V. M. MAZYRIN

Candidate of Historical Sciences

Vietnam's integration into the global capitalist economy has brought it both great dividends and new serious problems. The growing global crisis has caused a downturn and a threat of stagnation in the country's economy for the first time in the last decade. The Government of the Socialist Republic of Vietnam (SRV) uses quite effective methods of crisis management.

GROWING VULNERABILITY OF THE ECONOMY

In 2008, due to the impact of the global crisis on the national economy, the government was forced to reduce its expected growth rate from 8-9% to 6.5%. And this is despite the fact that over the past decade, gross domestic product (GDP) Vietnam's GDP grew by an average of 7.5% annually. The steady improvement of quantitative indicators of development led to the fact that the country's leadership began to overestimate the capabilities of the country's economy and allowed it to overheat. At the end of 2008, GDP growth was below the adjusted plan, amounting to only 6.23%, and in 2009, according to the calculations of the International Monetary Fund (IMF), it will fall to 5% and begin to recover only in 2010, when it may reach the level of 6.5 - 7% ¹.

The first difficulties pointed out by experts and initially ignored by government agencies were evident at the end of 2007, when the global recession had not yet begun. This was due to the deepening integration of Vietnam into the world economy, strengthening the link between the Vietnamese economy and the American one. It has become one of the most export-dependent countries in the world: in recent years, the ratio of foreign trade to GDP has exceeded 160%. Unfavorable economic conditions and, above all, lower consumption in the markets of the United States, the European Union (EU) and Japan, which account for about 50% of Vietnam's exports ($62.9 billion in 2008), led to a marked decline in export-oriented production2.

It was also reflected in the fact that after two decades of market reforms and profound institutional changes, the laws of capitalism were actually applied in the Vietnamese economy.³ The introduction of market mechanisms has inevitably brought a cyclical nature to its development. As a result of these processes, it can no longer remain aloof from the trends of the global economy and avoid the consequences of its downturn. If the Asian financial crisis affected Vietnam 10 years ago to a small extent, then a new, this time global wave of recession hit it seriously.

It seems that the global crisis of 2008 was only a catalyst for the expected aggravation of contradictions in the Vietnamese economy, showing that the decline in it is not just opportunistic, but structural in nature.

IT ALL STARTED WITH INFLATION

The first shock was caused by a rapid increase in world prices for fuel, food, steel, etc., as the country is forced to import large amounts of material and technical equipment to maintain high growth rates. Vietnam experienced a surge in inflation (rising at 2.86% monthly in the first half of 2008), but the lack of accurate information and the Government's poor response largely prevented a quick fix. As former Minister of Planning and Investment Chang Xuan Zia admitted, the necessary prescriptions were found with a delay and were implemented hastily, which reduced their effectiveness.

However, the main impact was caused by the inefficiency of domestic production and business, ensuring development primarily through investment in fixed assets. Statistics show that the rapid increase in Vietnam's national wealth by 57.5% is due to an increase in capital investment, 20% - by labor input, and only 22.5% - by an increase in multi-factor productivity. Public investment in Vietnam is financed by 25% of foreign capital, which increased sharply in 2008. They were expected to reach 715 trillion VND in 2009, or approximately 42 billion VND. and will exceed 40% of GDP ⁴.

This policy has caused an increase in the money supply in circulation and the payment imbalance at a rate many times higher than the growth of GDP itself. Money turnover increased by 44%, and public debt-by 54%, which was significantly higher than the Vietnam government's estimates and worse than the highest level in 1993.5 The normal ratio between the growth rate and the money supply in circulation and GDP should be less than 2.5: 1, but in Vietnam in 2004-2007. it reached 3.7 (the first indicator increased annually by 30.3%, while the second - by 8.2%), and in 2007 it became even higher than ⁶. Meanwhile, lending rates remained low, which caused a rush of borrowing in the country and increased capital inflows to the most profitable, in fact, speculative operations, i.e. to the stock market and to the purchase and sale of real estate.

Along with inflation, the trade deficit of the Socialist Republic of Vietnam increased. In 2007, it reached $ 14.12 billion, i.e. exceeded $ 1 billion. per month. In the first five months of 2008, it averaged $ 2.695 billion. per month. This put pressure on the exchange rate, raising concerns about the country's ability to pay, as the boe was required to cover the deficit.-

The extensive development of the Vietnamese economy resulted in a marked drop in investment efficiency, as measured by the ICOR Marginal Capital Return Index*: it rose from 3.0 in 1996 ^to 5.9 in 2008.7 Consequently, although economic dynamics were improving, quality indicators were deteriorating, calling into question the long-term growth prospects, especially in terms of environmental balance.

more than 3-month export volume.

