[Vnbiz] Inflation and the poor (formerly: June trade deficit down)

[Ken Liffiton]

Dear Anh Hoanh + CACC,

Vietnam already has a system similar to the Grameen Bank of Bangladesh, 
but it's not yet widespread.  CEP is by far the country's largest 
Grameen Bank style microfinance institution, and it currently serves 
over 80,000 poor clients in all districts of TPHCM (Cu Chi to Can Gio).  
I visited them a couple of years ago and was impressed with their 
operations.  See: http://www.cep.org.vn

CEP operates based on the Grameen Bank model, and they are working to 
replicate their model as a network of separate microfinance 
organizations across all provinces of Southern VN.  They have so far 
have started programs in Long An and Vung Tau: 
http://www.cep.org.vn/?page=replication

I agree that the government's banking-for-the-poor efforts have not been 
effective; IMHO, it's never a good idea for any country's government to 
run a microfinance program.  There is a very good chance that a 
government-run (or heavily subsidized) program won't aim to become a 
self-sustaining business.  As a result, it may:

1. Charge below-market rates on loans,
2. Fail to pursue full repayment of loans,
3. Operate inefficiently, and
4. Use loans for local political gain.

Lower rates and lax repayment policies may be good for the poor who 
receive them, but such practices make it unprofitable for others to 
enter the field and spread microfinance to even more of the poor. 
Meanwhile, for all of the reasons above, a government program may 
regularly require additional capital to stay afloat, rather than taking 
on new financing only to expand its reach.

I think that for microfinance to succeed, it needs to be operated 
separate from government, and with a market-based orientation.  CEP, for 
example, technically falls under the Labor Union but operates with a 
sufficient degree of autonomy to optimize its decision-making.

In Vietnam, we can do a simple comparison of government vs. 
non-government microfinance activities.  Let's look at 2007 financial 
performance for CEP versus the government-subsidized VBSP (Vietnam Bank 
for Social Policies).  As reported by each insitution on www.mixmarket.org:

Return on Assets: CEP 8.2%, VBSP -2.7%
Return on Equity: CEP 15.8%, VBSP -9.39%
Operational Self-Sufficiency: CEP 156%, VBSP 72.65%

The percentage of CEP's loan portfolio that is more than 30 days in 
arrears is around 1%, and they rarely have to write off loans.  VBSP 
does not report such figures.

CEP is serving the poor in a market-based, sustainable manner, while 
VBSP is not.  VBSP has produced negative returns over the past several 
years, charges below-market rates, and (anecdotally) may exhibit some of 
the other symptoms I outlined above, including loans to non-poor people 
attracted by the subsidized interest rate.  So, we have a subsidy 
problem in the microfinance sector as well.  Perhaps a non-subsidized, 
streamlined version of VBSP could be the answer, but how do you reach 
that goal from the current situation?

In my opinion, CEP are the ones to talk to if you want to spread Grameen 
Bank style microfinance across Vietnam in a sustainable manner.  To 
start, on their website and mixmarket.org you'll find full details of 
their operations, audited financial statements, and a detailed, 
up-to-date business plan.  I've done a fairly simple examination of the 
problem here, but CEP clearly knows how to run such a program and 
understands many of the more detailed issues involved.

