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Family Name DOAN Given Names THAI BAO NGOC (GEM)

Program/Intake & your DIP13B/ INTAKE 13/

program manager SANDY CHOW
Student No. DIPBA1321

DIP13B/ ELEMENTS OF
Module/Course/Unit
ECONOMICS
Lecturer MR RODNEY SIM

Assignment No. 1 Assignment Due Date 16th of August 2009

DECLARATION: I hereby declare that the attached assignment is my own work. I understand that if I am
suspected of plagiarism or another form of cheating, my work will be referred to the Academic Review
Committee/Registrar, which may result in me being expelled from the program.

Signature Submission Date

SECTION B: COMMENTS FROM YOUR LECTURER ASSIGNMENT GRADE:

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DEVELOPMENT OF VIETNAM’S ECONOMY

(2003 – 2009)

AND THE FINANCIAL CRISIS

NAME: DOAN THAI BAO NGOC (GEM)

CLASS: DIP BA/INTAKE 13TH

SUBJECT: ELEMENTS OF ECONOMICS

LECTURER: MR RODNEY SIM

OVERVIEW
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A. INTERNATIONAL ECONOMIC

The global economic had been worse in the last few year. With the beginning of American’s crisis in

loan market due to under-standard interest rate policy, the whole of financial system has been affected

negatively and it led to the most serious economic slump all over the world. It affected both developed

countries and developing countries. Vietnam was one of the countries influenced most.

B. VIETNAM ECONOMIC

By the new political and economic campaign named Doi Moi in 1986, Vietnam switched from

centralized economy to socialist-oriented market economy. It allowed farmers to sell goods at free

market, appealed foreigners for investing in Vietnam and encouraged private-business. This was the

reason of growth in economy of Vietnam by the late 1990s. (Library of Congress – Federal Research

Division, pp.8)

In 2001, the government launched 10-year economic plan. This led to the dramatic increase in economic

growth from 2002. (Library of Congress – Federal Research Division, pp.8)

Since 2003, the economy continued to grow. However, due to the economic crisis on the world,

Vietnam’s economy performed badly at many aspects.

Vietnam took part in the WTO in January 2007. Since then, the economy of Vietnam gains many

achievements.

However, there was a global economic crisis and Vietnam was one of the countries influenced heavily.

The economy of Vietnam performed so badly in last two years. In this report, we will understand more

clearly what and how the crisis impacts on Vietnam’s economic growth.

Inflation problem

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 By the crisis in global economy, the inflation rate in the countries all over the world shot up. In Vietnam,

the rate of inflation grew to an alarming level and led to other problems.

Percent
(%)
25

20

15

10

0
2003 2004 2005 2006 2007 2008 2009 Year
(1) Inflation rate (%) of Vietnam

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 (Source: Asian Development Bank)

It had been mentioned above that there was a speedy rise in inflation of Vietnam in 2008 (1). This was

the highest rate in history of Vietnam’s economy. However, there used to be inflation in 2004. Although

it dropped slightly in the next few years, the inflation surged up in 2008 again and created many

problems to Vietnam’s economy and its civilians also. After Doi Moi campaign has launched, the

economy of Vietnam developed enormously. The standard of living was higher and the GDP growth

increased dramatically. These led to the higher consumer spending, more foreign and domestic

investment and more outputs due to both import demands from other countries and domestic demands.

This resulted the prices of product and fuel were higher. Therefore, inflation rose speedily. At that time,

I still remember that the price of rice increased sharply by approximately 108 per cent (Citation:

www.eiu.com, 9th July 2009). This led to a growth in transportation costs also.

Of course the government could not just stand and look without doing anything. They tried to lower the

inflation rate as much as possible. Their solutions related to fiscal policy that was effective. The

evidence is to look in the graph above (1), after a dramatically rise in inflation rate in 2008, the rate

dropped considerably in the next year. However, it still arises some issues.

Gross Domestic Product (GDP)

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 Percent
(%)
9
8
7
6
5
4
3
2
1
0
2003 2004 2005 2006 2007 2008 2009 Year
(2.1) GDP Growth (Constant Prices, National Currency)
(Source: CIA World FactBook)

One of the issues is about Vietnamese GDP. It is easy to see that the Vietnamese GDP growth was above

8% from 2005 to 2007. The pace of GDP growth is the highest in 2007 that inflation shoots up at the

same time. We know people will want to spend much more when inflation happens, so the demand for

goods and the oil increase. Consequently, the prices of products and fuel rise and the GDP will grow and

consumer expenditure increases. That is why GDP growth is higher in 2007. According to the World

Bank (2009), the government launched “stabilization packed” policies in order to decrease inflation.

More clearly, the monetary and fiscal policies were tightened, the investments and expenditure were

restricted, encouraged consumers to practice thrift and adjusted the banking system. The central bank

not only had to use interest-free loan to do payments for workers but also lowered the interest rate.

