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Short-term solutions in ‘post-economic downturn’ period in combination with medium and long term economic development targets
According to Dr. Tran Du Lich, the stimulus package to prevent economic downturn applied since December 2008 has brought about positive effects. However, all the feasible solutions are only of ‘first aid’ nature in the economic downturn period. The question about how to combine the short-term solutions with the medium and long term economic targets is a problem to be solved in the ‘post-economic downturn’ period.
Pracitcal effectiveness of solutions package to prevent economic downturn
In 2008, to contain inflation, stabilise macro-economy and ensure social welfare, the monetary solution has dominated most and made the immediate effect out of the eight groups of solutions carried out since March 2008
With high inflation rate of over 2% a month, the Government has implemented the tight credit policy through the State Bank’s tools such as the increases in the basic interest rate and in the required reserve ratio for commercial banks, practiced compulsory issuance for some main credit institutions and the limitation on the discount of valuable papers and so on, with the aim of reducing the rate of credit outstanding growth of commercial banks and the aggregate supply of money in circulation, thus decreasing the aggregate demand of the economy and creating new balance between aggregate supply and aggregate demand.
As far as the fiscal policy is concerned, since early 2009 it has been advocated to cut public spending, put off unnecessary investment projects and review the portfolios of the State-owned enterprises. When an economy falls into the state of inflation, there are a lot of direct and indirect causes, but these causes are always reflected through currency, so ‘monetary prescription” has the quickest effect.
Since early this year, the country’s economy has seen a rather sharp reduction in the growth rate. Gross domestic product (GDP) in the first quarter of 2008 was up 7.4%, but in the same quarter of 2009, it was only up 3.1%. The macro-economic target is to prevent the economic slowdown, so it was necessary to apply the solutions to increase the economy’s aggregate supply. Once again, the fiscal policy was shifted to such a direction as to increase public spending in the field of investment, particularly in the social and technical infrastructure works, raise social allowances and increase the budget deficit to the level of 7% of GDP.
As for the monetary policy, flexibe tightening was shifted to cautious loosening in order to prevent the economic slowdown. However, the use of the tools of monetary policy has been prominent among the five groups of solutions carried out by the Government since December 2008. These tools include the loosening of credit policy, the lowering of required reserve ratio for commercial banks, the payment of debts for the required notes, the rediscount and refunding through open market operation, the widening of the VND/US$ exchange rate trading band in an attempt to stimulate the growth in the aggregate demand in the economy and as a result in the aggregate supply as well.
To implement the US$8 billion economic stimulus package announced by the Government, up to now the 4% lending interest rate support to loans for working capital demands remains the most effective measure.
However, any policy has a double-face character. The monetary policy used to rein in inflation in the first six months of 2008 made the economy take ‘high-dose antibiotic’ medicine and its side-effect landed many banks in the danger of losing their liquidity. A lot of enterprises faced with serious shortage of the working capital and met with many difficulties in maintaining their production activities. The situation lasted from the end of March to the end of June 2008 when the inflation eased and the Government began to carry out a tight but flexible monetary policy for each of different fields, raising liquidity for the economy.
At present, the situation is reverse for the credit support policy to increase liquidity for the economy in general and the banking system in particular. Apart from its positive effects, the interest rate market has shown signs of becoming distorted with a threat that some enterprises are taking advantage of the interest rate support policy to create unfairness in competition, thus putting up an obstacle to the implementation of the market-oriented interest rate policy.
A problem of the post-economic downturn period
The developments of the world economic situation have since early this year shown that the world economy is actually entering ‘the post-crisis period’. Countries are striving to carry out their own strategies. A new race is taking place in spite of the very slow rate of the recovery of the global economy until the middle of next year when investors’ confidence and the financial stability are to be strengthened.
As an open economy, but it is still heavily dependent on processing with the low added volume in the product value structure, Vietnam is still under huge impact of the world market.
Although the Vietnamese economy has not directly affected by the global financial crisis and its credit - financial system has been stabilised, its economic growth has still been influenced by the recovery level of the world economy.
However, the second quarter of 2008 was the most difficult time of the credit - financial system and the hardest time for the domestic economic growth also fell into the first quarter of 2009. Most of the remaining time of the year and the year 2010 can be considered as the economic recovery period and in fact the domestic economy is recovering in most of economic fields. The GDP growth targets of over 5% for 2009 and of around 6.5% for 2010 are relatively suitable to the current situation.
The stimulus package to prevent economic downturn, applied since December 2008, has brought about positive effects, particularly the 4% interest rate support solution to 18-month loans for working capital demands has created strong liquidity for the economy, thus helping increase the aggregate demand and create direct conditions for many enterprises to overcome difficulties regarding working capital so that they can ‘stick’ themselves to their markets, creating a lot of new working places for the economy.
However, all the feasible solutions are only been of ‘first aid’ nature in the economic downturn period. The question about how to combine the short-term solutions with the medium and long term economic targets is a problem to be solved in the ‘post-economic downturn’ period. It is not only very important in this period, but also creates premises for development in the following ‘speed-up’ period.
Solutions for the last months of 2009 and the year 2010
Under the impacts of the global economic recession and financial crisis, an important lesson drawn is that it is necessary to avoid the inadequacy of the horizontal economic growth model which is based mainly on the increase in investment capital, the use of cheap labour, the exploitation of raw materials and the export processing So, when the economic and financial solutions for the year-end months of 2009 and the year 2010 are to be discussed, it is impossible to separate it from the long and medium term problems of the economy.
The pivotal matter of the ‘post-downturn’ period is to reorganise the economy with the aim of changing it from the processing-based economy to production-based one, taking part in the global value chains in order to define the position of the Vietnamese economy in the ‘post-crisis’ period of the world economy with a forecast that there will be a race to change the international economic order in the global and regional relations.
For these reasons, the Government should put forth an overall programme to fulfill the target of the restructure of the domestic economy in the direction of raising competitiveness with a clear roadmap with specific quantitative goals in accompaniment of the specific economic and financial policies.
Such a programme should be promulgated by the end of the year so that it can be carried out from 2010 with the aim of supporting enterprises right from the beginning of the economic recovery period.
The above-mentioned programme will create foundation for the domestic market development policy to bring into full play the ‘inner strength’. At present, any ‘new emerging’ market with fast recovery has effectively exploited its domestic market.
The Poliburo’s guideline on encouraging the Vietnamese to give priority to using Vietnam-made goods is very right. However, to this end, it is necessary to reorganise the domestic production, assist enterprises in building up Vietnam’s brand names, invest in the domestic maket expansion and raise competitiveness of the domestically made goods.
Dr. Tran Du Lich
Member of the National Assembly’s Economic Committee and Member of the Advisory Council for National Financial and Monetary Policies
nhandan
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