Assignment Macroeconomics Group 2 Class B

8/8/2019 Assignment Macroeconomics Group 2 Class B

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I. Introduction

1. Global recession perspective:

2008 is the year of recession. Slowdown in US, the EU and Japan and

many developed country draws a gloomy economy picture. The world growth

rate is decrease sharply, in 2008 is 2.9% and forecast in 2009 is 0%.

Global recession is also showed in many aspects such as high credit

despite lower interest, falling stock market, and decline in consumer confidence

and especially is the increase of unemployment rate: in 2009, world

unemployment could rise 40 millions.



2. Impact on Vietnam economy:

The global recession has large impacts on Vietnamese economy. The first

impact is global recession make FDI into Vietnam decrease. In 2008, FDI investinto Vietnam is 60 billion$ but in 2009, it is estimated about 30 billion$, by half

of 2008.

Like other open developing economies, Vietnam is affected by falling

demand for exports from the United States, Japan, and EU, which together

consume 60 percent of its exports. However, Vietnam still needs import to

recover production so the balance of payment is deficit. In 2008, the trade gap is

17 billion$ and in 2009, it is forecasted about 15 billion$.

In this difficult period, economists forecast that Vietnamese GDP growth

rate will decrease; in 2009 it will be about 3.5 – 5.5%. In addition, when the

economy is well again, growth rate will increase to 7% in 2010.

3. Five solutions of Vietnam government against recession:



In this situation, Vietnamese government gave five groups of solutions to

achieve the set socio-economic targets and avoid recession, focusing on

boosting production and exports:

- Stimulate production and export

- Boost investment and consumption

- Use monetary policy flexibly and efficiently to maintain and boost

production and exports, stimulate investment and consumptions

- Stabilize the macro economy; ensure social security and the safety of

the system of credit institutions

- To direct the economy timely and efficiently and reform administrative

proceeds

To take above these solution, Vietnamese government gave many policies

and regulation. And two main policies are the financial policy and monetary policy, which play the most important role in protecting economy from

recession.

II. Policies and the impacts



On Vietnamese economy

1. Fiscal policy

1.1. Policy: Expansionary fiscal policy.

a. Tax

To versus economic downturn, demand stimulus taxation is considered

like the main tools in fiscal policies. In this situation of Vietnam’s economy,

Government applied some methods to exempt, reduce taxation for specific

objects.

Firstly, it decided to reduce the taxation for the corporate income.

National Assembly Standing Committee mulls corporate tax reduction. A

majority of the 18 National Assembly Standing Committee members agreed to

reduce the corporate income tax rate from 28 to 25% in the committee's seventh

session. The consensus of the discussion was that lowering the corporate tax rate

would stimulate the economy by enabling enterprises more available funds for

production and investment. Lowering the tax rate would thereby increase

economic competitiveness. . The lower tax rates and restructured incentives are

designed to improve resource allocation for disadvantaged areas. The revision

would also allow enterprises to assign 10% of their pre-tax revenues for research

and development. These reforms would bring Vietnam's investment

environment in line with the common trend worldwide. Economists consultedregarding the revision estimated that the State budget revenue would drop by

VND 5tril (USD 312.5 mil) a year in the short term after the corporate tax

reduction and rearrangement of incentives took effect.



Prime minister decided to reduce corporate income tax which would be

paid for income from producing dye, stain, fibre, and stitch and leather items by

30%. Reducing until 50% tariff, VAT for paper goods, cement from 1/5/2009 to

the end of 31/12/2009. Prime minister also allows delaying continuously the

expiration of VAT payment up to 180 days with import lot such as machine,

equipment, changeable attachment, the dedicated transportation, which are not

produced in domestic without importing to create business fixed asset. It is

applied to import declaration.

Secondly, Government favors small and medium business with some

especial taxes. For example : according to minister Vo Hong Phuc show

officially that about disbursement the package worth 1 billion, object which is

borrowed from solution package expected to make good 4% interest rate. The

destination of capital resources preferentially lends for small and medium

business as well as to deal with production difficulties, employment settlement,

restrictive unemployment; support for capital loan student… All these activities

lifted partly investors to forthcoming difficulty and stimulus investment.