In mid-2008, the world's leading rating agencies and investment banks either downgraded Vietnam's credit ratings (to BB/B in foreign currency and BB+ / B in local currency), or indicated the possibility of an impending currency crisis here ⁸. Morgan Stanley analysts expressed the most alarmist assessments, saying that the situation in the economy of Vietnam is developing according to the" Thai scenario " of 1998 and is fraught with a strong devaluation of the dong. International organizations and experts have warned the government that inflation may exceed 30% by the end of 2008, and the trade deficit - $ 30 billion.

THE ADJUSTMENTS WORKED

But the reality was not so grim. In June-July 2008, inflation and the trade deficit began to decrease. Inflation from July to November 2008 was 0.38% per month, well below the level of the first half of the year, and for the whole year the consumer price index, as its main indicator, increased by about 22%⁹. The foreign trade deficit from June to November added about $ 3 billion (an average of $ 529 million per month) and reached $ 17 billion by the end of the year, or almost 20% of GDP.¹⁰

The country still managed not to slide into the abyss of crisis. The main one was the shift of government policy priorities from economic growth to controlling inflation. The market breathed more freely after the adoption of an 8-point package aimed at curbing rampant inflation. The Central Bank (CB) of Vietnam has made it easier for firms to access credit resources, abandoning the course taken in the spring to raise interest rates. The base rate was reduced in mid-2008 to 10% per annum, and in December-January - to 6 - 7%, which led to a drop in credit rates in all banks of the country. The government has also reduced various types of taxes and duties on businesses, including basic corporate tax and value^-added tax11.

THE DONG EXCHANGE RATE HAS DECREASED BY 10%

The State Bank of Vietnam provided assistance to commercial banks in increasing liquidity. For this purpose, they were provided with additional funds, and the exchange rate of the dong against the dollar was lowered (last time since December 25, 2008-by 3%). This measure is expected to help the largest exporters and partially offset the increase in the country's trade deficit. It caused an increase in demand for US dollars, the transfer of household savings to gold and foreign currency. In this situation, the price of the dollar on the black market remains high: by the end of 2008, its exchange rate soared to 17,400-17,500 VND.

Since the beginning of 2008, the Vietnamese dong has lost 10% of its value.¹² At the same time, Vietnam's competitiveness declined, as the exchange rates of other Southeast Asian (SE) countries fell even more. For example, the Indonesian rupiah fell by 14%, the Philippine peso - by 13%. International organizations recommended that Vietnam devalue the national currency by 20-25% and take out new loans to support it. However, the Government of Vietnam did not adopt such prescriptions because of their negative impact on financial stability, and therefore on the inflow of foreign capital.

ANTI-CRISIS PACKAGE

No sooner had Vietnam managed to cope with inflation, than the crisis in the real estate and credit markets in the United States began to spread rapidly to other countries. It has also captured the Vietnamese economy, whose growth is largely dependent on foreign investment and exports, despite the fact that the country became a member of the World Trade Organization (WTO) only 2 years ago, while beginning to fulfill its heavy obligations.

Since August 2008, due to a decrease in trade turnover, Vietnam's export revenues have steadily declined. Even earlier, in July, the decline in the industry began. Since September, the flow of foreign tourists has been decreasing. Other sources of foreign exchange have also been curtailed by the crisis. For example, rhea was in question-

* The ICOR (Incremental Capital-Output Rate) index shows what public expenditures are needed to create each additional unit of gross product. The higher the ICOR value, the lower the capital return.

The volume of money transfers from Vietnamese expatriates and assistance from international organizations has decreased. The outflow of portfolio investments exceeded their inflow. The index of the Vietnamese stock Exchange began to fall and soon returned to the level of 3-4 years ago.

The threat of economic stagnation has become clear. The government has had to change its policy focus again and move from tackling inflation to preventing a recession. At the end of 2008, after inflation was brought under control, a 5-point anti-crisis package of measures was introduced. It is aimed at stimulating production and final consumption by implementing new investment projects and accelerating a number of financial transformations. The main focus is on infrastructure construction, which usually has a multiplier effect on the economy*. It is noteworthy that similar steps have been taken in most other Asian countries.

According to official statements, the total cost of the stimulus package may range from $ 1 billion to $ 6 billion. How significant this amount is is shown by the fact that it reaches a maximum of 6.8% of GDP (in 2008 it was equal to $ 88.5 billion) and 26% of foreign exchange reserves (more than $ ²² billion) in Viet Nam13.

