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Vietnam: Mobilize the People to Sustain Boom SPP 556 Macroeconomics Country Analysis Paper Ayako Ariga & Chih Chia Lin Socialist Republic of Vietnam GDP (2004): US$45.2 billions (about 1/250 that of the US) Currency: Vietnamese Dong (VD) “Doi Moi” Policy and Its Outcome Vietnam’s Growth Pattern period Policy environment Per annum per capita GDP growth (%) 1976-81 War communism -0.67 1981-86 Some relaxations of control 5.86 1986-88 Launching of Doi Moi policy 1988-97 Doi Moi policy starts to take 5.85 effect Spillover effects of Asia 3.40 crisis Steady growth 6.60 1997-99 1999- 1.97 GDP Growth Graph (1991-2004) Percent of Real GDP Growth 10 8 6 4 2 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year “Quality” of Growth: Not Linked GDP per capita= US$ 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 % of Investment, Saving and Consumption Consumption, investment and saving growth 100 90 80 70 60 50 40 30 20 10 0 1990 Consumption Investment Saving 指數 (Saving) 1995 2000 Years 2005 Lack of Sound Financial System Presence of crony capitalism/favortism Bank mismanagement Fledgling securities market Corruption Which 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 Planned expenditure Y=E Planned expenditure, E Actual expenditure E1=C1+I1+G 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 Y2 Y1 Income, output, Y Explanation by IS-LM Model Interest rate LM1, limited money supply LM2 IS2, Y=C(Y-T2) +I(r)2+G IS1, Y=C(Y-T1) +I(r)1+G Expected Y1 Y2 Income, output, Y Vietnam Tax System 70 60 Tax rates 50 40 Citizens Foreingers 30 20 10 0 0 20 40 60 80 Income (millions Dong) 100 120 140 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 graph Output per worker Output f (k) Saving s*f (k) Gap filled by: FDI ODA Remittances Investment i*f (k) Capital per worker 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