. investment dynamics
We can now look at Vietnamese trade and development after
WTO accession – some effects seem already evident
Lessons Learned – Prior research

Trade Agreements have had big impacts
Models grossly underestimated impacts
 WTO impacts likely to be larger than most predictions


Investment drives output and trade

Roles of state, FDI important, but…

Domestic private sector is expanding
Model with exogenous investment predicts trade well
 Difficult to relate investment allocations to trade
liberalization or even rates of return



Rates of return vary substantially across sectors, firm types
Market access may matter
Trade Liberalization - Lessons

Tariff reductions have small direct effect on trade through
prices and demand



Increased investment to “tariff reform” (sensitive)and
positive return sectors has much bigger impacts




Biggest impacts for Ag imports and services
Very small impacts on manufacturing
Trade impacts biggest on agriculture, services
Manufacturing exports and ag imports expand more with ∆I to “tariff
reform sectors” (e.g. clothing!)
Investment in high return sectors key when rates of return vary
across sectors
WTO reforms targeted services
Investment and Trade - Lessons


Strong institutional biases in investment allocation

Government invests in infrastructure, SOE equity
 Targets specific sectors, mobilizes savings
 State impacts biggest for energy

Foreign invested firms emphasize manufacturing, ag exports

Private firms emphasize agriculture, services
Differing economic impacts

SOEs show somewhat greater GDP impact

Private firms demand more unskilled labor, generate more wage income

SOEs have lowest labor demand impact (energy)

FI firms generate lowest wage income increases, least labor intensive
Outline of presentation





Recent Events and Economic Performance
Research objectives since last year
Base model evaluation to 2007
Parameters and economic behavior

ICORs, Labor requirements and TFP growth

Price Transmission

Investment allocation
Alternative scenarios

Removing WTO impacts – Tariffs, FDI & Financial account
Background
Recent Events and Economic Performance
Recent relevant events

WTO Accession






Approved by WTO – November, 2006  Joined January, 2007
Modest tariff cuts
Significant opening to Services, FDI – institutional reforms
Imports surged, faster than exports
FDI and other foreign investment surged
Global Recession and Financial Crisis



Effects evident since September, 2008
Export demand weak, FDI slowing
GDP projected to grow more slowly –


8.5% in 2007, 6.25% in 2008, 4.8% in 2009
Undoing WTO benefits?
GDP and growth




Growth accelerated from 2000-2004 at 7.2%
To 8.4% from 2005 to 2007
Slowing to 6.2% in 2008, projected 4.8% in 2009
Inflation increased over decade to over 8% from 2005,
21% in 2008

Recession has reduced inflationary pressures, 4.8% in 2009
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Growth rate (Real GDP) 6.79 6.89 7.08 7.34 7.79 8.44 8.23 8.48 6.2 4.8
GDP per capita ($)
402
440 492 553 636 722 835 1041 1035
Inflation
1.9% 4.0% 6.7% 8.2% 8.2% 7.3% 8.2% 21.7 4.8
Trade

Exports grew over 20% per year through 2008,



but expected to decline in 2009
Imports surged much faster than exports in 2007 – 38%

Grew rapidly, but no faster than exports, in 2008

Also projected to decline in 2009
Current account deficit large in 2007-08, slight decline in 2009
(in $ billions)
Exports
Imports
2000
17.2
17.3
2001
17.8
17.9
2002
19.7
21.5
2003
23.4
26.8
2004
30.4
33.5
2005
36.6
39.4
2006
44.9
47.7
2007
54.6
65.8
2008
69.2
83.8
2009
58.7
67.6
Trade Balance
Current Account Deficit
-0.2
-1.1
-0.1
0.0
-1.8
0.7
-3.4
1.9
-3.2
1.6
-2.7
0.5
-2.8
0.2
-11.3
7.0
-12.3
9.2
-7.1
7.3
4.0%
3.5%
10.2%
19.7%
19.2%
24.8%
29.6%
25.1%
20.7%
17.4%
22.7%
21.2%
21.5%
38.0%
26.8%
27.3%
-15.2%
-19.3%
Growth Rates
Exports
Imports
Balance of payments

Current account deficit expanded in 2007 and 2008


Some saw this as reason to devalue dong?
Financial Account Surplus increased faster!