Therefore, the central bank of Vietnam had to cut a lot of costs. On the other hand, this new policies also

impact on living standards such as it is encouraged that there were not increase in prices of electricity,

oil, gas, cement, fertilizers, clean water, medicines, air, train and bus ticket, tuition fees and hospital

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charges until June 2009. (Citation: www.dantri.com.vn, 3rd July 2009). Furthermore, the new policies

also reduced the investments so a lot of projects were cancelled or delayed. That is why enterprises met

some difficulties with those policies. However, because of decrease in investments and expenditure,

GDP growth fell in the early 2009 (2.1) and inflation fall significantly. In the first quarter of 2009,

inflation rate dropped by just over 3 per cent. (1)

GDP/capita
(Source: General Statistics Office of Vietnam)
US$
1200

1000

800

600

400

200

0
2003 2004 2005 2006 2007 2008 2009 Year
(2.2) GDP per capita (USD, current prices) of Vietnam

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It is easy to understand inflation situation by GDP growth. On the other hand, GDP per capita of a

country can also show the health of that country’s economy. The GDP/capita shows us the standard of

living in Vietnam years by years. The time inflation rose is the time when GDP/capita was quite high. It

means that in 2007 and 2008, standard of living was improved well so consumers’ demand for goods

and fuel grew. Therefore, the price increased and so did the inflation.

How the crisis impacts on import – export performance

(Source: Asian Development Bank)

Dong\US$
Exchange rate is another problems that financial crisis created.
18000
VND per
US$1
17500
S
17000 16.9
16.0
D2
16500 D1

16000 Quantity

15500
15000
14500
2003 2004 2005 2006 2007 2008 2009 Year
(3) Exchange rate VND against US dollar

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Although the dong has been keeping depreciating against the US dollar since 2003 with just a low pace

(3), from 2007 to Feb 2009, there was a downward pressure on the dong by 3 percent against US dollar.

This was caused by both high inflation and widening account deficit which was the result of government

solutions (World Bank 2008). They impacted on import and export performance. To understand more

clearly, when inflation happened, high import demand of Vietnamese from other countries happened,

especially from countries such as China and USA, so import rate increased speedily in the early 2008

(4). Therefore, the dong depreciated against US dollar. That is why inflation, import-export and

exchange rate have strong relationship with each other.

Percent
(%)
(Source: Asian Development Bank)
60

50

40
Import
30
Export
20

10

0
2003 2004 2005 2006 2007 2008 2009 Year
(4) Import – Export Growth of Vietnam

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Therefore, the economic crisis made inflation increase dramatically and impacted on trading of Vietnam

also, especially import-export performance. However, due to the participation in WTO, Vietnamese

export grew a lot in the last two years but it can not be said that the economic crisis did not affect export

in Vietnam. Although the exports of goods and services still rose slightly, the growth in exports did fall

in the late 2008 and early 2009. An illustration of this is about Mr. Le Quoc An - Chairman of the

Garment and Textile Association, he estimated that exports of garment products will fall in 2009

because the exporters lose their traditional customers in the US and UK. (Citation: www.eiu.com, 9th

July 2009).

In my opinion, the export growth that decreased in the end 2007 caused the drop in prices of many

products, especially of agricultural industry in Vietnam and the phenomenon that almost of the products

sold in the supermarkets was “Made in China” or from other countries. Otherwise, the import of goods

and services of Vietnam increased speedily. It is easy to recognize when looking at the graph above (4).

The pace of export growth dropped gradually and the Vietnamese imports developed quickly.

Labor market
Percent
(%)
7

10
0
2003 (5)
2004Unemployment
2005 rate (%)
2006 in Vietnam
2007 2008 2009 Year
Another impact of economic crisis related to labor market. Looking at the graph (5), we see that the

unemployment rate in 2007 decrease slightly. This was the consequence of high inflation that made the

prices of products and oil rise due to high demand from consumers, so suppliers wanted to supply more

goods. Therefore, they need more workers to work harder and make more outputs (with higher wage

rate) and thus, the unemployment rate dropped slightly.

However, there were still some negative impacts on the labors. I think that when the government put

new policies into practice to decrease the inflation. There was a part about practicing thrift that

encouraged Vietnamese to limit their consumption expenditure as much as possible. Therefore, the

demand for goods would drop, so suppliers provided products less. That means they had to reduce the

outputs. As a result, many workers lost their jobs because of cutting costs or their wage rate would fall.

That is why when we look in the graph (5), after inflation in 2007, the unemployment rate surged up.

Another problem was that a lot of people after graduation could not find a job at that time. Some

example about this issue is the Canon Co., cut down 2,000 workers or Hanoimilk, had 250 workers who

lost the job. (Citation: www.bbc.co.uk/vietnamese/vietnam, 11th August 2009) To solve the problem for

labor market, some firms reduce working time to avoid job losses or the policies mentioned in the last

part. (Citation: www.bbc.co.uk/vietnamese/vietnam, 11th August 2009).

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 REFERENCE

Library of Congress – Federal Research Division. Country profile: Vietnam, December 2005. Vietnam.

Asian Development Bank (2008). Key Indicators for Asia and the Pacific. Available from:

http://www.adb.org/Documents/Translations/Vietnamese/default.asp. Cited 7th July 2009.

The Economic Intelligence Unit (2008). Countries Report: Vietnam. Available from: www.eiu.com.

Cited 9th July 2009.

CIA World Fact Book (2008) Vietnam. Available from: https://www.cia.gov/library/publications/the-

world-factbook/geos/vm.html. Cited 7th July 2009.

Thanh, P. and Quynh, N (2009). Assist dismissed workers caused by economic downturn. Available

from: www.dantri.com.vn. Cited 3rd July 2009.

General Statistics Office of Vietnam (2009). Monthly Statistic Report. Available from: www.gso.gov.vn.

Cited 7th July 2009.

World Bank (2008) East Asia and Pacific Update: Navigating the Perfect Storm.

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BBC (2008) “Vietnamese firms are cutting down their employment size”. Available from

www.bbc.co.uk/vietnamese/vietnam. Cited 11th August 2009.

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