[Vnbiz] Inflation Control

[Tran Dinh Hoanh]

Dear Tu Anh & CACC,

Thanks for the response, Tu Anh.  I appreciate your input.  Please
allow me a quick reply.

Tu Anh said, "It hardly believes that policy makers in Vietnam
suggesting to "pump more Vietnam dong into the market to slow down the
appreciation of the Dong against (the depreciation) of the US dollar
to help export" at a time of high inflation."

Tu Anh, just so you know, that is not my analysis.  It is the fact.
The State Bank of Vietnam did pump in the Dong into the market, to
keep the rate of excahnge favorable to the USD to help export.  Please
read the VNExpress articles I posted previously.  In one of those
articles, former State Bank Governor Cao Sy Kiem specifically said
that the rate of exchange shouldnot be allowed to be lower than 1 USD
for 15,000 VND.  Yes, you are correct, it is hard to believe.  But
you'd better believe it, because it did happen (and that is why I have
problems with it so much that I write this long series).

Tu Anh said, "So there is no point to depreciate VND in inflationary
period."  I agree absolutely.  But the State Bank of Vietnam did do
that.  Please see the above paragraph.

Tu Anh said that increasing interest may help reduce inflation.  I
agree.  But sometimes it also may not reduce  inflation, depending on
how the market responds.   If high interest leads to higher cost and
higher selling prices (because of real cost or of psychological
panic), then higher interest may not help much.  And if higher
interest rate hurts a major market severely, such as creating a
recession in the real estate and construction markets, then we may
have more chaos, including more panic and more inflation.  I have gone
over this point before.

As always, the effect of an economic move may change, depending
largely on the market's reaction.  If the market doesn't react the way
the policy maker expects, then the policy maker must be quick to
change his move (like playing chess).

Tu Anh said, "High rise of prices of stocks alone rarely cause
inflation."  That is true in a normal stock market.  Usually companies
use money from stock sales to do more investments, so the money pumped
in to the market has services and products to offset.

BUT, BUT, BUT The Vietnamese stock market of last year is completely
different.  It is abnormal.  Stock prices increases not for any real
reason.  It grew too fast as a fad (that is why now the stock price
has to go down tremendously to its real value).  And companies did not
use stock money to invest (at least not a huge chunk of this money) in
anything.  So we have money pumped into the (stock) market at
tremendous rate without additional services/products to balance it
out.  Thus, huge inflation.

When we do an economic analysis, we cannot take the rule on one market
and apply it the same way to a different market.  Each market is
different.  We have to understand the market itself.   That is why
economics in an art and most economists don't get rich.  If they can
see the market very well and do their moves very well, all economists
have become millionaires already and no country would have any
economic problems.

About foreign investment creates inflation, I have gone over this
point, so I won't over the analysis at length again.  In short, FDI
doesn't create inflation if the country produce services/products in
response to that.  There is NO evidence at all that Vietnam couldn't
not produce.  In addition, Vietnam has good foreign investment for
more than a decade already.  There is no reason now FDI creates
problems.  That doesn't make any sense at all.  (Chine had great FDI
for several decades already, but it doesn't have FDI-created inlfation
either).  This line of argument has to be ruled out completely, unless
there is CONVINCING evidence that it is the case, because this
argument brings to the solution that we need to reduce FDI to curb
inflation.  Making  us poorer and weaker to solve inflation?  That
should be the last resort, done in case of absolute certainty only,
not based merely on theory and guessing.

Have a great day.  It is very good input, Tu Anh.  Thanks a million.
Please do some more.

Hoanh
_______




On Sun, Feb 24, 2008 at 6:07 PM, Nguyen Tu Anh <tuanh14 at yahoo.com> wrote:
> [ Vietnam Business Forum ]
>
>
> Dear CACC,
>
> I have read through your nice analyzes. Unfortunately I am not very convinced, hence let me put my two cents in as follows.
>
> First, Vietnam's export depend on largely on import for inputs therefore the export elasticity to exchange rate is very tiny and sometimes negative. It means that a significant change in exchange rate has a negligible effects on export. Vietnam's think-tanks all know that fact. Hence, It hardly believes that policy makers in Vietnam suggesting to "pump more Vietnam dong into the market to slow down the appreciation of the Dong against (the depreciation) of the US dollar to help export" at a time of high inflation.
>
> Second, even USD keep depreciating these days it puts modest pressure on Vietnam's export as long as her main competitors in the world market remain peg their currency against USD. So far, the Vietnam's main competitors are China and ASEAN countries and they remain peg their currency against USD. So there is no point to depreciate VND in inflationary period.
>
> Third, Hao has mentioned before, high interest rate does help reduce inflation except in super-inflation time. The process is simple. When interest rate is high, people will reduce consumption today to save more for tomorrow's consumption. The inflation will be declined when demand reduced. Hence, in my opinion raising interest rate now is a prudent response to control inflation at the moment.
>
> Four, high interest rate induces banks cut down their risky investments hence the banking sector is expected to be healthier. The "saving switch" phenomenon these day is normal and a good adjustment. It is a normal behavior in a competitive market. A better bank can offer higher interest rate then consolidate their position, worse banks may lose their depositors hence has to restructure their loans and deposits. It results in a better banking sectors.
>
> Fifth, high rise of prices of stocks alone rarely cause inflation. If it happens in primary market, the money gained would be invested in productive projects and then increase supplies. Price level is expected to slow down. If it (high rise of stocks' prices) happens in secondary market, it essentially redistributes wealth between investors. In aggregation, it does not affect price level!
>
> What are causes of inflation in Vietnam. I have not worked thoroughly on this issue, hence I can not have a firm answer. Nevertheless, let me presume to list some reasons for discussion.
>
> 1. A fact that state investment in total investment from 2002 to 2007 is always more than 50% (Vietnam economy in 2006, by CIEM). Put it differently government spend to much bring about a big increase in aggregate demand, then inflation.
> 2. Boom in FDI. This  phenomenon is similar "Dutch disease" in economist. When there is a huge influx of foreign exchange into the economy, money supply increases then inflation does. Further more, influx of foreign exchange cause a rise in demand for two type of goods: non-tradable goods (services, goods that not easily imported such as foods) and tradable goods. For the former, a rise in demand can not be met by import then push price up. Result in inflation.
> 3. State bank has to undertake too many targets. On the one hand they have to curb inflation, on the other hand they have to stimulate economic growth. Theoretically, It is impossible to fulfill both targets at the same time.
>
> Just my two cents,
>
> With warmest regards
>
> Tu Anh
>
>
>
>
>
-- 
Tran Dinh Hoanh, Esq., LLB, JD
Washington DC