Huge Inflows of FDI, Portfolio investment and foreign borrowing in 2007

FDI increased but other foreign capital sources slowed in 2008

Reserves accumulated until 2008, supporting dong exchange rate

Bigger Current account deficit, less FDI, declining reserves projected for 2009

Now greater pressure for dong to devalue?
Current Account Deficit
2000
-1.11
2001
0.00
2002
0.68
2003
1.94
2004
1.57
2005
0.50
2006
0.16
2007
6.99
2008
9.24
2009
7.32
Financial Account Surplus
Net FDI Inflows
-0.32
0.50
0.37
0.43
2.09
1.61
3.28
1.30
2.81
1.34
3.09
1.89
3.09
2.32
17.54
6.55
9.18
7.80
5.02
4.00
0.79
0.37
1.41
1.34
1.24
2.59
2.92
10.55
-0.06
-2.29
Reserves (Increase)
Exchange Rate
14,170
14,725
15,280
15,510
15,746
15,859
15,994
16,105
16,302
Government



Public savings for investment (revenue minus current
expenditure) was growing until 2007, falls in half in 2009
Fiscal deficit expanded in 2007 and 2008
Projected to double in 2009 (stimulus?)
Cuts in government spending to control fiscal deficits would
limit infrastructure and SOE investment
Revenue
Expenditures
Current
Capital
Off Budget
2000
90.7
102.7
70.1
32.6
9.9
2001
103.9
117.3
77.0
40.2
10.6
2002
121.7
129.4
84.2
45.2
17.7
2003
153.0
160.4
102.5
57.8
32.1
2004
191.3
184.8
121.2
63.6
26.6
2005
228.2
229.0
149.9
79.2
37.1
2006
279.5
268.4
180.1
88.3
21.8
2007
315.9
341.4
229.3
112.2
35.4
2008
401.6
425.3
307.5
117.8
45.6
2009
389.5
456.6
343.8
112.8
71.6
Public saving
Fiscal Deficit
20.6
21.9
26.9
24.0
37.5
25.4
50.5
39.5
70.1
20.0
78.3
37.9
99.4
10.8
86.6
60.9
94.1
69.2
45.7
138.7
Labor

Employment was growing much more slowly than GDP





Urban unemployment rate falling
Most rapid growth in foreign invested sector
SOE employment stagnant
Wages increasing rapidly, especially in state sector
GDP slowdown will ultimately impact employment
2000
2001
2.5%
2.9%
2.3%
20.0%
2002
2.5%
4.1%
1.9%
31.6%
2003
2.7%
7.6%
1.7%
31.4%
2004
2.5%
1.8%
2.1%
22.8%
2005
2.3%
-1.7%
2.3%
18.9%
2006
1.9%
-2.2%
1.9%
17.7%
2007
1.9%
0.7%
1.6%
15.5%
6.42
6.28
6.01
5.78
5.6
5.31
4.82
4.64
1.0
1.0
1.0
1.0
1.12
0.87
1.10
1.09
1.26
1.09
1.23
1.28
1.47
1.45
1.38
1.50
1.67
1.84
1.62
1.66
1.93
1.66
1.82
2.05
2.28
1.80
2.11
2.21
2.43
2.06
2.20
2.40
Employment growth
State
Private
FI
Urban unemployment
State Wages
Agriculture
Manuafcturing
Service (trade)
WTO related changes?

Imports growing faster than exports
 Current

account worsens
Surge in foreign borrowing and FDI
 Financial

account improves
Small tariff changes
 Adjustments

via price mechanisms
Results consistent with broad expectations
 Apparently
larger impacts than tariff changes predict
 Bigger changes for foreign investment than trade
Research objectives since last year
Data, Model, Parameters, Scenarios
Research objectives since last year

Data


Updated data from GSO on investment by sector of destination, by firm
type (SOE, FI, Private) to 2007
Updated all data to implement model through 2007


Parameters and economic behavior




limited Macro data for 2008, 2009
Labor biased technical change (“LFP”)
Price transmission
Investment allocation
Modeling



