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Debt, institutions and vulnerability: lessons from Thailand (Siamwalla article) Rapid economic growth over a decade or more
creates pr(over)confidence about future growth ratesVulnerability to a crisis: international borrowing in
short-terms markets to make long-term loans in domestic markets (especially nontradables like property dev’t)Problem of excess supply and falling property pricesProblem of inflation due to rises in nontradables’ pricesCurrent account deficit due to
Big inflows of borrowed foreign capital Shift in investment and labor from tradables to
nontradables
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Debt, institutions and vulnerability
Overconfidence extends to regulators such as Central Bank – reluctance to “prick the bubble” (bring down growth rate to stabilize economy)
Reluctance to acknowledge crisis, even when banks and other borrowers on int’l mkt are seen to be in deep troubleBailouts using Gov’t money to prevent/disguise
bankruptcyInstitutional weaknesses made worse by diminished
institutional performance (“technocracy”)Central Bank (should act to stabilize, e.g. by raising
interest rates or restricting lending) not fully independent of political demands
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Debt, institutions and vulnerability
Central government unable/unwilling to act in national interest (i.e. stabilize economy) largely due to political dependence on support from provinces and large public corporations need to keep money tap flowing to themProvinces/corporations pursue own interests, not
concerned with national goalsCorruption: political leaders benefit from preferential
treatment given to provinces/public corporationsSumming up: neither private actors, not State
regulators, nor civil government are willing/able to act effectively for stabilization as the economy overheats
Vulnerability; with a trigger, we have macro crisis
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Why macro instability matters for develop’t
Inflation creates uncertainty (exchange rate, future growth) which discourages investment
Perceptions of loss of regulatory/political control undermine investor confidence – int’l borrowing rates riseLiquidity falls; projects cannot be fundedLower capital inflows make current account deficit worse
Inflation erodes the real incomes of the poorLower investment fewer jobs createdReal incomes eroded by higher cost of livingCredit tightening may exclude marginal (poor) borrowers
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Vietnam
Main development policy task: create > 1m jobs/yearWTO accession January 2007 flood of FDI inflows,
increased domestic borrowing in world markets Important borrowers: SOEs, provincial governmentsProjects: not all contribute to long-term productivity
gainE.g.: Vinashin
Borrowing to finance wide range of investments; total debt $4.4bn
Dec. 2010: default on interest due on $600m foreign loan
Spillovers to entire economy (credit rating downgrade)
Increasing growth, greater vulnerability
Much of VN’s growth has been funded by loans – initially ODA (very cheap), but now at commercial rates
Domestic credit growing at 30%/yearMuch (most?) into large dev projects and land
developmentLand sales support provincial revenuesSOEs like land development: showcase projects funded
with cheap capitalPrivate developers get quick returns on land deals
But credit growth >> GDP growth fuels domestic inflation
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• Labor force grew by >1m workers/year in 2005-09• State sector employs only 10% of total labor force.
Role of state-owned enterprises
Favored for “leading role” in economic developmentDomestic monopolies, cheap land, cheap and easy
credit, government contracts, …Little direct supervision over their activitiesDo SOEs promote development?
Receive about ½ of all enterprise capital increasesMany projects of dubious value to long-term growthAccount for only ¼ of GDP growthAlmost zero employment growth
2005-08 growth rate of jobs: Private sector 18%; foreign-invested sector 18%; state sector 0.6%
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Instability: causes and symptomsExcessive credit growth & chronic government deficit
high inflation(World food and fuel prices also contribute to inflation,
but this affects all countries equally)Inflation means that savings in banks earn negative
real rate of interestInflation reduces tradable sector profits and
competitiveness current account deficit VND is expected to depreciate Preference for gold and US Dollars over VND More pressure on currency (“free market
rate” > official exchange rate)Defense of VND:USD exchange rate target depletes
foreign reservesCurrency reserves are critically low ($13bn; were $23
bn in 2008)
Stabilization vs. growth
Much of Vietnam’s current growth is based on speculative investment
Susceptibility to uncontrolled capital inflows, sparking monetary growth and demand-pull inflation
Gov’t exhibits strong preference for growth over macro stabilityRecent stabilizations have been brief and indecisiveProvinces and SOEs have too much autonomy“One of our top priorities now is to stabilize the
macroeconomy in order to maintain the pace of growth”Contradiction! See: Thailand, 1996
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Summing up
Vietnam’s growth has been very strong… until nowContinued long-run growth of GDP and jobs depends
on vitality of non-State sectorsChallenges they face:
Crowding-out of investment by competition with SOEsRising production costs due to land prices, inflation,
congestion in citiesReduced new investment due to exchange rate
instabilityHigh cost of debt due to VN’s bad credit rating
Fixing these problems is necessary is growth is to continue
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Could “bad times make for good policies”?
In 2010-11, attempts to restrict credit growth (high bank interest rates) have been unsuccessful
Biggest borrowers (SOEs) are largely outside banking system High commercial interest rates merely penalize private
investors, including producers of globally competitive tradables (which also generate many jobs)
Stabilization requires a sacrifice of some short-run growthNot doing so risks crisis – maybe wipe out the economic
(and employment) gains of several years of growthWhat’s needed?
Is there political will to reform the economy? Ask for an IMF loan with “structural adjustment” conditions?
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