Countries must grapple with the challenge of tackling crises efficiently in the short run without hampering long-term prospects.


Vietnam is highly reliant on external demand and the export capabilities of foreign-invested enterprises - PHOTO: THANH HOA

Covid-19 has inflicted far more widespread and serious damage on many national economies and the global economy than any recent pandemic. There are several reasons for this.

First, Covid-19 spreads the most rapidly in the 10 major economies—the United States, China, Japan, Germany, the United Kingdom, India, Italy, Brazil and Canada.

Second, Covid-19 erupts when the global economy enters a vulnerable phase. Global growth in 2019 was only 2.9%, the lowest since the financial crisis in 2008-2009.

Third, Covid-19 has spread around the world. As its epicenter shifts, economies enter lockdowns one by one. Uncertainty prevails.

Fourth, the global economy is more connected than ever. When the healthcare crisis erupts, forcing countries to enter a partial or complete phase of quarantine, flows of labor, investment (direct and indirect), production materials and goods face disruption.

Fifth, the vulnerability of the global economy is reflected in both growth figures and structural issues facing major economies. The U.S., Japan, the U.K. and many G20 countries are plagued by serious budget deficits and sky-high public debt. Consequently, they have little room for fiscal and monetary stimulus when the pandemic rages.

Sixth, a global downturn entails global solutions. However, the world is deeply divided, prompting some observers to predict a “new cold war” with the U.S., China and Russia grappling with conflicts regarding their strategic interests. The U.K. has left the European Union (EU), aggravating the fractures in this community.

In short, the global economy will be in a crisis in 2020. The extent and duration of the crisis depend on how fast and efficiently each country responds and the efficacy of global coordination. The most pressing need at present is to use all the resources available to swiftly and effectively prevent the healthcare crisis from escalating into an economic crisis and a financial crisis.

Vietnam’s case

To tackle the global downturn effectively, it is important to understand the main attributes of Vietnam’s economy.

There are several challenges.

First, the economy is highly reliant on external demand and the export capabilities of foreign-invested enterprises. Consequently, Vietnam’s economy is vulnerable to a global crisis. Over 50% of the country’s GDP may be plagued by the pandemic and the economic storm.

Second, Vietnam is dependent on trade. Its key export markets have been adversely affected by the pandemic and have entered partial or complete lockdowns.

Third, Vietnam receives one of the world’s highest amounts of foreign direct investment (FDI) per capita. A global crisis will slow FDI inflows and many existing FDI projects will slash capacity or cease operations. The contributions of FDI in terms of job creation, industrial production, export, tax payments and GDP will fall drastically.

Fourth, Vietnam’s supporting industries are not well-developed, so it is dependent on imports. When the global supply chain is obstructed, many firms in Vietnam, domestic or otherwise, will lack inputs and may have to trim capacity or retrench employees.

Fifth, tourism and related services (hospitality, food and beverages, as well as transport) have enjoyed brisk growth and claimed a significant share of the economy (about 10% of GDP). The pandemic has hit them severely.

Vietnam also enjoys certain advantages.

First, Vietnam’s economy has grown well over the past three years. The rate of public debt has fallen, the exchange rate remains stable and inflation is low.

Second, public debt has fallen to merely 56.1% of GDP. Government bond yields are relatively low. These conditions offer scope for fiscal stimulus, the most effective and appropriate macroeconomic response to the current crisis.

Unlike in developed economies, interest rates in Vietnam remain high and can be cut. However, since this is a crisis affecting the real economy rather than finance, lower interest rates will not work wonders and cannot be considered an essential policy instrument.

Policy responses

By virtue of its comprehensive efforts to combat Covid-19, Vietnam has managed to keep the disease under control. Even then, the country faces three fundamental types of shocks.

- Healthcare shocks: The number of infected cases has increased, the number of people in quarantine has soared, schools and borders closed and movement is restricted.

- Economic shocks: They include demand shocks (consumption, especially that relating to services and durable goods, has fallen) and supply shocks (supply chains are disrupted, input inventories cannot maintain capacity, and employees fall sick, face quarantine or lost jobs).

- Expectation shocks: As the global situation worsens, the public and enterprises are pessimistic about future prospects, so they have adjusted their consumption, production and investment accordingly. If the situation is bleak enough, pessimism may trigger a chain collapse or massive money withdrawal.

Confronted with these shocks, the Government should embrace transparency and consistency in its responses.

First, intervention should be sector-specific, depending on the importance and vulnerability of each industry. It is important to guard against a short list of policies.

Second, intervention should be timely. In this emergency, tardy responses may cause firms to be in trouble or even bankrupt.

Third, intervention should be market-based to avoid distortions and detrimental precedents.

Fourth, the time frame for each policy should be clear and based on the situation.

The unpredictability of Covid-19, as well as its uncertain impacts, means that nobody can know for sure. The idea is to accept imperfection. Sometimes, there is a need to forego the first best option and accept the second best option, which, while not optimal under normal circumstances, is the most appropriate and feasible response to the pandemic.

Given a severe economic downturn, an appropriate and prompt response will play an important role in helping enterprises survive.

The system of economic stimulus policies comprises several components.

- Macroeconomic policies include fiscal and monetary policies, as well as those pertaining to investment and trade. These are overarching responses that leave impacts on the entire economy.

- Some policies seek to support consumers, employees and producers.

- Some policies seek to help sectors susceptible to the deleterious effects of the pandemic.

- Some policies seek to support localities that need to channel the most resources into disease prevention (this is based on the number of people who are sick or under quarantine and whether the localities are in the front line of the battle against Covid-19).

When the pandemic continues to haunt the world, there are several factors of consideration for Vietnam’s macroeconomic policies.

While the disease is under control in Vietnam and economic activities can resume in phases, the world, especially many major economies, is still battered by the pandemic and global economic activities may be disrupted.

The priority is to implement public health measures to continue keeping the disease in check. Economic policies should move in tandem with these public health measures, so that these efforts will be financially feasible (by virtue of sufficient resources) and socially acceptable (with ample support for those affected).

There are several areas of focus.

- There should be more investment and spending in public health so that the system can improve its capacity, promptly respond to the needs of patients who require intensive care, and deal with other diseases.

- Poor households prone to financial hardship should receive prompt support, so that there will be a social consensus in the fight against Covid-19.

- Sectors and enterprises severely hampered by the disease should be given support via fiscal and monetary policies.

In the period following Covid-19, macroeconomic policy goals should be adjusted accordingly.

The aim will shift from crisis management to economic stimulus. The priority will be to nurture a recovery and restructure the economy in line with new developments. Several goals should be fulfilled.

- Demand should be fueled in the non-State sector (consumption, as well as domestic and foreign investment). Monetary policies will play a crucial role while fiscal policies need to be tightened (while still adhering to the road map for implementation and disbursement of public investment).

- Policies should help enterprises recover quickly.

- Macroeconomic stability will be essential for restoring growth.

- A post-pandemic economic restructuring effort should be launched, including drastic institutional reforms. SGT


Vu Thanh Tu Anh (Fulbright School of Public Policy and Management)