Viet Nam News reporter Ngoc Bich talks with World Bank Viet Nam Country Director Victoria Kwakwa about implementation of the Government's Resolution 11 to curb inflation and boost social security.
What is your assessment of the Vietnamese Government's implementation of Resolution 11 so far?
First of all, Resolution 11 is a good plan. It covers a lot of areas which are important for addressing some of the macro-economic challenges that Viet Nam faces and it covers monetary and fiscal policy.
It also talks about some structural issues, State-owned enterprises (SOEs) and the banking sector.
So I think it is a good policy.
Implementation has been good in some areas and not so good in others.
I can clearly see the strong implementation of monetary policy but in terms of fiscal policy, it's harder to tell because it's very hard to get the data and the information.
We are not sure that the planned fiscal adjustment and fiscal consolidation are really happening.
We also feel that implementation of the structural element has lagged. The monetary and fiscal policy adjustments are needed and good, but unless you address some of the structural issues, the problems won't go away and they'll keep coming back and causing instability.
We feel that while there is good progress in some areas of the Resolution, some other parts need to be accelerated in order to achieve full impact of the resolution.
This global economic situation is predicted to be worse than the one in 2008. How will it affect Viet Nam and what are the opportunities that the country can take advantage under the circumstances?
The recovery and the global economy have been rather disappointing. Last year, the sense of recovery was beginning then it fell a bit and it is not continuing as strong as it should be.
For Viet Nam, since joining the World Trade Organisation, its economy has integrated into the global economy and has had a lot of trade as a basis of its growth. That would be the source of concern.
Trade flow and foreign development investment (FDI) flow might be affected because of the global slowdown.
However, there are also opportunities. The European and North American economies still remain a little depressed and a lot of investors with resources are looking for places to put their money. So countries like Viet Nam where reforms are being made are more attractive.
Viet Nam is doing some of the right things. It can attract some of this money to help restructure the economy, the State-owned sector and the financial sector.
The sources of exports and export demand might begin to be depressed again as was the case of 2009, but it is also an opportunity for people who are looking for a better market to invest their resources.
Maybe Viet Nam wants to distinguish between the short-term flow that is very volatile and the longer term which is more reliable. If Viet Nam re-energises its reform programme, it can take advantage of some of these opportunities.
If Viet Nam continues with Resolution 11, the market could be in a better position. You have a good fiscal position, the reserves are in good shape, there is confidence in your currency, all putting you in a better position to withstand a shock.
Returning to Resolution 11, if it is well implemented and structural elements are enhanced, it will do Viet Nam a lot of good and help the country get through this period of instability. It will also position Viet Nam to take advantage of some global flows that might be looking for investment destinations.
The World Economic Forum report says that over the past 25 years, the gap between Vietnamese income per capita and the average income level in developing Asian countries has widened. Is this a sign that Viet Nam might be falling into the middle income trap?
Viet Nam is not in the middle income trap yet. It is still far off. But Viet Nam has to prepare itself so that it does not fall into the trap.
When you talk about the middle income trap, you're talking about the situation where a country has lost its comparative advantages and doesn't have strong sources of growth to continue to move forward.
When most countries start their development process, they're often based on cheap labour or low-cost labour. Viet Nam still has a strong comparative advantage in low-cost labour activities, including light manufacturing and agriculture.
What happens when countries get stuck is that it is not longer competitive in terms of low-cost labour and natural ability to generate growth while at the same time they have not reformed the economy enough to improve productivity through technology and skills. Then they do not achieve much growth because their sources of growth have become limited and growth will not progress.
But Viet Nam still has a comparative advantage in low-cost labour, but if it does not begin to prepare a basis now for a new form of competitiveness and competitive advantage which is based on skills, high productivity and high value-added production, then it could get stuck.
Do you believe that Viet Nam can keep this year's inflation rate at 18 per cent? What should Viet Nam do to rein in inflation further while maintaining sustainable growth?
It's quite challenging. Inflation is due in part to some Government policies, which are the right policies, such as adjusting electricity prices.
Activities in the power sector also need to be sustainable. If Electricity of Viet Nam produced power and sold it at a low cost, it would not be sustainable. It would quickly create a financial problem in the power sector. Tariffs need to go up, but that means adding to inflation.
Similarly, minimum wage has been increased which also has some inflationary elements because it increases productions costs which could be passed on to the consumer.
The inflation challenge is significant and it is going to be very difficult to solve.
I think structure and high inflation need to be addressed. That is really the way Viet Nam has chosen to grow.
In the last few years, growth has been achieved with more investment. In economic theory, economic growth can be brought about with a combination of building capital through investment and improving productivity.
In Viet Nam's case, structural reform has slowed because you don't have productivity sources so you have to let capital accumulation and investment do all the work of driving growth. So you have to invest a lot.
You are pumping a lot of credit into the economy. Viet Nam's credit to gross domestic product (GDP) ratio has grown very fast recently and it is much higher than most countries. When you add credit, you are going to create more inflation pressure.
At the same time, State-owned enterprises execute these particular investments inefficiently and they are taking on a lot of debt. That debt is spilling risk onto the financial sector. You are creating a larger fiscal deficit, more debt and more risk of financial instability.
The Government needs to tighten and rein-in credit and consolidate on the fiscal front. To do so effectively, you must address the structural problems that have been created. SOEs can do as much as they want, with no accountability and using money inefficiently which forces them into debts which cause problems for the rest of the economy.
Some of structural things need to be addressed to allow the Government to focus on the long and medium term in a more sound and sustainable fiscal position, which also helps tame inflation.
For long-term growth, Viet Nam needs to build more sources of productivity including investing in skills, education, improving infrastructure, promoting innovation and technology, and putting money into cutting edge areas that more the country forward.
Viet Nam needs to invest in the right things, things that can drive productivity and help it grow rapidly again. The efforts need to start now.
VNS
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