The new government must follow words with action and cure the country of its economic ills. Government credibility cannot afford another hit.
In 1979 I was a real estate developer trying to build my first mega project: a 120-home tract in Scottsdale, Arizona. When it was completed in 1980, inflation hit 15 percent and bank interest on long-term mortgages reached 18 percent. I sold two houses, eight months after completion. Finally, I gave up and signed off all deeds of the project over to the bank. I was one of the unfortunate and nameless victims in the great stagflation of the US in the 1980s.
The combination of stagnation and inflation caused severe damage to both ends of the wealth spectrum. The poor could not cope with the rising price of merchandise and commodities, while the rich could not profit from the slowdown of economic activities. A repeat of this phenomenon may be happening again in the US, as GDP growth is expected to stay under 2 percent over the next two years while the Treasury rate may increase to 5 percent due to the competition for credit from Europe and emerging countries. However, it will be much smaller in scale compared with the events that happened in the late 1970s and early 1980s.
It took then-President Reagan and Fed Chairman Paul Volcker almost four years to pull the US out of this financial crisis. The two kept interest rates high to maintain a strong US dollar and managed to enact pro-business measures of tax cuts and loose regulations to allow private SMEs to be the locomotive of the economy. US innovation in technology and management finally ushered it into the prosperous period of the internet era by the beginning of 1990s.
The economic situation in Vietnam is very much like the US back then. Inflation will hit at least 18 percent this year while GDP growth will be 5 percent at most. The VND is overvalued by 16 percent, bringing further pressure to devaluate the currency, where inflation and the balance of payments will wreak havoc on the supporting financial structure. S&P recently downgraded the country to BB-, citing the inherent weakness of the banking tem. The freeze in real estate markets and the drastic reduction in both FDI and FII will cause stagflation to be in full force.
Meanwhile, instead of Reagan and Volcker we are going to get the likes of Obama and Bernanke. The US may have survived the stagflation crisis of the 1980s and the 2010s thanks to the size and strength of its economy and the popularity of its US dollar. I am not sure the same medicine will revive the Vietnamese economy sufficiently over the next four years for it to gain some traction in the global race towards modernization. In fact, the approaching crisis will erase many of the achievements by Vietnamese entrepreneurs over the last decade.
There is a new government in place. Ministers are younger and promises are made with more confidence. However, all the talk will not influence any economic activities or its effects. Foreign investors are waiting to see how the Governor of the State Bank is going to keep currency rate fluctuations at within 1 percent over the next six months. Private entrepreneurs are anxious to see if bank interest rates will fall to 15 percent within three months, as predicted. Wage earners are interested in inflation falling to 16 percent by year-end, as indicated by the Minister of Planning and Investment. Meanwhile, different interest groups, from within and without the government, are looking to a situation where their advantages are maintained and protected as usual. The balancing act will be spectacular if all these promises are kept and actions follow words. I truly hope so. Government credibility cannot afford another hit.
But there are cynics who insist that Governments will always do what Governments are used to doing. Habits die hard. They predict that money will be printed and loans be secured, to give more stimuli to banker friends and State-owned enterprises; that government spending will be increased to keep constituents happy; and that the future and sustained growth will be sacrificed for short-term stability. As a result, the VND will continue to be devaluated, the inflation rate is going upward and the period of stagflation will be likely last longer than a few years. In short, there is no political will to swallow the bitter pill to set the economy right once and for all.
Nevertheless, I remain hopeful. I actually wish that someone in the Government would take the initiative to invite Mr. Paul Volcker to come to Vietnam for serious consultation. I am sure he will be able to change the perspective of local economists towards a brave new solution to bring the country to real stability: a strong economy based on true resources of human talent, creative technology and global capital. I believe Mr. Volcker would advocate a strong VND policy, a liberalization of the private sector, the reduction of public debt and government spending, a divestment of State-owned enterprises and a legal structure that respects capital and rewards performance.
A friend recently pontificated to me on the main difference between Eastern (Chinese) medicine and Western medicine. The roadmap of Western doctors is to diagnose the illness, isolate the causes and cure the symptoms by eliminating the sources (virus, bacteria, malignant cells). Whereas the Eastern medicinal men first try to re-vitalize the body, increase its resistance and step aside to let the internal elements fix the problems themselves. One believes in quick external pressure and intervention; the other prefers a holistic, internal and natural approach.
With all due respect to Western medicine, I think it is time for the Vietnamese government to follow the slow but steady approach of Eastern medicine. Since I believe in the potential of the country and the ingenuity of its people, I propose they reinforce the economic body to its full strength and let nature (the market) takes its course. This crisis will soon pass and we will have a better structure to deal with future ones.
Dr. Alan Phan, Chairman of Viasa Fund
Published on Vietnam Financial Review, Issue No. 9, Volume LIII, 8 Oct 2011
Góc nhìn của Alan 