''

V i e i iNaiii jf-*

UPPSALA UNIVERSITY (SWEDEN) &
iSITY OF ECONOMICS AND BUSINESS, VNUH
liR PROGRAMME OF PUBLIC MANAGEMENT

Swe<*

Nguyen Tai Thu
MPPM-Uppsala - Intake 1

VIETNAMESE GOVERNMENT'S ROLE IN
ECONOMIC MANAGEMENT DURING CRISES

Supervisor:
Local Supervisor:

Prof»& Dr. Lars-Torsten Eriksson
Dr. Nguyen Manh Hung

Hanoi, Mav 2011


I

ABSTRACT
Title: Vietnamese Government's role in economic management during crises.
Level: Final assignment for Master Program in Public Management.
Authors: THU NGUYEN TAI

Viet Nam Supervisor: Dr. HUNG NGUYEN MANH
Sweden Supervisor: Prof. Dr. LARS-TORSTEN ERIKSSON
Date when the thesis is presented: 2011 -May

Aim: The study has objective to identify the connection between state mechanism and
ways to resolve crisis, from which apply to Vietnam in order to enhance effectiveness
of preventing and overcoming crisis.
Method: After collecting data from sccondar\ sources, the writer use the method of
statistics, data analyzing, comparing, etc to make clear the research problem. Four
countries is chosen to analyzed, in which 2 countries apply market-based socialist
economy, one applies free market-based econom> and one applies developed state,
which are: US. .Japan, China and Vietnam.
Result & Conclusions: Effect of Keynes theor> in saving economy from crisis is not
denied; and one of the most important factors for demand stimulus package accordino
to Keynes theor>' to reach success is the role of State in econom\. According to
analysis, the economy that appreciates the role of State in managemeni will be eas> to
put policies of Kcwnes theor>' into realit\ to get good results. Such Slates will have
lower density of economic stimulus package (compared to Governmental spendins)
compared to States with the economy appreciating the role of market.
Such analysis will give the fact that ahhough economic models have their own
weaknesses and strengths, patient following market econom\ according to socialist
orientation is the right wa). Howe\er, in term of pre\enting economic crisis
prevention, apart from focusing on sustainable de\elopment. \'iet Nam must focus on
harmonizing the management of the State and the role of market manipulation. This is
the best alternati\e to raise the role of Vietnamese State in preventing economic crisis.
Suggestions for future research: Within the limits of the thesis, research the
relationship bciween the opening of the econom\ in the state models and its
1



,

• --

v.. ^^wventing economic crisis has not been studied. In the

future, the thesis can find out the policy of the problems in preventing and
controlling economic crisis.
Contribution of the thesis: The conclusions of the thesis showed the importance
of harmonizing the management of the State and the role of market manipulation in
preventing and controlling economic crisis. If the management role of the state in
the economy are overlooked, the application of the economic stimulus packages
according to the theories of Keynes would be very difficult and expensive when
the economic crisis happened.
Key words: Role of Keynesian theory, the relationship between the state model
and method of handling the crisis, economic stimulus package ...


TABLE OF CONTENTS

INTRODUCTION

4

CHAPTER I : THEORY ON CRISIS AND CRISIS PREVENTION

8

1.1 What is economic crisis ?
1.2 Keynes' theory on crisis and crisis prevention

1.3 Market economy models in the world
1.3.1 Feature of free market economy
1.3.2 Features of social market economy
1.3.3 Economic institution of developed government model
1.4 Government' role in crisis and measure to overcome crisis
CHAPTER 2 : GOVERNMENT'S POLICIES IN CRISIS

j
(
K

I
13

2.1 Policy of US Government
2.2 Policy of Japanese Government
2.3 Policy of Chinese Government
2.4 Policy of Vietnamese Governineiil
CHAPTER 3 : THE ROLE OF STATE AND METHOD TO SOLVE CRISIS

1
1I
1
22

3.1 The role of the State in crisis
2!
3.2 Relation between the role of the State and method to treat crisis
2.
CHAPTER 4 : IMISING THE ROLE OF STATE IN MANAGING TO PREVEP