Simplifications to specification
Base model projects 2001 through 2007
Alternative scenarios to explore WTO impacts
Base Model Predictions

Base model evaluation to 2007
Underlying Concepts – Investment and Trade Model


Trade policy and institutional reform influence
capacity additions (via incentives to invest )
Savings – Investment balance, paying attention to
public investment, SOE’s and FDI, determines growth
 Growth
dynamics modeled – recursive annual models
 Foreign savings – financial account in SAM


Focus on exports, determined by capacity additions
and market access opportunities
Simplify economic specifications
Investment Patterns

Foreign investment briefly fell, then rose substantially
after WTO accession (2007)
Foreign Borrowing (already in 2005), as much or more than FDI
 Foreign savings important to overall investment



State investment falling, Public savings falling faster
Private investment had been rising rapidly, big increase
in 2007 of Foreign I cut its share a bit

Household and firm savings shares falling
Savings Investment Balance
Billion Dong
2000
Shares of I
2003
2005
2007
2000
2003
2005
2007
Investment
131,479 231,616 343,215 521,700
State
89,419 125,125 161,635 208,100
68%
54%
47%
40%
Foreign Invested
27,171
37,801
51,183 129,301
21%
16%
15%
25%
Private
34,593
68,690 130,397 184,300
26%
30%
38%
35%
14,287
16,919
-27,701
11%
7%
-1%
-5%
117,192 214,697 348,061 549,401
89%
93%
101%
105%
Saving
Public
Private
-4,846
Household
61,091
91,613 118,548 172,193
46%
40%
35%
33%
Firm
56,793
61,302
70,842 122,909
43%
26%
21%
24%
61,783 158,671 254,300
-1%
27%
46%
49%
5%
9%
9%
20%
Foreign
-692
FDI
7,085
20,225
29,957 105,488
Trade performance


High sectoral correlation holds through 2007
Underestimating exports – 10% in 2007
 Imports
very close
 Current account deficit overestimated
 Bigger

Biggest errors for energy
 Services

errors in 2005, 2006 on imports and CA
and manufacturing export sectors
Financial account, reserves mirror current account
Trade performance
Actual Trade
Prediction errors
Growth Rates
2000
2003
2005
2006
2007
2003
2005
2006
2007 2000-03 2000-05 2005-07
Agr E
52.7
65.0
95.3
130.2
153.8
11%
24%
0%
2.0%
7.2%
12.6%
27.1%
Agr M
-6.1
-15.7
-21.8
-28.0
-40.3
-41%
-20%
-16%
-7.1%
37.1%
29.0%
36.0%
Manf E
46.4
91.8
114.2
146.2
176.3
-21%
-8%
-17% -24.2%
25.5%
19.7%
24.2%
-134.0
-217.3
-282.0
-371.9
-516.8
-1%
14%
-9.6%
17.5%
16.0%
35.4%
Energy
20.5
36.2
55.8
75.1
83.9
41%
102%
39% 133.4%
20.9%
22.1%
22.6%
Services
-2.0
-17.9
-5.8
-12.8
-23.5
-67%
-59%
Exports
242
364
528
717
878
-2%
-5%
Imports
253
415
564
765
1,032
5%
14%
6%
-0.6%
93.1%
95.7%
94.3%
92.4%
Sectoral Net
Trade
Manf M
35 sector correlation
2%
-61% -28.8% 109.0%
24.3% 101.0%
-11% -10.2%
14.5%
16.9%
29.0%
17.8%
17.3%
35.3%
Balance of payments
2000
2001
2002
2003
2004
2005
2006
2007
-15,672 -10,043
10,329
30,011
24,642
7,882
2,623
112,607
135,319
168,153
Current Account Deficit
Actual
Predicted
-692
15,636
23,090
57,222
95,610 103,857
-4,478
5,463
31,934
50,860
44,199
48,956
49,390
282,483
-11,563
-913
7,349
30,636
23,068
18,999
12,364
176,995
Actual
11,194
15,506
21,605
20,849
19,557
41,075
46,767
169,877
Predicted
-3,786 -10,173
8,844
-6,362 -51,411 -54,900
-85,929
114,330
14170
15280
15510
15994
16105
Financial Account Surplus
Actual
Predicted
Reserves (Increase)
Exchange Rate
(VN Dong/$)
14725
15746
15859
GDP projections

