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A. The impacts of Global economic recession to Vietnams economy Global trade plunged by nearly 30 percent relative to GDP during the Great Recession of 2008-2009. The average of imports and exports relative to GDP for the four largest economies in the world: the United States, Japan, China, and Germany, trade/GDP fell sharply in each of these countries since 2008. This large drop in international trade has generated significant attention and concern. Vietnam is influenced by global recession, too. In order to understand the effect of global recession 2008-2009, we discuss those economy factor : 1. Inflation (CPI) 2007 2008 2009 2010 CPI ( % ) 8.3 22.97 6.8 9.19

Inflation in 2007 - 2010

25 20 Percentage 15 10 5 0 2007 2008 2009 2010 CPI 8.3 9.19 6.8 22.97

By effect of recession, most of it is supply shock, when world price of crude oil increase very fast in day by day, one more factor is Vietnam government increase wage, that make money supply increase and unit labor cost going up, the CPI in Vietnam 2008 strongly increased by 22.97% compared to 2007. In the end of 2009, CPI index reduced clearly to 6.88% because in the beginning of the year, the Vietnam government and other departments have implemented drastic

and comprehensive measures to proactively prevent inflation, restore and promote the business, particularly focusing development of the domestic market; direction and administration of financial and monetary flexibility, so in 2009 the inflation rate is not high. And when the economy recover in 2010, it rose again. Look closely, although the CPI rose quite high in 2008, but the trend of changes in a positive way in the last months could be results of the implementation of the eight groups of measures to hold down inflation, stabilize macro-economy, ensuring social security and sustainable growth, giving priority to curbing inflation target for monetary tightening measures is the basic reason to keep inflation below 20%. This also confirmed that government measures are fully set out in the right direction, in time and achieve positive outcomes, consumer prices have been declining since October 2008. 2. Trade balance Exports Imports 2007 48.4 60.8 2008 62.9 80.4 Value (Billion USD) 2009 56.6 68.83 2010 71.63 84

Trade balance in 2007 - 2010

180 160 140 120 billion $ 100 80 60 40 20 0 2007 2008 2009 2010 48.4 62.9 56.6 80.4 68.83 60.8 71.63 Imports Exports 84

The recession has directly affected the exports from Vietnam to the United States, Japan, China, and Germany ( Europe ). These are important export markets of Vietnam. Right from the early months of 2008, the trend appeared to slow down exports to the U.S., the largest export market of Vietnam. Due to consumer demand in the U.S. are on the decline strongly by the impact of financial crisis. It make value of export of Vietnam decrease from 62.9 billion $ to 56.6

billion $ in two years 2008 2009. In 2010, the world have signs of economic recovery, so that, export increase much from 62.9 billion $ to 71.6 billion $. Looking on trade balance we can see that Vietnam import value exceed very much than Vietnam export value. Cause Vietnam always import high value goods and ex port low value good. So value added very low. 3. Invested capital / Investment

2007 2008 Public sector 200.0 184.4 Individual sector 187.8 263.0 FDI 74.1 189.9 Total invested capital 461.9 637.3 (Invested capital in million VND)

2009 245.0 278.0 181.2 704.2

V iet N a m In vested C ap ita l in 20 07 - 2 00 8

8 0 0 .0 7 0 0 .0 6 0 0 .0 Million VND 5 0 0 .0 4 0 0 .0 3 0 0 .0 2 0 0 .0 1 0 0 .0 0 .0 2007 2008 2009 2 0 0 .0 8 7 .8 1 7 4 .1 2 6 3 .0 1 8 4 .4 1 8 9 .9 4 6 1 .9 2 7 8 .0 2 4 5 .0 1 8 1 .2 6 3 7 .3 7 04 .2

P u b l ic secto r In d iv id u a l se cto r F DI To ta l in ve sted ca p ita l

The crisis was initially affect foreign direct investment (FDI). The number of newly registered FDI projects tend to level off, in May 10-2008, the total number of registered projects, 68 new projects with total registered capital of 2.02 billion, lower than the early months or the year (the first 9 months has 885 registered projects with total registered capital of 56.27 billion U.S. dollars).