Thirdly, that is tax levy on consumption. The three groups of

commodities and services not now subject to the Value Added Tax Law were:

Equipment; machines; means of transport imported as enterprise property;

international transport; cultural activities; exhibitions, sports, art performance,

film making; the import and distribution of documentary films; geological

surveys and map making. The Government is expected to submit the revised law

to the National Assembly in May with approval before the third plenary session

ends.



The Vietnamese National Assembly has passed Vietnam's first ever law

on Personal Income Tax (PIT) which would have been applied to the declaration

and payment of PIT from 1 January 2009 . However, Implementation of the new

Law on Personal Income Tax has been delayed until the end of May, with major

tax provisions waived for certain classes of taxpayers, the Ministry of Finance

announced. Under Circular No 27/2009/BTC, enforcement will be delayed for

resident taxpayers, meaning most foreigners living and working in the country

will still have to pay their taxes under the new Law on Personal Income Tax,

which took effect on January 1. The deferment of income taxes for Vietnamese

citizens or those who have obtained resident status is intended as an economicstimulus measure, aimed at spurring consumer spending during the current

economic downturn.

Current regulations authorize the Ministry of Finance to delay or defer a

tax, but the National Assembly is required to vote on any exemption or

reduction in taxes. Legislators are expected to further review the issue of

applying permanent reductions or exemptions when the National Assembly

reconvenes in May. Under the circular, taxes will be deferred on income from

wages and salaries, capital gains and transfers, royalties, commercial

concessions and inheritances, but there will be no deferral of taxes on income

from real estate transactions, lottery winnings or cash gifts.

The tax, which has imposed on stock market, also delayed. Taxes on

securities, among the provisions of the new Law on Personal Income Tax that

engendered the greatest controversy were new taxes on capital gains from

securities investments and on income from dividends. These have also been

deferred until May under the new circular, with the aim of supporting stock



market investors dealing with the prolonged market downturn. However, the

circular requires securities investors to continuing computing the deferred tax

amounts through May. "The National Assembly will decide whether this money

will be collected when it convenes in May," the ministry said in the circular,

noting that the ministry's authority was limited merely to delaying collection of

the tax. The HCM City Stock Exchange reacted to news of the delayed taxes

with the VN-Index gaining 2.11 per cent to close at 287.57 points. The market

has reacted positively to the ministry decision analyst with a Hanoi-based

securities firm.

b. Government spending

While tax reduction methods are considered like demand stimulation, the

way to restructure government spending is supply...Measure include social

welfare, increase in investment in infrastructure; increase in spending for social

securities. In the ongoing global economic turmoil, social security policies

should target laid-off workers and poor people badly affected by increased

prices of goods. This method is restructuring expense budget with trend:

increasing normal expenditure, reducing expenditure for investment.

Social security plays an essential role in ensuring basic welfare services

for all people, particularly amid the country’s process of international

integration. Some social welfare policies have applied to perform. At the

beginning of 2009, Government decided to subsidy by 60% for unemploymentfrom 1/1/2009 from 5/2009 basic salary of staff member would increase from

540.000VND to 650.000VND. This order presently not only will stimulate

consumption level, but also aids partly lift difficulties of consumer from



economic downturn. Moreover, the increasing salary also contributes

government spending up, but not pull price.

Government concentrates increasing investment for public works like

education, community medicine, and road. In the economic recession, the

preference for infrastructure investment and construction is the most accurate

and efficient way to recover the economy. So what infrastructure area is the best

choice to overcome recession? In Vietnam, this is traffic facility “government

only should invest in shared infrastructure for sectors, businesses such as:

highway, waterway or railway which is the necessary facilities but is less

profitable and private, corporate don’t want to invest in. In 2009, according to

the Ministry of Transport’s report, disbursement plan for the sources of capital

construction is up to about 25.000 billion VND, which includes about 10.000

billion VND for capital state budget and the rest for other financial resources.

Especially, in Hanoi and Ho Chi Minh city need set up early underground

projects, grade-separated intersection to deal with traffic-jam which are making

loss tens billion VND per day by present statement. Besides investing in

infrastructure, demand stimulating in housing investment also very encourages.

To meet the demand for quick performing two tasks, one of the most factors is

“improving procedure in investment, construction such that performing projects

like in work schedule. It is also one of the demand stimulus measures.