GDP predictions within 10%
 2.7%

low in 2007
Consumption closer than GDP
 Investment

exogenous
E-M reflects current account, trade errors
 Why
GDP underestimated
GDP projections
2000
2001
2002
2003
2004
2005
2006
2007
Actual
442
481
536
613
715
839
974
1144
Predicted
442
469
531
605
688
785
891
1113
0.0%
-2.5%
-0.9%
-1.4%
-3.8%
-6.5%
-8.6%
-2.7%
Actual
294
312
349
406
466
533
617
742
Predicted
276
293
339
414
498
528
605
759
-5.8%
-6.2%
-2.8%
1.8%
6.9%
-0.9%
-2.0%
2.3%
GDP
Error
Consumption
Error
Labor demand

“LFP” assumptions critical to getting this close
 Assumed
firms reduce use of unskilled labor more so
than skilled labor
 Pressure seems greatest after LFP on educated workers,
before LFP on unskilled labor demand


Base excess skilled labor demand persists
Rural income shares declining
 Urban
wage income shows biggest increase
Labor demand
2000
2001
2002
2003
2004
2005
2006
2007
Employment (GSO)
37,610
38,563
39,508
40,574
41,586
42,527
43,339
44,172
Labor demand
42,358
42,538
43,287
44,961
46,663
46,885
46,904
48,887
Educated
1,636
1,712
1,807
1,924
2,057
2,157
2,261
2,449
Technical
5,633
5,880
6,202
6,615
7,044
7,367
7,680
8,363
Unskilled
35,088
34,945
35,279
36,422
37,562
37,360
36,963
38,075
Labor Supply
40,417
47,144
Educated
1,741
2,228
Technical
5,995
8,894
Unskilled
32,680
36,022
Income Distribution (Shares)
Rural
Farm
Informal
Urban
Wage
Farm
Informal
Wage
2000
37.8%
11.9%
7.1%
4.0%
21.9%
17.3%
2003
37.4%
11.4%
7.3%
4.4%
21.0%
18.5%
2005
36.4%
10.9%
7.1%
4.5%
21.3%
19.8%
2007
36.0%
10.7%
6.7%
4.5%
22.4%
19.8%
Parameters and economic behavior



ICORs, Labor requirements and TFP growth
Price Transmission
Investment allocation
ICORs, Labor requirements and TFP growth

ICOR based on GSO output and investment data

Labor-output ratio based on employment data

ICOR is erratic but falling, after rising

Surge in 2007 investment may lead to final jump
Both Labor and Capital requirements falling  TFP growth


W/R increasing  less labor intensive techniques (to 2004)

Literature has been inconclusive on extent of TFP growth

Labor biased technical change, also intermediate demands?
1.6
1.4
Labor-output ratio
1.2
1
Wages - State Manf
0.8
W/R
0.6
Incremental Capital output ratio
0.4
Interest rate - Lending
0.2
0
2000
2001
2002
2003
2004
2005
2006
2007
Price Transmission

Domestic and world prices diverge
 LOP
violated
 Divergence becomes large in a few sectors


Lagged domestic prices better predict current
domestic prices
Estimated price transmission elasticities low
 No
special effect of trade policy
Price Transmission Models
32
1) For exporters:
ln (domestic price)t, i = β0 + β1 ln (domestic price)t-1, i
+ β2 ln (world price)t, i + εt, i
2) For importers:
ln (domestic price)t, i = β0 + β1 ln (domestic price)t-1, i
+ β2 ln (world price)t, i + β3 ln (import tariff)t, i + εt, I
t: time period
i: sector
Price Transmission Variables
33
Variable
Definition
Domestic price
(dependent variable)
Producer price index (GSO)
Lagged domestic price
World price
Import tariff
Producer price index in the
previous year
Import and export price
index (GSO) - including
tariff and exchange rate
1+percentage import tariff
Methods and Data
34


Data pooled over 87 sectors from 2001-2007
Disaggregated into
 agriculture
and manufacturing,
 imports and exports