Given the excessive capital expenditures and modest reserves of foreign currency, independent experts consider such a burden to be unaffordable. However, the authorities have already started implementing a plan for at least $ 1 billion.

In this regard, today the Government of the Socialist Republic of Vietnam has to solve several serious problems at once: where to get funds to finance the program, according to what criteria to choose applicants for incentive funds, which methods and pace of program implementation are more rational. The sources of financing are the state budget, reserves, and foreign aid. In order to ensure that the allocated funds are used for their intended purpose, the authorities strive to develop a mechanism for distributing aid and ensure its transparency.

When selecting targeted projects, Vietnam is primarily concerned with meeting the main socio-economic objectives. Support is provided primarily to those sectors of the economy in which stagnation is observed or key export goods are produced. Special attention is paid to maintaining employment and purchasing power of the population, and increasing the competitiveness of local goods. As in the period of the Asian financial crisis of 1997-1998, it was decided to build transport communications, irrigation systems, and other infrastructure facilities. In many ways, these projects are focused on rural areas and the creation of productive incentives for the peasantry. At the same time, structural adjustment of the economy is accelerating, which is easier to implement in times of crisis.

An important form of stimulating demand is the reduction of prices and taxes, including prices for petroleum products, transportation, etc., as well as other support measures designed to help businesses overcome the period of stagnation. When deciding what form is best to provide funds, Vietnamese experts recommend doing it on a paid basis, in the form of interest-free loans. The government has promised to allocate 20 - 30 trillion VND to commercial firms in the form of concessional loans for the implementation of investment projects.¹⁴

Finally, Vietnam strives to launch new projects as quickly as possible. To this end, the Government, taking into account the lessons of the previous crisis, simplifies administrative formalities. Then it took 3 years (1998-2000) to reach the pre-crisis growth rates. The country's GDP grew by 4.8% in 1998, 4.7% in 1999, and 6% in 2000 alone ^.15 At the same time, Thailand, the first country hit by the Asian financial crisis, improved significantly faster. Some other newly industrialized countries took just one year to recover from the shocks.

RECOVERY PATHS

According to a number of foreign experts, the Vietnamese economy may start to rise again in a year ¹⁶. According to them, the impact of the global recession will affect Vietnam to a lesser extent than other countries, since the most dangerous stage of the crisis has passed, and the world's leading economies have begun to apply unprecedented measures to reduce negative phenomena. Other encouraging factors are related to the specific socio-economic situation in Vietnam. First of all, it is still a predominantly agricultural country, with about 70% of the population living off traditional agricultural production.-

* Multiplier (econ.) - a coefficient that shows the measure of the multiplying effect of positive feedback on the output value of the controlled system (editor's note).

small-scale and artisanal production, and 97% of firms are classified as small and medium-sized. Working mainly for the domestic market, they can quickly adapt to new circumstances, as they do not depend much on external influences.

The fact that Vietnam has not yet fully integrated itself into the global financial and production chains is another positive factor contributing to the rapid recovery of the Vietnamese economy. As Vietnam's exports declined due to lower demand in developed markets, there was an opportunity to expand domestic consumption. Finally, a high level of social cohesion and business spirit plays a positive role here.

THE COUNTRY CAN GET OUT OF THE CRISIS IN A YEAR

One of the most important resources for economic recovery is considered to be compensating for the decline in exports to developed countries by expanding ties with the regions least affected by the crisis, in particular, with the States of the Middle East and Africa. Thus, in 2008, Vietnam's exports to Africa grew by 95%¹⁷. There are still high hopes for the US market. Vietnam's exports to the United States are growing faster than any other country in East Asia. According to the US International Trade Committee, for the first 10 months of 2008, It increased by 21% (to $ 10.5 billion), while China's exports to the United States grew by only 6%.

Reducing the volume and cost of imports can also help balance foreign trade. It is expected that in 2009 world prices for the main raw materials and material and technical resources purchased by Vietnam (pig iron and rolled steel, steel billets, fertilizers) will fall sharply. A projected 30% to 50% reduction in the prices of these commodities would result in a reduction in imports of approximately $ 6 billion. ¹⁸ In addition, the launch of Vietnam's first oil refinery in Dung Caat in 2009 is expected to almost halve the volume of petroleum products imported into the country, which currently stands at 11 million tons per year.