Those are the policies; and how these policies impact on the economy.

We will analyze it by using consumption and investment function.



1.2. Using consumption function and investment function to analyze impact

of fiscal policies:

a. Using consumption function in Keynes theory in short run

When government decrease tax and increase minimum wages, it makes

the disposal income (Yd) increase. We also have the consumption function in

Keynes theory:

C = Co+ MPC x (Y – T)

In which: C: consumption

C0: Autonomous consumption

MPC: Marginal propensities consumption

Y: Income

T: Tax

Therefore, the expansionary fiscal policies make consumption rise up

b. Using investment function (fixed business investment function)

With the investment function:

I=In x (1-t) x [MPK- (PK/P) (r+δ)] + δK

In which: I: Investment

t: corporate income tax rate



MPK: marginal product of capital

PK/P: the cost of capital

δK : depreciation

We will see the increase of investment when the tax rate reduce

Moreover, we have:

AD = C +I + G + NX

Therefore, consumption and investment raise up will make aggregate demand

increase. In conclusion, with expansionary fiscal policies, the government can

boost aggregate demand

2. Monetary policies

2.1 Policy: Expansionary monetary policy.

a. Monetary Policies

Since the beginning of 2009, The State bank of Vietnam has applied

Expansionary monetary policy in order to increase money supply. Among tools

on financial market, State Bank considers interest rate the most effective tool to

executive the policy. There are several specific measures the State bank has

implemented in 2009:

They lowered benchmark interest rate to 7%,which is much smaller than

that in the middle of 2008 reaching 14%.Also,The State bank lowered discount

rate and replenishment rate to respectively 5% and 7%. At the same time, they



decided to decreased required rate by 2% from 5% to 3% towards commercial

banks (except Agribank).As a result, in order to ensure the stability of financial

market, The State Bank restructure old debt in banks with lower interest rate

less than 10,5%.This means the ratio of bad debts in commercial banks will fall

and the security of whole financial system will be improved.

In addition, the most effective solution, which has attracted most attention

of the society, recently is the combination between fiscal and monetary policy,

in which The Central Bank of Vietnam spends Government budget supporting

loans with low interest rate 4%. In estimation, 17000 billion VND from

Government budget will create another amount of 600000 billion VND cash

flow in the credit market. They hope that if the plan is fulfilled successfully, the

bonus money pouring into the economy will spur aggregate demand and protect

the whole economy from recession.There are two kinds of this support:

Supportive Loans for production and business:

Commercial banks lends firms with supportive interest rate 4%which is

much lower in comparison with the vast interest rate approximately 20% firms

had to borrowed last year when inflation is still a hot danger. The object of this

plan is firms with new reliable production and business plans. At first, only

short time loans were available (applied since 1/2/2009) for suitable objects.

Then under pressure of businesses who wants to have longer capital to ensure

production, The Government expanded the maturity of loans to include long-term loans but they still limit the maturity lower than 2 years. In addition, some

appropriate firms have received this cash flow from 1/4/2009.However,only

construction, infrastructure developers, producers of exportable goods are



objects of this program. The target of the Government is to encourage firms to

establish new production and business plans.

Supportive loans for consumption:

The second phase of interest rate support package of the Government is to

provide preferential loans. They focus peasantry and country side. These

programs can provide lower interest up to 50% or free. By that way, people have

chances to purchase computers, input for agriculture production such as

fertilizer, rural tools, and pesticide and so on.

b. Exchange rate policy:

Exchange rate policy or trade policy is a sensitive problem in financial

market. Unlike most countries which choose either fixed or floating exchange

rate or the combination of both, The State Bank of Vietnam stepped in another

way when consider crawling pegged exchange rate regime as exchange rate

policy. An action expressing this choice is the decision to widen band for trading foreign currencies from 3 % to 5% on 24/3/2009.This means one par

value with the benchmark can be regulated and the benchmark is widened,

which made real exchange rate more flexible. As a result, the independence and

effect of monetary policy will be improved.

2.2 .Impact of monetary policies

a. Consumption function

We use Irving Fisher model to explain the effect of the decrease of real

interest rate on Consumption



A whole economy consists vast number of households, firms and the total

savings of all of them is always is positive. Therefore, we can suppose that the

economy is a giant household having positive savings.

