ABSTRACT Vietnam is experiencing a rising inflation and volatility in asset markets in recent years. The main reason for this is a large inflow of foreign exchange relative to economic size, which generates liquidity surplus, economic overheating and accumulation of international reserves. Exchange overvaluation is also occurring but it is partly offset by the falling US dollar to which the Vietnamese Dong is almost pegged. This type of economic boom is commonly observed in capital-receiving countries around the world. Aggressive public investment of the Vietnamese government is contributing further to economic buoyancy. Reform of macroeconomic management and the monitoring of incoming capital are called for as Vietnam integrates into the global financial market. Global influences such as high oil and other commodity prices, as well as shocks due to floods and animal epidemics, also affect Vietnamese inflation but the main policy response should be directed to the management of large capital inflows. Key words: inflation, exchange rate, asset bubble, financial liberalization, capital account crisis.
This paper provides analyses and proposals concerning Vietnam's current macroeconomic problems including inflation and asset market instability. The main idea presented here is that Vietnam must look outward to understand and find solutions to these problems rather than discuss them in purely domestic terms. The current situation of Vietnam somewhat resembles that of Thailand prior to the 1997 Asian Financial Crisis. Vietnam's economic management
must be revised to incorporate new complexities as the country moves from financial isolation to international financial integration.
The inflation puzzle
Let us start by asking this question: why has Vietnam's inflation been higher than most neighboring countries in recent years? After the very high inflation ended in the early 1990s, general prices in Vietnam remained stable with an average
Kenichi Ohno, Professor of economics. The author is the co-leader of the Vietnam Development Forum (VDF), which
is a joint research project between the National Graduate Institute for Policy Studies in Tokyo and the National Economics University in Hanoi. This paper was originally drafted as one chapter in VDF's policy report, Vietnam as an Emerging Industrial Country: Policy Scope toward 2020. This report is under preparation for which the Preview Edition, March 2008, is available. Vietnam Economic management review
Volume 2 - Number 2 - 2008
ECONOMIC POLICY DEBATE
Vietnam's Rising Inflation and Asset Booms: An External Explanation
consumer price inflation of 3.1% during 19962003. However, in 2004 it jumped to 9.5% and has stayed relatively high ever since. In 2007, it rose to 12.6%. One may argue that annual inflation of around 10% is not a macroeconomic disaster and
perhaps even tolerable if the real economy continues to grow strongly. However, it is important to understand the causes behind Vietnam's current inflation in order to identify background macroeconomic forces at work and anticipate future risks.
Figure 1: Consumer price inflation in selected East Asian countries, 2000-2007
Source: IMF, International Financial Statistics, various issues.
As illustrated in Figure 1, from 2004 to 2007, inflation in Vietnam has been higher than in the neighboring countries except Indonesia, a country facing serious political and economic problems. At present, Vietnam has the highest inflation among East Asian high performers. Although high prices of oil and other commodities are certainly to blame for part of the price increase, inflation differential between Vietnam and other countries cannot be explained by such globally common factors. Similarly, Severe acute respiratory syndrome (SARS), bird flu, and other epidemics pushed up food...