- Ken

Tran Dinh Hoanh wrote:
> [ Vietnam Business Forum ]
>
>   
>
> ------------------------------------------------------------------------
>
> Dear Brother Duc & CACC,
>  
> Thank you for the good note, brother Duc.  The SOE issue is really a 
> pain in the rear.  I started to talk about that issue at least as 
> early as 1992, and we will have to work on that issue for quite some 
> time.  But, you have touched another issue dear to my heart -- the 
> effect of inflation on the poor.
>  
> The poor is so close to my heart and I never forget them.  But during 
> the entire process of solving this inflation crisis, since March until 
> now, I've rarely mentioned the poor, other than reminding 
> the government of emergency support for the poor when needed once in 
> awhile.  The reason of my relatively silence is that an inflation 
> crisis is a different problem from social security for the poor.  
> Although these two problems are tied together in consequences, i.e., 
> high inflation hits the poor the most, they are really two different 
> problems.  If we dump them together, we will confuse ourselves so much 
> and all economic policies will be wrong and the main problem, i.e., 
> inflation, will be worsened.  This is not farfetched theory.  Many 
> developing countries around the world have made this mistake.  When 
> there is high inflation, of course, the poor get hit the most; the 
> government, instead of focusing on solving inflation, spends more 
> money to help the poor and therefore make the inflation worse, until 
> the entire economy collapses.  That is why I have deliberately avoid 
> talking about the poor even though I've been think about them every 
> day and my heart hurts.
>  
> But, now that the inflation crisis has lessened and may be on the way 
> out soon, for the last several days I have started to send private 
> notes to some friends in Vietnam about the situation of the poor.  
> Good ESP, brother Duc.  I know that food price has been increasing so 
> high that many urban and rural poor can't even afford enough food on 
> the table.  And the price of imported fertilizers and animal 
> foodstuffs have increased tremendously that farmers can't afford them 
> anymore.  So how do we solve this issue?  
>  
> Right now, we know that there is rice subsidy and price control in 
> place; but this system doesn't work because food prices, including 
> rice, has risen continuously.  This tells me that food, especially 
> rice, is being smuggled out of the country and the current market 
> price is the free market price.  It means, the government is spending 
> money on subsidy and price control for nothing.  But this is also a 
> good thing, because if food price is truly free market price, then 
> probably it will not increase much more because the global food 
> crisis has been abated greatly (and lifting subsidy and price control 
> would be painless).
>  
> And we don't want more subsidy and price control on anything for the 
> poor, because these things don't work.  Goods will simply be smuggled 
> out of the country, supply will be short inside the country, and the 
> price will just rise.
>  
> So, for now I am thinking about two major things the government can do:
>  
> 1.  An intensive system of micro-financing to lend money to farmers 
> for agriculture activities, be they fertilizer for the filed or 
> foodstuff for chicken.  I have the feeling that the banking system in 
> place under the Ministry of Agriculture and Rural Development (MARD) 
> is not good enough for this purpose.  I have the feeling that MARD's 
> banking system works too much like a commercial bank and not very 
> effective in managing microcredits.  We need to have a system similar 
> to the Grameen Bank of Bangladesh (Dr. Muhammad Yunus, founder of 
> Grameen Bank has won the Nobel prize in 2006).  I think the VN 
> government should talk to Grameen Bank immediately to gain expertize 
> on running a nationwide microcredit system effectively.
>  
> The money used for this microcredit system should be taken from some 
> Worldbank (emergency) agriculture loans so that Vietnam doesn't simply 
> print more VND that will worsen inflation.
>  
> 2.  In addition to that, the current VN social security system though 
> local women's unions and local authorities at village level seems to 
> be very good in helping the very poor when they are in need.  The 
> government can rely on this system and support it, to make sure the 
> most desperate cases of the poor will be taken care of decently.
>
> But these two things will not cover many urban poor who are simply 
> floating out there without a village or a "phu+o+`ng" structure to 
> support them.  I know that many urban poor do not have any kind of 
> community structure around them.  They just float around in the city.  
> How do we help them?  I don't know.  Still thinking.  I hope that 
> whatever services they are doing in the city increase in price, so 
> that they ride the inflation storm OK. 
>  
> I'm still thinking.  Please chip in to help me out.
>  
> Have a great day.
>  
> Hoanh
> _______________
>  
> Duc Phamcao to vnbiz
> show details 11:37 PM (10 hours ago) Reply
>
> [ Vietnam Business Forum ]
>
> Dear anh Hoanh and CACC,
>  
> anh Hoanh, I totally agree with you about all immediate treatment for 
> hot problem at hand. As I already said, I believe that the tighter 
> measures applied are the right treatment methods. I am even arguing 
> against buying $$ USD for speculation with my colleagues. However, 
> please bear in mind that the treatment can be successful only when the 
> dose is proper.
>  
> Moreover, can the administrative tool be the good treatment for the 
> next coming months? What is about the dose? High inflation seems just 
> hit the poor and middle class thus it does not really waken up the 
> managers of VN Corporate and Groups, that are very rich. As far as I 
> know, just VND 5,000 billion ($USD 312m) was cut down from fiscal 
> expenditure. It is too small to be a good treatment, comparing to a 
> project of Hanoi museum which I heard of no delay will cost VND 2,100b 
> or the amount of VND 21,000 billion that SBV could in one week 
> withdraw from the banking system by selling compulsory note for banks.
>  
> The point here is that, the awareness of people who directly run the 
> economy must be changed. Honestly, on the one hand, I hope that the 
> situation should be worse for SOE Corporate & Groups and even Vietnam 
> enterprises. On the other hand, I do expect the economy early recover 
> because if it last longer I will be also financially hurt :(. My 
> statement is quite a contradiction in terms. But it is true because I 
> find the poor awareness of people around me.
>  
> My job requires me to meet a lot of enterprises and I know that they 
> are all very rich thanks to last year stock market and real estate 
> booming. They seem ignorant about the high inflation and the poorness 
> of many farmers who lost land. Many find raising fund too easy thus 
> investing carelessly. For example, a company raised VND 1,000b bond 
> then investing about VND 400m in VCB stock, so far they at least lost 
> 60% of this investment. Many spent proceeds and retained profit on 
> real estate and stock market, which is not their core business. All 
> power SOE groups tried to open bank or financial institution with the 
> naive thought that they have money and they can lure employees from 
> other banks. Consequently, the liquidity of big banks as VCB get 
> trouble, inter-bank overnight reached 40% some times.
> Now, they begin to fell the breath of crisis. They begin to see the 
> risk of bankrupt and question about their investment decision. If the 
> government at any cost to save those SOE corporate, even by harsh 
> administrative tools that can lead to stagflation there will may be 
> not good treatment for management but bad result fall on the economy 
> as a whole. I meant that I want to see at least some managers of those 
> SOE corporate have to step down for their ignorance. And these 
> business expansions should be reduced to the core business.
>  
> In terms of stock market, I think it is a good time to find some 
> really good company or too cheap stock to take some stakes. There are 
> some but not many, because many that are with great result last year 
> from financial income and real estate income can no longer get this 
> again. I expect those Non-SOE will soon recognize their situation and 
> adjust their business to the core activities that they have the edge 
> over competitors. On the other hand bankruptcy may be good lessons for 
> others and for the economy as a whole.
>  
> Please do not misunderstand me. I am myself really optimistic about 
> the long-term development of Vietnam. I believe that government have 
> been aware of the situation and start taking good measures. I just 
> raise some issues for people not being over optimistic.
>  
> Have a great Sunday,
> Duc
>
>
>
>
>
>
>
> -- 
> Tran Dinh Hoanh, Esq., LLB, JD
> Washington DC
> ------------------------------------------------------------------------
>
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