When the real interest rate decreases base on effect of policies from the

State Bank, Budget constraint curve rotates flatter around C (Y1, Y2).As can be

seen from the graph first period composition increases C to A as an income

effect. This will cause instant consumption increase as a result. According to the

formula: AD= C + I + G + NX, Aggregate demand rises, too.

b. Investment function

According to standard model of investment, we consider r (opportunity

cost of holding money) as a variable moving along investment curve. We have

the following Investment function:

New budgetconstraint

Second-PeriodConsumption

First-period consumption

Old budgetConstraint

B

IC2

IC1

A

C

Y1

Y2



I= In x (1-t) x [MPK- (PK/P) (r+δ)] + δK

Easily we realize that the real interest rate and investment have a negative

relation. Thus, while real interest rate r decreases, business fix investment

increases, thus fixed business investment increase, too, this will make AD

increase.

3. Using IS-LM-BP model (Mundell-fleming model for small open

economy) to analyze the impacts of expansionary and fiscal policy

to economy in Vietnam

In real situation of Vietnam, because of easy and imperfect capital

mobility, the BP curve is upward slopping and more elasticity than LM curve.

Moreover, Vietnamese has the crawling pegs exchange rate regime, so we have

to analyze the IS-LM-BP model in two cases: in floating exchange rate regime

and in fixed exchange rate regime and then combine them to see the impacts of

these policies on Vietnamese economy

3.1 In fixed exchange rate regime

a. Using expansionary monetary policy

According to the part 2.2, expansionary monetary policies will shift LM

from LM0 to LM1, it leads to lower interest rate, and then, there is capital out

flow (graph 3.1.a). The result is depreciation of domestic currency, so to keep

fixed exchange rate as before, government has to use contractionary monetary

policies to shift LM from LM1 to LM0. In conclusion, monetary policies have no

effect in this case.



b. Using both expansionary fiscal and monetary policies

However, when we combine expansionary fiscal policy and expansionary

monetary policies, we will get the greater effect. Expansionary fiscal policies

make AD increase (as in part 2.2), it leads to changes of IS from IS0 to IS1. At

point B, the domestic currency is depreciated. To keep the fixed exchange rate,

Government has to increase money supply by expansionary monetary policies

and the result is the shift of LM from LM0 to LM1, new equilibrium with higher

Y. That illustrates the combination of two policies in Vietnam real situation is

very suitable.

IS0

LM0

LM1

BP0

Graph 3.1.a: expansionary monetary policy in fixed exchange rate regime

r 0

Y0



3.2 In floating exchange rate regime

a. Using expansionary fiscal policy:

IS0

LM0 BP

1

IS1

BP0

IS0

*

A

C

B

Graph 3.2.a: expansionary fiscal policy in floating exchange rate regime

r 1

r 0

Y0

Y1

IS0

IS1

LM0

LM1

BP0

1

2

AC

B

Graph 3.1.b: expansionary monetary policy and fiscal policy in fixed exchange rate regime

r 1

r 0

Y0

Y1



At first, IS shift from IS0 to IS0*, at point B, the domestic currency is

appreciated. It leads to decrease in export and increase in import so net export

go down. However AD=C+I+G+NX, so the aggregate demand decrease shift IS

from IS0* till to IS1, Where it meets LM and new BP (BP1) at the same point

(point C) with higher Y than point A. In this case, fiscal policy has less

effective.

b. Using both expansionary fiscal and monetary policies

Expansionary fiscal policy shift IS0 to IS1, expansionary monetary policy

shift LM0 to LM1 and with floating exchange rate, BP shift from BP0 to BP1 tohave equilibrium in 3 markets at point B. In conclusion, combining two policies

is very effective to increase Y.

IS0

IS1

LM0

LM1

BP1

BP0

AB

Graph 3.2.b: expansionary monetary and fiscal policy in floating exchange rate regime

Y0

Y1

r 0

r 1



3.3 Apply in Vietnam

Because of crawling peg exchange rate with the small band, so we can

consider it more similarly with the case fixed exchange rate, and we can see

clearly that fiscal policies is more effective than monetary policy. Moreover,

when wide the bench mark of exchange rate, it make exchange rate more

flexible and as we can see in the graph 2, it helps the fiscal policy have more

impact. In summary, with expansionary fiscal policy, expansionary monetary

policy, and new band of exchange rate, as we analyze in these above model,

Vietnamese government can surely boost the economy to avoid the recession.