Fixed-effects models are used
β2 is short run price transmission elasticty
β 2 / (1-β1) is long run price transmission elasticty

1/ (1-β1) approximate lag length
Regression Estimates
35
Lagged
domestic
price
Sector
Agricultural
Exporter
Importer
Manufacturing
Exporter
Importer
World
price
Import
tariff
0.97**
0.10*++
(0.10)
(0.05)
0.98**
0.04**++
0.09
(0.06)
(0.01)
(0.13)
0.67**
0.67*
(0.13)
(0.27)
0.92**
0.04**++
0.10
(0.04)
(0.02)
(0.08)
R2
Within
Between
Overall
0.71
0.60
0.63
0.80
0.68
0.73
0.76
0.96
0.88
0.74
0.82
0.77
Notes: Numbers in parentheses are standard errors.
** significantly different from zero at 1 percent level; * significantly different from zero at 5 percent level;
and ++ significantly different from one at 1 percent level.
Results of the Price Transmission Models
36


Price transmission models can explain both cross-sector
and within-sector variations reasonably well
Lags slow, critical to model success


Last years price predicts this year’s price well
Price transmission elasticities statistically significant, but
very low
Except for the manufacturing export sector (0.67), the
price transmission elasticities are very small (0.04)
 Significantly different from 1 at 1 percent, LOP violated
 Import tariff is not a significant explanatory variable for
importing sectors – but tariffs are included in Pw

Investment allocation

Rates of return influence investment


Vary by sector, firm type
Trade policy?
No special role beyond influencing rates of return for tariffs
 Market access, proxied by lagged exports, influenced
manufacturing sector allocations


Explaining ∆I across sectors, not over time
Returns to capital and Firm Type shares of
ΔI (new investment) – Last year
Sector
Agricultural Exports
Agricultural Imports
Manufacturing
Exports
Manufacturing
Imports
Energy
Services
Average
Share of Investment (%)
Returns to
Foreign
State
capital
Private
Invested Owned
1.246
0.850
0.184
0.201
0.353
0.420
0.463
0.380
0.481
0.499
0.170
0.331
0.022
0.837
0.193
0.445
0.407
0.116
0.247
0.202
0.352
0.761
0.261
0.428
0.241
0.123
0.492
0.370
Note: Share of investment calculated over period 2000-2005. Averages are across the 35-sector aggregation.
Investment Allocation Models
39
1) ln (investment share)t, i = β0 + β1 ln (investment share)t-1, i
+ β2 ln (rent to capital)t, i + β3 ln (gross output)t, i
+ β4 ln (variance of rates of return)t, i + εt, i
2) ln (investment share)t, i = β0 + β1 ln (investment share)t-1, i
+ β2 ln (rent to capital)t, i + β3 ln (export)t-1, i
+ β4 ln (variance of rates of return)t, i + εt, i
t: time period
i: sector
Investment Allocation Variables
40
Variable
Definition
Investment share
(dependent variable)
Investment in sector i
Total investment
Lagged investment share
Investment in sector i in t-1
Total investment in t-1
( Income _ from _ K )t ,i
Rent to capital
 ( Income _ from _ K )t ,i
i
Justification
Persistence
Gross _ output t ,i
Returns
 Gross _ output t ,i
i
Gross output
(Gross_output ) t ,i (Gross_output ) t 1,i
(Gross_output ) t ,i (Gross_output ) t 1,i
i
Scale/ Engle Effects
i
Export
Export in sector i
Total export
Market access
Variance of rates of return
Variance(rates of return)
Risk
Import tariff
Percentage import tariff
Lost protection Never matters
Methods and Data
41


Data pooled 112 sectors from 2001-2007
Disaggregated into
 agriculture,
manufacturing and services
 Sometimes imports and exports