Though the total registered capital was very high (up to USD 63 billion) ,the ability to FDI disbursements in 2008 are affected by the global crisis and total FDI made in the 10 months of year 2008 compared with total registered capital increased only about 15% The attracted foreign direct investment in 2009 was also low due to world economic crisis Overall, foreign investment flows directly and indirectly in Vietnam were decline because of the economic unstability and the global economic downturn and started to gradually recover in 2010 But domestic investment of Vietnam still to increase from year to year. Social capital investment made in 2008 at equaling 43.1% of GDP and 22.2% over 2007 4. Government budget From 2007 to 2010, the government budget always remained deficit. In late 2007-2008, facing the global recession, the government increased government spending, thus the deficit climed high. In 2009, 2010, the deficit came back to normal rate and the government implement contractionary fiscal policy to pull down the budget deficit. 5. GDP Quarter I Quarter II Quarter III Quarter IV Total 2007 7.7 7.87 8.16 N/A 8.48 2008 7.49 5.72 5.98 5.89 6.18 2009 3.14 4.46 6.04 6.99 5.32 2010 5.84 6.44 7.18 7.34 6.78 current prices estimated at 637.3 trillionVND,

GDP growth rate in 2007 - 2010

45 40 35 30 25 20 15 10 5 0

8.48 6.11 8.16 7.87 7.7 6.18 5.89 5.98 5.72 7.49 2008 5.32 6.99 6.04 4.46 3.14 2009 6.78 7.34 7.18 6.44 5.84 2010 Total year Quarter IV Quarter III Quarter II Quarter I

Percentage

2007

In the economy, we have Y=C+I+G+F Y: Total GDP C: Consumption I: Investment G: government speding F: Net export = Export - Import As we see on upper part, we can see that in 2008 - 2009 Inflation increase much in 2008 and 2009, it make domestic consumption decrease => GDP decrease in 2008 2009 FDI decrease = > GDP decrease Government spending always is deficit, it influence to GDP. X decrease and M decrease => GDP have effect.

As result in 2009, according to the economic downturn of 2008, gross domestic product growth in the first quarter of 2009 the water reached only 3.14%, the lowest growth rate in recent years, but the second quarter, third quarter and fourth quarter of 2009, the growth rate of total domestic product has increased gradually to 4.46%, respectively, 6.04% and 6.99%. The whole of 2009, total domestic product grew by 5.32%, including the agriculture, forestry and fishery increased 1.83%, industry and construction by 5.52% and the services increased 6.63%. First, the economic growth in 2009 still lower than the growth rate of 6.18% in 2008, but has exceeded the target growth of 5% of the plan. In the context of world economic recession, many countries got negative economic growth but our economy achieved positive growth rates are relatively high as above is quite a success.

Second, the growth rate of gross domestic product of the first quarter and second quarter of 2009 lower than the growth rate of the first quarter and second quarter of 2008, but the third quarter of 2009 increased 6.04%, higher than the growth rate of 5.98% of the third quarter of 2008 and fourth quarter of 2009 increased 6.9%, higher than the growth rate of 5.89% for the fourth quarter of 2008 showed that the Vietnamese economy had overcome the period of declining growth, suggesting that the governments policies and measures to prevent economic decline, implemented last year in line with the actual situation, had come into effect. 6. Unemployment rate Growth rate (%) Total Urban Rural 2007 4.20 4.64 N/A 2008 2.38 4.65 1.53 2009 2.90 4.60 2.25 2010 2.88 4.43 2.27

Unemployment Growth rate (%)

5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2007 2008 2009 Because the sluggish growth rate of GDP in 2008 2009.
u = 1.4 0.4 x % GDP Change in GDP decrease => u > 0 and increase.

