1. Vietnam: Mobilize the People to Sustain Boom SPP 556 Macroeconomics Country Analysis Paper Ayako Ariga & Chih Chia Lin

2. 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

3. Vietnam’s Growth Pattern periodPolicy environment Per annum per capita GDP growth (%) 1976-81War communism-0.67 1981-86Some relaxations of control5.86 1986-88Launching of Doi Moi policy1.97 1988-97Doi Moi policy starts to take effect 5.85 1997-99Spillover effects of Asia crisis 3.40 1999-Steady growth6.60

4. GDP Growth Graph (1991-2004)

5. “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

6. Saving & Investment Consumption, investment and saving growth

7. 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

8. Explanation by Keynesian Cross Actual expenditure E 1 =C 1 +I 1 +G Income, output, Y Planned expenditure, E Planned expenditure Y=E Y1Y1 Y2Y2 Actual expenditure E 2 =C 2 +I 2 +G High tax rate: T 2 >T 1 C 2 =C(Y-T 2 ) < C 1 =C(Y-T 1 ) Limited money for investment: I 2 < I 1 Expected

9. Explanation by IS-LM Model IS 1, Y=C(Y-T 1 ) +I(r) 1 +G Income, output, Y Interest rate Y2Y2 Y1Y1 LM 1, limited money supply IS 2, Y=C(Y-T 2 ) +I(r) 2 +G LM 2 Expected

10. Vietnam Tax System

11. 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

12. Explanation by Solow Model  graph Output f (k) Saving s*f (k) Investment i*f (k) Capital per worker Output per worker Gap filled by: FDI ODA Remittances

13. 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

14. 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

15. Thank You