[Vnbiz] Inflation Control

[Vu The Binh]

Anh Hoanh, CACC,

I'm not researching the economics. But the topic was very interested, as 
  it affect every single life here in Vietnam. I might have some simple 
questions, just to be clear.

There might be many causes for inflation, but anyone can explain: what 
is the inflation? how to calculate the inflation? and how to calculate 
the so-called CPI? When we how how to calculate the inflation rate, 
another view to know the causes?

Thanks, Binh.

Tran Dinh Hoanh wrote:
> [ Vietnam Business Forum ]
> Dear CACC,
>  
> Thank you, anh Roger, for posting The Straits Times article.  It brings 
> life into the discussion. Even though the numbers can give me a very 
> good sense of what is going on, my heart still hurts when I read your 
> article.  Please continue to send more articles into this forum.  As you 
> see, we cover every thing related to Vietnam.  Our fundamental 
> philosophy is that every thing is interrelated and we want our all 
> brothers and sisters to always have a clear comprehensive picture of 
> Vietnam.
>  
> In search of the causes for our current high rate of inflation, I ran 
> into this article by  anh Pham Do Chi and Nguyen Hoai Bao, published on 
> Thanh Nien a month ago (please see the article below).  I know anh Chi 
> as a a nice gentleman at the International Monetary Fund (IMF) in 
> Washignton DC (Hello, anh Chi!) and the Thanh Nien article is very good, 
> and it seems the government has implemented several suggestions by anh 
> Chi and anh Bao.  But  the article does not exactly pinpoint the causes 
> of the problem. 
>  
> And I have problem with one possible cause of inflation mentioned in the 
> article:  That is the high rate of foreign investment.  "Last year, the 
> record level of foreign investment, direct and otherwise, pouring into 
> the country increased both demand for the dong and the amount 
> circulating in the market, thus fueling inflation."  Well, I am not sure 
> about this.  When you have FDI (foreign direct investment) you have a 
> bunch of money coming in (intiailly USD, immediately exchanged into Dong 
> for spending) and you have products and services in response to that 
> money, then everything will be fine.  Inflation may occur a little when 
> the money is out for spending but the first batch of products and 
> services are not in the market yet.  But this kind of inflation is very 
> short, no one even sees it (maybe in a couple of weeks only). 
>  
> FDI may also create inflation when invesment money comes in, but a big 
> chunk of that money has no services or products in return.  This usually 
> happens when that big chunk of money goes into the private pockets of a 
> couple of corrupt guys in power.  TBut this doesn't happen in Vietnam.  
> Corruption is rampant, but mostly at lower level, involving many in the 
> rank and file, and mostly in the form of tien boi duong of some kind, 
> which is more or less like a kind of additional wages, which are 
> generally used for regular spending, which stimulates production for the 
> economy.  I feel that the inflatinary effect of FDI in Vietnam would be 
> very minor.  (Therefore, the Thanh Nien's article's proposal to slow 
> down the country's GDP growth as a solution to the inflation problem 
> is not in my book at this time). 
>  
> Another cause that the Thanh Nien article mentions is the rise in oil 
> prices and food prices.  Vietnam is an oil and rice exporter, so I don't 
> think these two things wouold push Vietnam inflation up higher than its 
> neighbors.  The Thanh Nien article recognizes this point.
>  
> So what are the causes of inflation other than the two causes I 
> mentioned previously: The State Bank's pumping more Dong into the market 
> and the trade deficit? 
>  
> The trade deficit has been there for more than a year, so its effect has 
> been there all along.  Thus, by itself, it doesn't explain the recent 
> jump in inflation rate.  The State Bank's Dong pumping is relatively 
> new, but it  was done after the inflation was known to be high.  So it 
> may be an additional actor, but not the original culprit.
>  
> So what other causes that we are looking for?
>  
> There is this cause that I have been thinking more than a year.  Since 
> more than a year ago, I have been waiting for its affect to show up.  It 
> seems it is showing up now, but since no economist anywhere in the world 
> mentions it, I haven't said anything either.  However, now that I search 
> more seriously for inflation causes, I am really convinced that it is a 
> major cause for the recent unexplained jump in inflation:  That is the 
> STOCK MARKET.
>  
> For the last two years, especially the last one year, the stock market 
> grew disproportionately fast and put a lot of inflationary pressure on 
> the economy.  However,  riding on the excitement of the stock 
> market, economists and policy planners miss this all together, and it 
> seems everyone still misses it now.
>  
> We all know that many companies have put their stock on the stock 
> exchange and their stock have grown in value tremendously immediately, 
> sometime growing tenfold within a very short time.  Obviously that kind 
> of growth is not real.  No company can grow that fast.  The stock price 
> rose just because of the stock fad at the time.
>  
> But such an atomic-bomb boom in the stock market attracted a lot of 
> money into the market, both from foreign and domestic clients.  Foreign 
> clients paid by USD which was immediately changed to VND to pump into 
> the market.  Domestic clients were more interesting.  Of course, many 
> small investors used their hard-earned dong.  But many people who had 
> secretly hoarded unaccounted-for wealth in the form of USD or gold, now 
> had the golden chance to "wash their money" by investing in the stock 
> market (and the government would not investigate the source of money 
> going into the stock market because it wanted the stockmarket to keep 
> growing and growing.  Crazy investigation ruins the party!).   These 
> people simply sold their gold and USD in the open market for the VND and 
> usde the dong to buy stocks.  If my memory is correct, the gold and USD 
> prices in 2007 in Vietnam were lower than their prices in December 
> 2006.  That was because of all the selling of these secret holdings. 
>  
> All these stock purchases brought a lot of Dong into the market, without 
> ANY services and products in return.  Can anyone tell me any of these 
> companies that sold stock to the public last year invested seriously in 
> anything in their operation?  Most of the new wealth is in the hands of 
> a small group of stockholders in paperwork form; the bulk of the Dong 
> simply floats in the market without any products and services 
> produced.  That generates tremendous inflationary pressure on the 
> economy.  If my memory is correct, the stock market was valued at 10 
> percent of GNP as of December 2007.  That, by itself, would probably add 
> 10 percent inflation rate into the economy.
>  
> This surprised stock money may account very well for the surprised jump 
> in inflation in 2008.  I said "surprised" because no one has paid 
> attention to it at all.  But it has been there for a couple of years, 
> most prominently last year.
>  
> Thus I temporarily conclude that there are 3 major causes for inflation 
> at this point:  The trade deficit, the stock money and the government's 
> pumping of the Dong into the economy.  I said "major causes" because 
> many other things in the economy may have some inflationary effect.  
> That is very normal all the time.  We are now just focus on the major 
> causes so that we can focus on solutions.
>  
> I will temporarily stop here, to wait for comments from you brothers and 
> sisters (Please chip in), and to take a rest to clear my head.  In the 
> next message we will explore the solutions.
>  
> Have a great day! 
>  
> Hoanh