4. Other policies

Outside fiscal and monetary policy, The Government also conducted

several other policies to get the situation brighter. Some of them can be named

follow in the following list:

Restructure the economy: in terms of regions and production field. After recession, only businesses, which are more dynamic and own greater resources

of human being and capital can survive and develop .Also, each province based

on the natural conditions should decide the strength to avoid, be left back

behind.

Build Marketing plan for domestic goods towards domestic people,

especially rural areas and peasants. Vietnamese is used to prefer foreign goods

although they are generally more expensive than domestic ones. This marketing

will practice the habit of consuming domestic productions in order to gain

domestic demand replacing the decline of export.



Promote commerce to new markets in order to encourage export. The

Ministry of industry and trade has pointed out some potential market for

Vietnam export including Central East, Africa ,Central and Eastern Europe and

conducted a great number of marketing action such as attending exhibitions,

eliminate administrative formalities, focus on training and education in order to

attract more foreign investment.

5. Achievements

The results of these policies above were expressed by bright statistics of

Vietnam economy in the first four months of 2009 announced by General

statistics office: despite bad impact of global crisis, Vietnam economy has got

some achievement:

1. Progress of the interest rate support

According to the report of The State bank in the meeting with business,

updated to 13/5/2009,commerial banks and finance companies lend firms288.227 billion VND, attaining 70% of the scheme .Among them, Short-term

loans occupies 281.695 billion VND and Long-term 6532 billion VND.

Therefore, loans in banks increased by 10,28% in first 4 months of 2009

compared with those of 2008.The speed of conducting the program is

considered to be relatively fast thanks to the effort of the Government and

system of finance. A large number of firms have been provided capital resource

at the moment they are really lack. Most of them have overcome difficulties and

continue developing.



2. To businesses

By the policies from the Government, firms have chances to approach

cheap capital resource and lower capital cost. As a result, the price pf production

can be reduced. Vietnamese goods become more competitive than those of

others. This not only boosts export but also reduces import, so that trade deficit

will be improved. In the meeting above, the central bank gives an example that

two typical investigations were conducted in firms receiving preferential loans

with Group 1 included businesses in Ho Chi Minh and Group 2 which loans

from ACB Bank provided the same results : Firms saved 36,6% capital cost and

decrease products price by 2-4,65%

According to offset of interest rate, till the middle 4 / 2009, has about 220

thousand billion equivalent to USD 12.4 billion has been financing, Bank of

predicted this figure will up to 420 thousand billion contract in late 2009 (when

the program end)

The commercial banks have received the support of government active in

the provision of loan; subject to less enthusiasm for the program is a branch of

foreign banks. 60% of loans provided to private companies, the remaining for

state enterprises and cooperatives

3.To the whole economy

Due to implementation of solutions, Vietnam economic grow positively.

in first quarter of this year, GDP increased by 3.1% over the same period; month

4-2009 value industrial output increased 5.4% over the same period,

contributing to all 4 months, the industry is 3.3% over the same period .



Agricultural-rural region was focused investment, policy support rate was

maintained rhythm production and ensure jobs. Especially, 4 months of this year

we exported more than 2 million tons of rice and estimated the year will be

approximately 5.5 million tons, an increase of half a million tons compared with

2008. Purchasing price of rice has also increased light improved the lives as well

as create more encouragement to farmers. Export country 4 months reached

USD 18.64 billion, approximately the same period and some products are

growing signs, light textiles, rice, tea, pepper ...The export volume of domestic

enterprises increases 27% over the same period.

Index CPI in the month 4-2009 increased 0.35% over the month 3-2009

and all 4 months, the CPI increased 1.68% over the month 12-2008, this shows

that the total demand has on the move. Here are signs that economic growth is

spectacular, the solution was to enable development work. The positive side to

see the country has two basic objectives is to prevent the decline in economy

and ensure social security.