Due to difficulties in accessing the capital market and credit, businesses will be forced to reduce production, and people will be forced to reduce consumption. This will be another reason for the reduction of raw material imports.

In many respects, the recovery of the Vietnamese economy will depend on the state of the banking and financial sector, which will have to overcome a number of manifestations of the general recession to strengthen it19. Since this sector reflects the real state of the economy, the slowdown in economic growth in Vietnam causes a decline in activity in the financial services sector. It is expected that its activity will resume only with the recovery of the economy after 2010. And the global liquidity deficit is holding back the exorbitant inflow of foreign direct investment and corporate borrowing to Vietnam in recent years.

The crisis situation initiates a new stage of reforming the national financial and banking system, including increasing the level of capitalization of banks and companies participating in the stock market, improving supervision, improving accounting and auditing, widespread introduction of risk management mechanisms and corporate governance standards, and transparency of financial institutions.

Another significant trend is the opening of the Vietnamese market for direct operations of foreign banking capital. Fulfilling its WTO commitments, Vietnam allowed foreign banks to establish branches here for the first time. The condition that enterprises with 100% foreign ownership must have an authorized capital of about $ 200 million will allow them to play a more prominent role in the Vietnamese economy. The experience of other countries that have also allowed the opening of foreign banks has shown that this provides a fairly serious expansion of the market, but their share usually does not exceed 10 - 15%.

SOCIO-ECONOMIC GOALS AND PRIORITIES

Business support has become one of the main goals of the new anti-crisis program. It is noteworthy that the state began to show increased concern for the private sector. This is due to the fact that in 2008, according to the head of the Association of Small and Medium-sized Enterprises, former chairman of the Central Bank Kao Shi Kiem, at least 60% of enterprises reported a decline in turnover, 20% are on the verge of bankruptcy, and only 20% continued to operate successfully. The country's business climate survey showed that the share of enterprises with no expansion plans increased to ²²% in 2008, compared to 10% in the previous year20.

According to Wu Zui Thai, Chairman of the Hanoi Association of Industrialists and Merchants, banks were able to meet only 10% of the credit needs of small and medium-sized businesses in January-October 2008, when there was a shortage of liquidity. Despite the reduction in lending rates, many businesses still do not have access to borrowed capital. The government called on banks to extend the terms and soften the terms of payment of accumulated debts, and subsidized the rate (by 4%) of annual working capital lending for small businesses so that they could continue working. At the same time, it called on entrepreneurs to show social responsibility and care for employees and the poor.

Despite these challenges, the international rating agency Grant Thornton ranked Vietnam 7th out of 36 countries and territories in terms of optimism among private enterprises in its 2009 Business Outlook report. In 2008 in

In a similar ranking, Vietnam was even higher - 3rd after India and the Philippines ²¹. Noting the general sharp decline in optimism at this stage of global economic development, the agency recognizes the prospects for the Vietnamese economy as encouraging.

The Government of the Socialist Republic of Vietnam takes special additional measures to protect the interests of workers and, above all, the low-income segments of the population. Nguyen Thi Ngan, Minister of Labor, Social Affairs and War Invalids, stated that ensuring comprehensive social guarantees and limiting the impact of the economic downturn on the poor is one of the highest priorities of the state authorities. This position is dictated, first of all, by the growth of social tension caused by the decline in production and the increase in consumer prices.

According to official data, the number of strikes at enterprises of the Socialist Republic of Vietnam in 2008 increased by almost 40%^compared to 200722. If during the period of economic recovery, labor conflicts occurred mainly at enterprises of foreign capital, and strikers usually demanded higher wages, now the reason is increasingly the reduction of existing wages and jobs at domestic enterprises. Since August 2008, up to 30 thousand employees have been subject to a wave of cuts. In 2009, the Ministry of Labor estimates that at least 150,000 more people may lose their jobs.²³

Based on this, the state has provided for the payment of additional benefits, the redistribution of funds from social funds to help the unemployed. The Ministry of Labor plans to create 1.7 million new jobs in 2009, although experts estimate these plans as unreal24.

Migrants returning to the countryside from the cities due to the decline in industrial production were not ignored. The Ministry reviews the list of poor households and develops new criteria for determining the poverty line. The dramatic change in the economic situation in Vietnam and around the world required an adjustment of the criteria introduced in 2005.

By the end of 2008, the share of households living below the poverty line was about 13%, a decrease of 1.66% compared to 2007. Natural disasters and inflation prevented the country from reaching the planned 12%²⁵.