Random-effects models are used.
Chow tests show that it is okay to pool the data for
total investment, state investment, and private
investment in the agricultural sector at 5 percent
level.
Regression Estimates of Agricultural Sector
Lagged Rent to
I share
K
42
Type of I
Total
State
Private
Foreign
Exporter
Importer
Gross
output
Variance
of RR
0.79**
0.12*
0.17**
-0.06**
(0.04)
(0.06)
(0.05)
(0.02)
0.74**
0.14
0.18**
-0.07**
(0.05)
(0.11)
(0.07)
(0.02)
0.77**
0.16*
0.21**
-0.07**
(0.04)
(0.07)
(0.05)
(0.02)
0.66**
-0.21
0.22*
-0.04
(0.09)
(0.19)
(0.11)
(0.06)
0.63**
0.19
0.30*
-0.01
(0.08)
(0.23)
(0.15)
(0.05)
R2
Within
Between
Overall
0.18
0.99
0.90
0.03
0.97
0.75
0.14
0.99
0.87
0.22
0.98
0.73
0.09
0.91
0.56
Notes: Numbers in parentheses are standard errors.
** significantly different from zero at 1 percent level; and * significantly different from zero at 5 percent
level.
Regression Estimates of Manufacturing Sector
Type of
I
Lagged
I share
Rent to
K
Gross
output
Lagged
export
Variance
of RR
43
Total
State
Private
Foreign
Exporter
0.05
(0.18)
2.22**
(0.66)
Importer
0.56**
(0.05)
0.20**
(0.09)
Exporter
-0.24
(0.16)
4.87**
(0.94)
Importer
0.45**
(0.06)
0.50**
(0.17)
Exporter
-0.21
(0.22)
4.27**
(0.88)
Importer
0.75**
(0.06)
0.15
(0.15)
Exporter
-0.02
(0.20)
0.75
(0.63)
Importer
0.56**
(0.05)
0.07
(0.12)
0.22**
(0.09)
0.36**
(0.05)
0.36**
(0.12)
0.52**
(0.08)
0.39**
(0.11)
0.24**
(0.07)
0.13
(0.09)
0.32**
(0.06)
R2
Within
Between
Overall
-1.04**
(0.22)
0.21
1.00
0.91
-0.20**
(0.03)
0.09
0.99
0.84
-1.84**
(0.27)
0.17
0.99
0.88
-0.27**
(0.05)
0.04
0.93
0.63
-1.04**
(0.21)
0.10
1.00
0.86
-0.07
(0.04)
0.18
0.94
0.68
-1.10**
(0.23)
0.04
0.99
0.84
-0.18**
(0.03)
0.04
0.95
0.72
Notes: Numbers in parentheses are standard errors.
** significantly different from zero at 1 percent level; and * significantly different from zero at 5 percent level.
Regression Estimates of Service Sector
44
Type of I
Total
State
Private
Foreign
Lagged Rent to
I share
K
Gross
output
Variance
of RR
0.83**
0.14
0.16**
-0.05*
(0.04)
(0.10)
(0.06)
(0.02)
0.89**
0.10
0.10
-0.05*
(0.04)
(0.12)
(0.07)
(0.03)
0.67**
0.60**
0.39**
-0.10**
(0.06)
(0.19)
(0.11)
(0.04)
0.46**
0.73*
0.16
-0.04
(0.08)
(0.30)
(0.11)
(0.04)
R2
Within
Between
Overall
0.37
0.99
0.90
0.37
0.98
0.89
0.15
0.98
0.77
0.07
0.89
0.42
Notes: Numbers in parentheses are standard errors.
** significantly different from zero at 1 percent level; and * significantly different from zero at 5 percent
level.
Results for Investment Allocation


The investment allocation models do a good job in explaining
cross-sector variations, but not over time
Rates of return generally positive, sometimes significant

Magnitude of effect varies by sector and firm type





Elasiticities low
Insignificant for foreign invested firms
Risk important – captured by variance
Lags matter – last year predicts this year, except
manufacturing exports
Market access


Gross output is replaced by lagged exports for manufacturing
exporters – works better, captures market access
Lagged exports does not work well for agricultural exports
Alternative scenarios –
WTO Impacts
 Tariffs
 FDI and Foreign savings

Investment, Devaluation
Tarifffs


Average tariffs – 10.9% in 2000, 4.6% in 2005, 2.4% in 2007

Small changes in applied tariffs

Some bigger changes for Manufacturing exports (clothing, wood)
Price transmission mutes tariff changes


Price changes alter sectoral rents


0.04 except manufacturing export sectors: 0.67 (cannot raise export prices due to tariffs!)
Effects somewhat bigger on rents than prices
Scenarios:

