Economic Restructuring: Starting from Resource Allocation

The year 2011 came to a close with the continuing vicissitudes of the world economy, and the Vietnamese economy in particular. Economic turmoil had serious implications when inflation and interest rates escalated. Difficulties are forecast to continue in 2012. Vietnam Business Forum has a talk with Dr Tran Dinh Thien, Director of the Vietnam Institute of Economics, on this issue. Luong Tuan reports.

Yes, I did. It is very surprising that while the economy is facing numerous difficulties like slowing economic growth, spiralling inflation, exorbitant interest rates, and weakening enterprises, incomes and outgoings of the State Budget seem not to be affected. According to targets set for the past five years, the State Budget’s revenues would account for 23 percent of GDP (by this time), but it has in fact reached 28 percent. Vietnam expenditures also exceeded GDP by over 5 percent. In my opinion, the State Budget should share more with enterprises in the current economic slowdown context. If this had been the case, the economy would not have slid into such a difficult situation.

 

Anyway, let bygones be bygones, but we should look back on what has happened to understand the need for the State Budget to carry a greater spirit of sharing.

 

Let’s look at the ways resources of the economy are allocated. This is an urgent issue of Vietnam’s economy at present. First of all, let’s use simple math to see the shortcomings more clearly. Currently, Vietnam's GDP is about US$100 billion. To create this value, what should Vietnam need? It has 100 seaports, including 20 international seaports, so each port serves, on average, production worth US$1 billion. It has 100 commercial banks, and a much greater number of securities companies and financial companies, so each bank will then make only US$1 billion no matter how much profit it earns. Next, it has 22 airports, including eight international airports, 18 coastal economic zones, 27 or 28 border-gate economic zones, 260 large-scaled industrial parks, regardless of thousands of small industrial complexes, and hundreds of universities. Now, we can feel that our economic structure has problems.

 

While Vietnam should focus on enhancing appeal to foreign investors and competing with other countries, the competition is shifted to the rivalry among provinces and cities and it is escalating. This is an extremely tough problem. So, economic restructuring – the phenomenon we speak so much about in recent times – means the reallocation of resources. If this fails, the completion of objectives and plans in the near future is very difficult to reach.

 

That’s right. The allocation of resources helps us solve current basic problems of the economy. For example, why does annual inflation remain high? Vietnam always places the highest objective on controlling inflation but the annual growth is higher year after year. The roots of inflation and economic uncertainty lie at resource allocation. It cannot be understood that lower interest rates will help bring down inflation. Indeed, if interest rates are reduced, inflation may drop slightly in the short term, but will surely rebound after that because the money supply principle is not changed, investment efficiency is not improved, and macroeconomic uncertainty persists.

 

To fight against inflation and reorder the macro economy, Vietnam cannot adopt short-term measures but it must generate investment efficiency, this is the most fundamental element.

 

Vietnam is considered one of seven emerging economies with the highest risk of overheating growth in the world. This will cause disinterest among foreign investors intending to invest in Vietnam. Accordingly, the confidence of foreign investors in the investment environment will decline. Vietnam needs to look at this issue seriously to have reasonable economic development plans.

 

It is necessary to define the current situation and status of Vietnam’s economy. In my opinion, the current situation of Vietnam’s economy is very difficult; hence, solutions for 2012 must be quick and strong. Although economic development programmes and objectives for 2012 have been passed, companies must carefully consider and analyse to have appropriate solutions.

 

I would like to put forth two scenarios related to objective assessments set for 2012. First, Vietnam’s GDP growth in 2012 is forecast at lower than previous years and this is originated from financial and monetary policies. According to reports released by the Ministry of Planning and Investment, the number of companies filing for bankruptcy in 2011 was 30 percent higher than the previous year, but the real figure may be much higher. Interest rate hikes for the purpose of containing inflation, plus salary rise and food price increase plans, is complicating macroeconomic stabilisation instruments. I think this is an important measure to combat inflation.

 

The top priority in 2012 is to bring inflation down to 7 percent. Second, salary reform in the State-owned sector is painstaking but necessary. This is an important measure to ensure effective government administration. Third, economic restructuring will lead to a new growth model.

 

The world economy in 2012 is forecast to be much more difficult than in 2011, especially the eurozone. If the European debt crisis gets worse, the consequence will be incalculable because this zone has a very strong influence on world trade and investment. There are a lot of forecasts about the world economy in 2012 and I find that all predictions are more pessimistic than previous ones. This is very notable.