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Introduction
2008 is the year of recession. Slowdown in US, the EU and Japan and
many developed country draws a gloomy economy picture. The world growth
rate is decrease sharply, in 2008 is 2.9% and forecast in 2009 is 0%.
The global recession has large impacts on Vietnamese economy. The first
impact is global recession make FDI into Vietnam decrease. In 2008, FDI invest
into Vietnam is 60 billion$ but in 2009, it is estimated about 30 billion$, by half
of 2008.
- Stabilize the macro economy; ensure social security and the safety of
the system of credit institutions
1. Fiscal policy
a. Tax
The tax, which has imposed on stock market, also delayed. Taxes on
securities, among the provisions of the new Law on Personal Income Tax that
engendered the greatest controversy were new taxes on capital gains from
securities investments and on income from dividends. These have also been
deferred until May under the new circular, with the aim of supporting stock
market investors dealing with the prolonged market downturn. However, the
circular requires securities investors to continuing computing the deferred tax
amounts through May. "The National Assembly will decide whether this money
will be collected when it convenes in May," the ministry said in the circular,
noting that the ministry's authority was limited merely to delaying collection of
the tax. The HCM City Stock Exchange reacted to news of the delayed taxes
with the VN-Index gaining 2.11 per cent to close at 287.57 points. The market
has reacted positively to the ministry decision analyst with a Hanoi-based
securities firm.
b. Government spending
While tax reduction methods are considered like demand stimulation, the
way to restructure government spending is supply...Measure include social
welfare, increase in investment in infrastructure; increase in spending for social
securities. In the ongoing global economic turmoil, social security policies
should target laid-off workers and poor people badly affected by increased
prices of goods. This method is restructuring expense budget with trend:
increasing normal expenditure, reducing expenditure for investment.
Those are the policies; and how these policies impact on the economy.
We will analyze it by using consumption and investment function.
1.2. Using consumption function and investment function to analyze impact
of fiscal policies:
C = Co+ MPC x (Y – T)
In which: C: consumption
Y: Income
T: Tax
In which: I: Investment
δK : depreciation
We will see the increase of investment when the tax rate reduce
Moreover, we have:
AD = C +I + G + NX
2. Monetary policies
a. Monetary Policies
Since the beginning of 2009, The State bank of Vietnam has applied
Expansionary monetary policy in order to increase money supply. Among tools
on financial market, State Bank considers interest rate the most effective tool to
executive the policy. There are several specific measures the State bank has
implemented in 2009:
In addition, the most effective solution, which has attracted most attention
of the society, recently is the combination between fiscal and monetary policy,
in which The Central Bank of Vietnam spends Government budget supporting
loans with low interest rate 4%. In estimation, 17000 billion VND from
Government budget will create another amount of 600000 billion VND cash
flow in the credit market. They hope that if the plan is fulfilled successfully, the
bonus money pouring into the economy will spur aggregate demand and protect
the whole economy from recession.There are two kinds of this support:
a. Consumption function
We use Irving Fisher model to explain the effect of the decrease of real
interest rate on Consumption
Old budget
Constraint
Second-
Period New budget
Consumption
C constraint
Y2 A B
IC1
Y1 IC2
First-period consumption
A whole economy consists vast number of households, firms and the total
savings of all of them is always is positive. Therefore, we can suppose that the
economy is a giant household having positive savings.
When the real interest rate decreases base on effect of policies from the
State Bank, Budget constraint curve rotates flatter around C (Y1, Y2).As can be
seen from the graph first period composition increases C to A as an income
effect. This will cause instant consumption increase as a result. According to the
formula: AD= C + I + G + NX, Aggregate demand rises, too.
b. Investment function
Easily we realize that the real interest rate and investment have a negative
relation. Thus, while real interest rate r decreases, business fix investment
increases, thus fixed business investment increase, too, this will make AD
increase.
IS0 BP0
r0
Y0
IS0 2 BP0
r1
C
A
r0
B 1
Y0 Y1
Graph 3.1.b: expansionary monetary policy and fiscal policy in fixed exchange rate regime
LM0 BP1
*
IS0
IS1
IS0 B
C BP0
r1
r0 A
Y0 Y1
LM0
IS1
LM1
IS0 BP0
r0 A BP1
B
r1
Y0 Y1
Graph 3.2.b: expansionary monetary and fiscal policy in floating exchange rate regime
3.3 Apply in Vietnam
Because of crawling peg exchange rate with the small band, so we can
consider it more similarly with the case fixed exchange rate, and we can see
clearly that fiscal policies is more effective than monetary policy. Moreover,
when wide the bench mark of exchange rate, it make exchange rate more
flexible and as we can see in the graph 2, it helps the fiscal policy have more
impact. In summary, with expansionary fiscal policy, expansionary monetary
policy, and new band of exchange rate, as we analyze in these above model,
Vietnamese government can surely boost the economy to avoid the recession.
4. Other policies
5. Achievements
According to the report of The State bank in the meeting with business,
updated to 13/5/2009,commerial banks and finance companies lend firms
288.227 billion VND, attaining 70% of the scheme .Among them, Short-term
loans occupies 281.695 billion VND and Long-term 6532 billion VND.
Therefore, loans in banks increased by 10,28% in first 4 months of 2009
compared with those of 2008.The speed of conducting the program is
considered to be relatively fast thanks to the effort of the Government and
system of finance. A large number of firms have been provided capital resource
at the moment they are really lack. Most of them have overcome difficulties and
continue developing.
2. To businesses
According to offset of interest rate, till the middle 4 / 2009, has about 220
thousand billion equivalent to USD 12.4 billion has been financing, Bank of
predicted this figure will up to 420 thousand billion contract in late 2009 (when
the program end)
Index CPI in the month 4-2009 increased 0.35% over the month 3-2009
and all 4 months, the CPI increased 1.68% over the month 12-2008, this shows
that the total demand has on the move. Here are signs that economic growth is
spectacular, the solution was to enable development work. The positive side to
see the country has two basic objectives is to prevent the decline in economy
and ensure social security.
Investing in projects using much labour to create more new jobs and
projects satisfying internal market. As a result, the labour can have more settled
life and consumption demand, thus boosting the economy.
4. Consumption demand
In addition, the authority should have close control with imported goods,
especially cheap products from China and other countries in the area. Otherwise,
the policies will become less effective, or even it will boost foreign product
consumption like it did in 1998-1999.
Both State and firms need to find potential export market to expand for
strong products such as reasonable agricultural products. These products involve
in farmers and enterprises using much labour. As a result, this solution will help
to remain a part of economic motivation, reduce trade loss. Besides, not only
many people can keep their jobs, income but also political stability is
guaranteed.
6. Management style and administrative procedure