Tariff MAX – full pass through to prices, consumption adjusts

Tariff PTE – pass through muted by price transmission elasticities

RENT MAX – effects on sectoral rents  capital allocations and output adjusted,
full pass through

RENT PTE – effects on sectoral rents  capital allocations and output adjusted,
price transmission mutes effects
Tariff Scenarios – Trade Outcomes




Scenario:
Import quantities down, especially for agriculture (sugar)
Import Cost in domestic currency after tariffs generally up
slightly – inelastic demand for imported goods
Price transmission mutes effects significantly
Rent effects on output only somewhat larger
2007
Tariff MAX
Actual Predicted
Net Trade
Agr E
Agr M
Manf E
Manf M
Energy
Services
153.8
-40.3
176.3
-516.8
83.9
-23.5
156.8
-37.4
133.7
-467.2
195.8
-16.7
159.0
-29.3
134.3
-458.2
200.8
-16.1
Exports
Imports
878
1,032
789
1,026
799
1,038
Tariff PTE
Diff.
1.4%
-21.6%
0.4%
-1.9%
2.6%
-4.0%
1.3%
1.2%
Rent MAX
Diff.
Rent PTE
Diff.
156.8
-37.1
133.7
-466.8
195.8
-16.7
0.0%
-0.9%
0.0%
-0.1%
0.0%
0.0%
159.8
-26.7
132.0
-453.7
206.5
-15.4
789
1,026
0.04%
0.01%
795
1,029
1.9%
-28.6%
-1.3%
-2.9%
5.5%
-7.6%
0.8%
0.3%
Diff.
156.8
-36.9
133.6
-466.6
195.8
-16.7
0.0%
-1.2%
-0.1%
-0.1%
0.0%
0.0%
789
1,026
0.00%
-0.02%
Tariff Scenarios – Macro Outcomes




GDP only falls slightly with higher tariffs
Effects smaller with price transmission muting signals
 GDP, current account effects ambiguous, very small
Labor market effects very small, only with output effects
WTO impacts from FDI, foreign savings impacts, not price
changes – even with output mix adjustments
Scenario:
GDP
Consumption
Current account
Labor demand
2007
Tariff Max
Actual Predicted
1144
1113
1108
742
759
756
-113
-168
-171
46,114 48,887 48,887
Tariff PTE
Diff.
-0.5%
-0.4%
1.5%
0.0%
1114
759
-168
48,887
Rent Max
Diff.
0.0%
0.0%
-0.1%
0.0%
1116
758
-165
48,981
Rent PTE
Diff.
0.2%
-0.1%
-1.9%
0.19%
Diff.
1114
0.0%
759
0.0%
-168
-0.1%
48,885 -0.003%
FDI & Foreign Savings

Both FDI and Foreign savings surged
 ∆K
Share in FI sector increased
 I increased in all sectors

2007 early for output effects of FDI, Foreign
Borrowing - ∆K2006  Q2007
 2008

effects would be larger, smaller in 2009
Without foreign savings pressure for devaluation
much stronger
 Devaluation
impacts depend on price transmission,
much stronger if fully passed through
FDI & Foreign Savings - Scenarios

Scenarios:
 FDI
– 2006 ∆KFI, 2007 Q reduced; 2007 FDI reduced
 ∆KFI
from 65 to 58 trillion dong
 FDI from 105 to 37 trillion dong
 INV
- 2006 ∆KSOE and PRIV also reduced
from 185 to 182
 ∆KPRIV from 154 to 148
 I 2008 from 522 to 445
 ∆KSOE
 DEV
– dong devalued from 16105 to 17500 (20%)
 DEV pte – devaluation muted by low price transmission
FDI & Foreign Savings – Trade Outcomes


Biggest FDI, Foreign investment impacts on Manf imports

Small effect on services, even smaller on agriculture

Imports fall more than exports – intermediate demand effects

Next years’ investment down means much less demand for construction – biggest
effect on intermediates
Devaluation expands exports

