VietNamNet Bridge - The Government’s recent measures to combat inflation have focused on tightening monetary and fiscal policies.

As correct as they may be, those measures are inadequate for radically tackling Vietnam’s inflation. Monetary and fiscal problems are the direct triggers for inflation in the country. However, another crucial factor which has been neglected relates to feeble market institution which has destabilized the balance between money and commodities and finally led to inflation.

Of the productive elements, capital is the most crucial which has accounted for 50% of Vietnam’s gross domestic product. Nonetheless, capital sources in the economy have been allocated asymmetrically. Of the three categories of business forms currently in operation—State-owned, privately owned and foreign-owned enterprises—the ineffective State-owned entity has been favored to receive almost 50% of the capital allocation. The waste of capital in the State-owned enterprises (SOEs) has crowded out counterparts in other economic sectors.

Aside from SOEs’ impediment to the private sector, the same between big private businesses and smaller ones is also a reality. This has been illustrated by the appearance of private groups which maintain close relations with financial and banking institutions. Those relations have paved the way for “crony credits” that have been used to finance highly speculative business affairs, such as those on the realty and stock markets, and, more recently, mining, instead of high value-added production.

As such, a considerable part of capital in the economy has been allocated for destinations which are either ineffective or highly speculative. The inevitable aftermath will be more risks for the economy and imminent skyrocketing inflation.

Distorted pricing

Many have argued that Vietnam’s spiraling inflation is ascribable to fluctuations of world prices which have exerted bad influence on local prices and input factors of production. This argument is correct but fails to fully interpret how the prices of commodities have fluctuated in Vietnam. Normally, escalating input prices will be a shock to a source of supply which makes it become scanty, or be an unexpected crisis making prices rise sharply. In the Vietnamese context, no such a shock has been spotted. The rising input prices are mainly due to the ways prices are regulated.

The monopoly on essential markets such as the power sector has considerably distorted prices. The maintenance of the administrative management of commodity prices, for instance power and fuel prices, has derailed prices and deprived them of the ability to faithfully reflect the relationship between supply-demand and production costs. What follows is a disruption of supplies and pervasive speculation and smuggling which have in turn caused scarce sources of supply. The situation has compelled authorities to often resort to strong price revisions which give rise to hyperinflation.

Better quality of market institution for combating inflation

The above analyses show that the measures currently taken to push back inflation—tightening money supply and fiscal policies—are effective in the short term. If the present feeble market institution is retained, the capital flow will not be used efficiently. Economic production will not be on par with the committed capital and prices of essential goods will fluctuate, which is harmful to the entire economy. As a result, high inflation will come back as soon as monetary and banking policies are loosened.

In the long run, to solve the inflationary problem in Vietnam, it is necessary to improve the efficiency of market institution. Vital productive resources such as capital and land funds must be distributed as per market signals which will use them most effectively and create the highest added value. To translate this into reality, SOEs must be subject to a “hard” financial mechanism which forces them to compete on market-based principles or go bankrupt if they fail.

Equally important are Government’s measures to effectively monitor “close relations” between banks and robustly growing enterprises so as to minimize their highly risky speculative investments and direct the capital to production sectors which generate better added value and create more job opportunities.

In addition, the monopoly and administrative measures to put prices under control should be eliminated. Prices must be allowed to work in line with the supply-demand rule. Price management must be conducted as per market terms which favor healthy production and commercial development. At the same time, policies on price stabilization should be used scantily because by nature they are subsidies that are capable of distorting the supply-demand relationship.

Vietnam’s impressive economic achievements during the past 20 years have stemmed from renovations in economic management, particularly the enforcement of the role of market institution. Therefore, Vietnam should spare no effort to proceed with strong boosts to renovating and raising the quality of market institution so as to remove all barriers to the country’s sustainable economic development.

Source: SGT