After the transition to the new assessment standard in 2009, the proportion of the population living below the poverty line may temporarily increase. However, due to the implementation of an active social security policy, the authorities still hope that this indicator will be reduced to 10% in 2010.

VIETNAMESE ALTERNATIVE

The policy of the Government of the Socialist Republic of Vietnam to overcome the economic downturn and the consequences of the global crisis is persistent and so far generally successful. In a number of significant ways, it differs from the haphazard attempts made in some other countries. It seems that the "financial tsunami" does not necessarily turn into a disaster for any State. On the contrary, some of them may partially benefit and come out stronger from this situation.

The example of Vietnam shows that a regulated and socially oriented market economy can successfully ensure sustainable development. While pursuing their own course, the authorities of the Socialist Republic of Vietnam do not use "shock therapy" and do not rely only on the "invisible hand of the market", which supposedly can correct the imbalances that arise spontaneously in the market economy.

A comparison of the neoliberal model and alternative economic concepts, such as those used by the Vietnamese leadership, helps to assess both the advantages and weaknesses of the development strategy of transition countries.

¹ www.bbc.co.uk/vietnamese/vietnam/story/2008/12/081218_imfvnecon.shtml; Hong Kong Newspaper Prints Assessment of the Prospects of Vietnam's Economy // Takungpao, China, 22.12.2008; Statistical Yearbook of Vietnam 2007. Hanoi, 2008, p. 80.

² Report of the State Fiscal Service of Vietnam on the socio-economic situation in the country in 2008 (in Vietnamese).

³ See for more details: Mazyrin V. M. Reforms of the transition period in Vietnam: main directions, dynamics and results (1986-2006). Moscow, 2007, p. 336.

⁴ Prolonged Discussion, Opportunities May be Missed // Vietnam Economic Times - www.gda.com.vn/?page-news&code=news&id=1529, 02.01.2009; Statistical Yearbook of Vietnam. 2007..., p. 93.

⁵ Prolonged Discussion, Opportunities May be Missed ...

⁶ Vietnam's Economy: One Year, Two Crises // Vietnam Economic Times - www.gda.com.vn/?page=news&code-news&id=152729.12.2008.

⁷ Ibidem; World Bank. Global Development Finance - Harnessing Cyclical Gains for Development - 2004. Washington, 2004.

⁸ The Asian Macro Weekly. Vietnam: an Anatomy of Inflation Shock. Merrill Lynch. 23.05.2008.

⁹ Report of the SRW GSO ...

¹⁰ Vietnam's Economy: One Year, Two Crises...

¹¹ SME Seek to Ride out Economic Slump // Voice of Vietnam News - www.cpv.org.vn/english/forums/details.asp?topic=29... - 04.01.2009.

¹² Banks Still Lacking Foreign Currencies //www.english.vietnamnet.vn/biz/2009/01/822637 - 07.01.2009.

¹³ Vietnam's Economy: One Year, Two Crises...

¹⁴ SME Seek to Ride out...

¹⁵ Statistical Yearbook of Vietnam.., p. 80.

¹⁶ Hong Kong Newspaper Prints Assessment... Vietnamese Businesses will Develop Despite 'Earthquake' and 'Tsunami' // Vietnam News Agency - english.vietnamnet.vn/biz/2009/01/822131 - 05.01.2009.

¹⁷ www.vneconomy.vn/2009010101321425P0C10/nhung-diem-noi-bat-cua-xuat-nhap-khau -2008.htm - 10.01.2009.

¹⁸ 2009's Imports Unlikely to Increase Suddenly - www.cpv.org.vn/english/economics/details.asp?topic=16... - 06.01.2009.

¹⁹ This opinion was expressed by Standard Chartered Bank CEO Ashok Sood-see: Vietnam Well Placed to Ride out the Storm / / Vietnam Investment Review - www.cpv.org.vn/english/vietnaminforeignereyes/details.asp.topic=107... - 06.01.2009.

²⁰ SME Seek to Ride out...

²¹ Vietnam Still Optimistic, Says Grant Thornton // Vietnam News Agency - www.english.vietnamnet.vn/biz/2009/01/822650 - 07.01.2009.

²² www.bbc.co.uk/vietnamese/vietnam/story/2009/01/090109_strikesstatistics.shtml - 09.01.2009.

²³ According to the ILO's calculations, a 2% reduction in GDP leads to a 0.65% drop in employment, which is 300,000 people for Vietnam.

²⁴ Vietnam's Poor on the Increase // english.vietnamnet.vn - 07.01.2009.

²⁵ Ibidem.

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