Scenario:
Much less so if muted by low price transmission
2007
Actual Predicted
FDI
INV
Diff.
DEV
Diff.
DEV pte
Diff.
Diff.
Net Trade
Agr E
Agr M
Manf E
Manf M
Energy
Services
153.8
-40.3
176.3
-516.8
83.9
-23.5
156.8
-37.4
133.7
-467.2
195.8
-16.7
156.6
-37.3
132.2
-435.0
192.6
-16.6
-0.2%
-0.2%
-1.1%
-6.9%
-1.6%
-0.8%
155.8
-37.3
132.1
-427.4
192.3
-16.8
-0.6%
-0.4%
-1.2%
-8.5%
-1.8%
0.3%
171.3
-23.3
136.5
-400.1
199.2
-16.9
9.2%
-37.7%
2.1%
-14.4%
1.7%
1.3%
156.7
-37.2
135.0
-426.6
192.1
-17.0
-0.1%
-0.5%
0.9%
-8.7%
-1.9%
1.9%
Exports
Imports
878
1,032
789
1,026
786
992
-0.3%
-3.3%
785
984
-0.5%
-4.1%
897
1,048
13.7%
2.1%
808
992
2.4%
-3.3%
FDI & Foreign Savings – Macro Outcomes

Large GDP declines with lost investment




Much smaller impact on consumption
Current account improves, but not as much as financial account declines
Realistic devaluation scenario has GDP reduction cut in half
Labor impacts small, bigger for INV than FDI, especially for
unskilled labor

FI sectors used least labor
Scenario:
GDP
Consumption
Current account
Financial account
Labor demand
Educated
Technical
Unskilled
2007
Actual Predicted
1144
1113
742
759
-113
-168
282
282
46,114
48,887
2,154
2,449
8,490
8,363
35,470
38,075
FDI
1079
758
-137
214
48,759
2,442
8,337
37,980
INV
Diff.
-3.1%
-0.2%
-18.5%
-24.2%
-0.26%
-0.28%
-0.31%
-0.25%
1071
756
-130
56
48,589
2,435
8,310
37,844
DEV
Diff.
-3.9%
-0.4%
-22.6%
-80.2%
-0.61%
-0.60%
-0.63%
-0.61%
1144
780
-82
56
DEV pte
Diff.
2.7%
2.8%
-51.4%
-80.2%
1091
762
-115
56
Diff.
-2.0%
0.3%
-31.5%
-80.2%
Conclusions
Tariffs and Price Transmission
Investment and Foreign Saving
Labor
Lessons Learned –
Tariffs and Price Transmission

Price transmission and rents
Some big gaps between border and domestic prices
 Low transmission elasticities, lags matter
 Seriously mutes impacts of any price mechanisms (tariffs,
devaluation)


WTO Tariff adjustments have very small effects
Even when output response is considered
 Biggest effect on agricultural imports, if full pass-through
 Low price transmission negates even small effects

Lessons Learned - Investment and Trade

Investment allocation?

Difficult to show investment following trade policy




Mechanism through rates of return and price transmission
Market access does matter for manufacturing
Patterns do differ by firm type, so FDI change alters capacity
composition
Foreign investment and foreign savings changes due to
WTO have large effects on GDP
Consumption much less affected
 But increased current account deficit substantially
 Demand effect of new investment felt on construction,
intermediates

Lessons Learned – Labor and Income

Labor –output ratios declining significantly



Labor surpluses not yet exhausted, but…




Vietnam wants to “move up value chain”
Biased technical change a critical adjustment – “LFP”
 Need better information on this
Expected skilled labor demands to become tighter sooner than unskilled
labor
Wages growing faster than productivity & inflation
FDI change had smaller labor effects than overall investment
changes
Very small changes in income distribution
 WTO helped urban wage labor, hurt rural areas
Next Steps

Push model to 2008, 2009

Bigger WTO impacts in 2008

Recent macroeconomic problems – undo WTO benefits



Inflation, trade deficits, excessive FDI? Then..

Recession, fiscal deficits, less foreign investment
Does trade performance stand up?
Keynesian Closure?



Labor demand tightening?
Refine econometric investigation of investment and trade incentives, price
transmission
 Low price transmission estimates critical to results now
Labor market impacts, intermediate requirements (energy)
 Need better production functions by firm type