Inflation Controlling In Vietnam In 2011 Economics Essay

Vietnam accelerated its economic reform since early 2000s and achieved many important results. While enjoying a high economic growth rate, averaging of about 7% annually, the country maintains well its macroeconomic stability. Yearly inflation rate of the country had been kept at one digit for up to the year 2007. This inflation rate may not be of special in developed countries, however t it is an evidence of great success of economic reform in Vietnam, given that the rate used to be over 600% in the late 1980s.

Figure 1: Inflation in Vietnam before and after the Global Financial Crisis

Source: GSO, official website at http://www.gso.gov.vn

The economy, however, started to show signs of instability when the global financial economic crisis became clearer. There needs careful research before being able to conclude if this instability was effectively an impact of the global financial economic or there was simply a coincidence of time. However, the government of Vietnam has taken a number of bold measures to mitigate the impacts, especially to push up economic growth. One among the most well-known measures is the demand stimulus package announced in 2009. According to Vo Thi Thuy Anh (2000), the package values at up to 160 trillion VND or 9 billion USD. The major components of this package include 17 trillion VND to assist loan interest rate for enterprises, 28 trillion VND reduction of taxes, 17 trillion VND government guarantees for enterprises, 20 trillion VND issuance of government bonds etc.

Table 1: Vietnam GDP Growth, period 2000-2010

Year

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

GDP Growth (%)

6,79

6,89

7,08

7,34

7,79

8,44

8,23

8,46

6,31

5,32

6,78

Source: GSO, official website at http://www.gso.gov.vn

The measures taken by the government of Vietnam seems to work. While the world suffered so much from the global crisis, in 2007 and 2008, Vietnam still gain a reasonably high GDP growth rate of 8,46% and 6,31% respectively. The economy marked a lower economic growth of only 5.32% in 2009, however it started to recovery after that.

Vietnam announced the above huge demand stimulus package in 2009 under the fact that the inflation rate drops strongly from 23% the year earlier to only 6.9% in 2009. Theoretically, such above demand stimulus package would contribute to higher inflation rate and what happened to Vietnam seems to be in line this theory. Inflation soared to 9.19% in 2010 and over 18% in 2011.

Embarking on 2011, the inflation has appeared to be the most concern by the government of Vietnam. On 24 February, 2011, the Government had to issue the Decrective 11/CP-NQ, indicating the important measures to be taken to control inflation, stabilize the macroeconomy and social securities. On 01 March, 2011 the State Bank (which acts as a Central Bank of Vietnam) had to issue the Directive 01/CT-NHNN, indicating monetary and banking measures to control inflation, stabilize the macroeconomy and social securities.

While emphasizing inflation control as the most important objectives of the economy, the government still applies some measures which, theoretically go against the achievement of this target such as controlling and lowering interest rate; exemption, reduction, postpone the tax payment liabilities for enterprises etc.

The above analysis seems to support that inflation and inflation controlling is a very complicated issue, especially for Vietnam in which inflation has been strongly surging in recent year. Therefore, I choose the issue of “Inflation and Inflation Controlling 2011 in Vietnam: The Lessons Learned” as the topic of my thesis.

Research Objectives

The aim of this research is to understand more about the nature of inflation of Vietnam, the policy instruments available to the Government in controlling inflation, effectiveness of such policy instruments and making recommendation on how to better control inflation in the year to come.

With the above aim, the following objectives are targeted:

– Understanding more why inflation in Vietnam became so serious in 2011.

– Understanding more the preference of the Government of Vietnam on measures taken to control inflation.

– Understanding more the impact of inflation on the economy of Vietnam in 2011, the side effects of inflation controlling effort.

– Providing the government of Vietnam with appropriate recommendations on the harmonization of inflation controlling and macro-economic stability in the years to come

Structure of the Research

This dissertation will include of 6 chapters, whose main contents will be as follows:

Chapter 1: Introduction: In this chapter, the author presents the background and the importance of this research; the research objectives and questions; research limitation and research structure.

Chapter 2: Theoretical framework and literature review: This chapter provides an overview of the theories related to inflation and curbing inflation. First, it starts with demand-full, cost push and monetarist approaches to inflation. Second, it presents theories related to the relation between macroeconomic policies and inflation, including the monetary theory model, the AD-AS model, the policy mix model. Finally, this chapter describles the consequence of inflation

Chapter 3: Research methodology: this chapter, presents 4 main issues: the research philosophy, research process, research methodology and data collection process,

Chapter 4: Inflation in 2011: Causes and Government Policy Response: This chapter analizes the main cause of high rate of inflation in 2011 in Vietnam; presents the monetary and fiscal policies that have been utilized by the government of Vietnam to control inflation. Apart from these, this chapter also analizes the reason for utilize an “unsual” policy in Vietnam, that is prevents interest rate from rising while trying to curb inflation.

Chapter 5: Inflation: What are the Trade-off: This chapter tracks down the inflation rate of Vietnam after strong government polices to control in have been applied. The chapter analizes heavy consequence of such strong inflation-controlling policies to come up with relevant policy recommendation.

Chapter 6: Conclusion: it sums up what has been done in this research, including reason for interest, research questions, research methodology, research findings and research recommendation.

Research Philosophy

Positivism relates to the philosophical stance of natural scientist. Thus, it can be seen that Positivism is more concerned with facts and the assumption that the researcher does not affect nor being affected by the subject of the research

Interpretivism referes to the philosophy stance, which is contended that there is a fundamental difference between natural and social science. Therefore, it is important to understand differences between humans in our role as social actors. Researchers that follow this philosophy focus on understanding the meanings and interpretation of social actors, understanding the world from their view point.

Data Collection

Due to time and resource constraint, this research will be basically based on secondary data. It is the data the is published by Vietnam’s government agencies such as the General Statistics Office, the State Bank of Vietnam, the Ministry of Finance, the Ministry of Planning and Investment. It is also the data that is published by well-know international organizations such as the International Monetary Fund, the World Bank, the Asian Development Bank.

Difficulty in doing dissertation

First, I face a lot of difficulties in narrowing down my research topic and rasing up the research question. Inflation is a popular issue in economics and there has been vast amount of writing on it. Writing on it is not really difficult, but writing something that is different from others and is meaningful is important. After a lot of reading and consideration, I decide to focus on the inflation and inflation controlling in 2011 and its consequence. It turns out that my selection is very meaningful and this is evidenced by the fact that the consequence of inflation controlling (in 2011) has been increasingly become heavier.

Second, I face difficulties in collecting data and information, especially information on the performance of the economy in year 2012. This is because that, statistics and announcement of statistic data in Vietnam is generally much slower than in other countries. Without the “real-time” data and information, it is very hard for me to show the heavy consequence of policies taken in 2011.

Next, I face difficulties in learning the theories related to issues under study (inflation, inflation control etc.). Under the MAITF, there are very little theories related to these issues. I did not know what theories are relevant, where to collect them. To solve this issue, I have to read a lot and discuss with people around. Even after collecting the right theories, it turns out very hard for me to read and understand them. Luckily, after great effort, together with assistances of my supervisor, I have been able to understand them.

Finally, I face great difficulty in terms of time management. I do this research when I am still working normally at my office. With pressure from both work and research, sometimes I face stress. Because of the fact that I will have to travel frequently on business from late June, 2012 and could not work on the research at that time, I have to ask for work leaves and finish this research in June.