Industrial production increased continuously for 3 months; value of

industrial production increased 3.1% in April 4 first months of year increased

3.3%. Two large center economics in Ho Chi Minh City and Hanoi have

increased the level of industrialization than 3 months. Some local authorities

have increased the level is quite high, as in Ba Ria - Vung Tau increased 10.1%,

Quang Ninh increased 9%, Hai Phong increased 7.1% ...

Through policies to enable investment sales of retail goods and the

purchasing power of people increases strongly, exports reached 4 months of 4.5

billion USD, import turnover in 4 / 2009 reached 5.2 billion USD. Invested

foreign direct implementation in 4 months reached 2.2 billion USD.



It is very happy that in such difficulties that direct investment abroad (FDI) in

the first quarter has reached 6 billion USD in the investment level for the capital

increase was over 3, 8 billion USD. Deputy Planning and Investment Viet Sinh

said demonstrated FDI enterprises operating in Vietnam (Vietnam) see long-

term prospects here. Capital investment also increased more than 34% over the

same period

In conclusion, we can see that government policies have an important

impact to domestic economic growth.

III. Some recommendations to make policiesmore effectively

The main purpose of stimulus package is to avoid recession, high inflation in

short-term and obtain high growth rate in long-term. However, there are still

some major problems needed tackling as soon as possible.

1. Restructure the economy

Government and local authorities should not regard economic indicators

proposed before recession as important matters but try to restructure the

economy, restructure production – distribution – consumption, restructure

export – import, restructure state and private investment, restructure

consumption – saving, restructure sectors in the economy; try to invest in new

technology; improve the human resources to prepare for economic recovery or

in other words, promote reforms, create regulations, sustainable structure for

long-term growth.

2. Give priorities to essential projects using Government budget.



With projects using Govt. budget, we need to identify clearly and exactly

prioritized areas which are:

Developing infrastructure such as traffic, hospitals, schools, information

technology and media. It attributes stable economic growth after the recession.

Investing in projects using much labour to create more new jobs and

projects satisfying internal market. As a result, the labour can have more settled

life and consumption demand, thus boosting the economy.

3. Boost agricultural and rural areas

Reinforcing and prioritising to boost agricultural demand and rural areas.

Investment in agriculture and rural areas needs to be both direct and indirect

investment through credit interest rate support. This area accounts for more than

70% of population and social labour. It also suffers less from global crisis, so if

it is received reasonable investment, it will have remarkable advance. Moreover,

it is attracting more and more labour from cities, industrial zones that have justlost their jobs. So, concentrating on boosting demand in this area will not only

help the economy – society but also consumption demand of most people to be

more stable.

4. Consumption demand

Boosting demand policies needs to concern more about consumption

demand of citizens and manufacturers. From experiences of other countries,

boosting consumption demand is an essential solution to reduce impacts of

global recession. To implement it effectively:



The Government should adjust salary increase; postpone the time to apply

Individual income tax, temporarily exempt VAT tax for some domestic

products. This solution will reduce Govt. budget but in return, it will help to

boost production and purchasing power of people quickly and effectively.

With necessary goods having direct effects on production and living

standard, the Govt. should avoid increasing price. The reason is that higher

charged price will lead to higher price of inputs then higher cost of enterprises,

which reduce the competition of the economy. Moreover, it also reduces

purchasing power of the society, effort of the Govt. to stimulate the economy

then finally leading to a deeper depression.

In addition, the authority should have close control with imported goods,

especially cheap products from China and other countries in the area. Otherwise,

the policies will become less effective, or even it will boost foreign product

consumption like it did in 1998-1999.

5. Expanding export market

Both State and firms need to find potential export market to expand for

strong products such as reasonable agricultural products. These products involve

in farmers and enterprises using much labour. As a result, this solution will help

to remain a part of economic motivation, reduce trade loss. Besides, not only

many people can keep their jobs, income but also political stability is

guaranteed.



6. Management style and administrative procedure

The Government should have deeper reforms in management style,

administrative procedure along with economic solutions. If we do not have a

serious concern about corruption, lack of transparency, benefit conflict, stimulus

package of the Govt. will lead to unforeseeable result. Therefore, in order to

have the best stimulus package, it is about keeping on reforming management

style and administrative procedure.

Documents

Assignment Macroeconomics Group 2 Class B