Total Urban Rural

2010

B. What policy Vietnam government conduct to help economy out the recession To help Vietnam economy out the recession, government must enforce policies, those help increase AD and AS Demand side policy AD = C + I + G + X M AD = C + I + G + F To increase AD, government will influency C, I, G, F 1. Fiscal policy : is deberate change in government spending and tax In order to decrease the influence of recession to Vietnam, government did demand stimulus packed, so that total demand for all goods and services by all sector in the economy could increase. Vietnams demand stimulus package (2009) No 1 2 3 4 Total Policy Measures Interest Subsidy State Development Investment Tax holiday and exemption Other spending for social security and economic downturn prevention VND 143,000 billion (equivalent to $8 billion) Source: Report by the Government to the National Assembly (2009) In first two quarter in 2009, government exclude personal income tax and delay income tax of firms. As we have : YD = Y T = C + S C = C + MPC . YD with YD is disposable income, T : tax, C : consumption, S : saving When tax decrease, YD will increase so C will increase, too. As result AD must increase 2. Monetary policy : change in money supply Vietnam government uses expandsionary monetary policy : increasing money supply. Depend on money market : Amount VND 17,000 billion VND 90,800 billion VND 28,000 billion VND 7,200 billion

MS

MS

E E

MD

QD

MS increase => i decrease Because interest rate is cost of investment => i decrease make I increase. As result AD increase 3. Investment policy : Government want interest rate is cheaper so that firms have more incentive to borrow i = i1 + 4% with i : interest rate is received by bank i1 : interest rate firm must pay 4% : government pay Government reduce business tax to encourage people invest more to have more profit Investment tax credit : government provide general tax credit so firm got more Government create more attractive investment environment like : delay tax for lend money form bank. What government do is subsidy interest rate by 4%

incentive product. 4. The fourth factor influence to aggregate demand is F = X M with X is export, M is import. When government want AD increase, government must kick up net export Trade policy : is policy effect F With X depend on the world environment. In global recession X decrease. With world environment is one factor Vietnam government could not effect. So in order to kick up net export government must reduce import.

Because Vietnam joined WTO so Vietnam government can not change on tariff and quotas, Vietnam government must find the way to effect other factors which influence M like exchange rate : Like we can see on part I : VND is depreciated Supply side policy AS present total out put that economy can produce. Short-run : AS has positive relationship between price and total out put. Price Long-run : AS become vertical line. In long run aggregate supply Y = YF
LR AS SR AS

increase so AS increase

SR AS is change in per unit cost of production. When per unit cost of production go up then SRAS will shift to left because profit of firm go down. With, there are factors influence SRAS is capital, labor, technology and land. Any policy affect per unit cost of production will effect to SRAS 1. Labor The most factor effect directly to labor is wage. Vietnam government was decrease personal income tax that make total wage employees and workers increase. It will make short run aggregate supply increase. 2. Capital

One of policy Vietnam government did in order to increase SRAS is Economic

grow policy. Having equation K = Ig . Government increase K so Ig increase too. Attracting FDI to increase I

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3. Tecnology Can increase T factor by spending on technology research of technology transfer from FDI. 4. Human captital Education and training : increase stock of human capital AD and AS policy together If government use demand side policy alone :
P AS

P1

P2 E

AD1

AD2

Y1

Y2

YF

Y (real GDP)

AD AS model (with YF is GDP in full environment) In global recession : Y1 < YF Will all of demand side policy by government, we can see the result is having trade-off between economic growth (Y increase), and inflation happens ( P increase). If government use supply side policy alone, the results is Vietnam achieve economic growth but not have to worry about inflation.

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AS1

AS2

E P1 P2

AD

Y1

Y2

YF

Y (real GDP)

AD AS model (with YF is GDP in full environment) So government used both demand side and supply side policy in order to achieve economic growth but having general price stable

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