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“Don’t panic and cry out ‘inflation!’ whenever prices go up,” expert says
Every time when the consumer price index CPI increased, policy makers hastily concluded this was the high inflation and hurriedly tightened the monetary policies and raised interest rates. However, this is not the right move, according to Bui Kien Thanh, a well known economist in Vietnam.
VietNamNet’s Vietnam Economic Forum would like to introduce the opinions of the economist Bui Kien Thanh which he shared at the workshop discussing the financial risks and opportunities in 2011.
The first reaction of the policy makers when they see the CPI increasing is to tighten the monetary policy and raise the interest rates. However, the high CPI does not always mean high inflation.
The CPI represents a “basket” of consumer goods, of which food products account for 39 percent. Every month, the General Statistics Office, after considering the changes of the prices of the goods in the “basket” calculates an average index.
In fact, whether the CPI increases or decreases depends on many other factors apart fromthe monetary policies, for example, the exchange rate policy, fiscal policy, the public investment and the decision by the Government on electricity, coal and petroleum pricing. Besides, the speculation, “underground fees”, corruption, and ineffective public investment also can put pressure on the prices.
Therefore, it is unreasonable to start panicing and crying out “inflation!” whenever the CPI increasing, and then to blaming the inflation on the monetary policies.
In developed economies, consumer credit accounts for a big proportion of the total credit. In the US, for example, consumer credit accounts for 70 percent. In principle, when the national economy becomes too “hot”, enterprises increase their size too sharply, which makes raw materials and labor force scarcer and causes increases in prices,. Then the State has to tighten the monetary policies and raise interest rates in order to limit investments and consumption.
In Vietnam, the consumer credit is not developed yet, accounting for less than 10 percent of total credit. Therefore, the high interest rates would not have big influence on the consumption and prices. High interest rates mostly affect businesses.
The question is if Vietnam’s national economy is too “hot” now, why have the raw materials and labor force have not become scarce yet?
Official statistics show that the labor force in Vietnam is superfluous. The National Assembly has decided that the annual GDP should be 7-8 percent, and the CPI should be curbed at 7 percent. This means that the national economy still needs to develop rapidly but in a sustainable way
So, is it reasonable to tighten monetary policy, if this will cause difficulties to businesses’ development?
In Vietnam, in the context of the low consumer credit, high interest rates will not help reduce the consumption, but will push up the production costs.
A perfect monetary policy is the one which ensures a big enough volume of money in circulation, to help the national economy develop sustainably.
“We need to use the interest rates to force the prices down. We do not base the interest rates on the CPI,” Prime Minister Nguyen Tan Dung stressed at the Government’s conference on December 30-31, 2010.
vietnamnet
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