CRISIS IN VIET NAM

i3


CHARTS AND TABLES

Table 2.1: Structure of US' stimulus package
Table 2.2: Structure of Japan's stimulus package
Table 2.3: Structure of China' stimulus package
Table 2.4: Summary of Vietnam's stimulus package number
Tabic 2.5: Effectiveness of demand stimulus policies

Table 2.6: Policy on cutting basic interest rate and reality of 2008 saving-lending intere
rate
Table 2.7: Structure of Vietnam's stimulus package number 1

Table 2.8: Scale of national budge expense in comparison with Vietnam's GDP and son
Asian countries
Tabic 3.1: Relation between state regime and features of economic stimulus packages
Table 3.2: Comparison of some governments' stimulus packages
Table 3.3: Percentage comparison of economic stimulus packages
Table 3.4: Comparison of some countries' demand stimulus packages' component

Figure 3.1: Relation between government's role and economic stimulus package
Figure 3.2: Structure of US' demand stimulus package
iMgure 3.3: Structure of Japan' demand stimulus packages
Figure 3.4: Structure of China' demand stimulus packages
Figure 3.3: Structure of Vietnam's demand stimulus packages



ABBREVIATIONS

MBS

Mortgage Backed Securities

CDS

Credit Default Swap

GDP

Gross Domestic Product

CPI

Consumer Price Index

FED

Federal Reserve System

VAT

Value Added Tax

lARP

Troubled Asset Relief Program


ODA

Official Development Assistant

FDI

Foreign Direct hiveslment

CPI

Consumer Price Index

CIT

Corporate Income Tax


INTRODUCTION

L Background to the study:
The issue of economic crisis is always a hotly debatable one because of it substanti
influence on the whole society.
The economic crisis since late 2008 has given adverse impact on global economy, leadir
the world economy to the most ever serious recession since World War II.

This economic depress has its roots in real estate and the subprime lending crisis in the L

and Wall Street financial institutions have institutionalized the lending in the form of re


estate bonds to issue to foreign countries. The kinds of bond are Mortgage Back(

Securities - MBS and Credit Default Swap - C D S . which lead to the situation that in US

22,000 billion of US real estate value, over USD 12,000 billion is debt able in which US

4,000 billion is bad debt'. It is estimated that he tolal of CDS is approximately US

35,000 billion and around USD 54,600 all over the world". The other countries al:
imitate the US to sell MBS in the financial markets. Il is this latent reason, along wilh tl
bankruptcy of Lehman Brothers Bank and then of AIG as well as hundreds of banks th
has trigger the crisis, affecting a series of countries.

It is realiable that from the Greal Depression in the 1930s to the economic crisis in 200;

many things need to be considered. Although countries' financial crises are basicall

similar and collaboration of goxernments is essential lo pre\enl global crisis'', il is simih

to the Cireal Depress in the 1930s, there are many differences in measures and policies I
deal with crisis of each Go\enimenl.

In the Great Depression, in spile of all countries' acknowledgement of coordination'

necessity to overcome crisis, the) also intenlionalK found interest for their own countrie
by laking ad\ antage of other's losses.

Moreover, in this period, each countr)' measures were different and because they did nc
have good eooperalion to deal with common economic problems, all countries ha\e I
incur disastrous losses in the Greal Depression.

The reasons were not identified clearh'.
' '^Vietnam ccononn recovers from L'S tlnancial crisis'^". VNEconomy. 6 October 2008
" International Swap and Derivatives Association.2008. "Summaries of Market survey results"
' John 2009, pp 7


5

The UK Prime Minister at that time, Ramsay MacDonald assumed that the problei
originated from capitalism.

The German argued that the crisis had il polilical root and resulted from big \\i
compensation.
The French claimed that the UK's irresponsible monetar> policy and the US
"unemployment exportation" policy were reasons'^.
The economic idea dominating in this period is the Theor\^ on self-adjusting economy

claiming that supply will automatically generate demand, market mechanism will stabili:

all aspect of capitalist economy, no need to government's inter\ention in economy ai
freely floating, competing, producing and trading econom> should be encouraged. It w
this idea that cause economic crisis 1929-1933 to be more serious.
In the financial crisis 2008, each country had its own policies beside the cooperation
handling crisis.

Besides the clear identification of reason, the fact that countries and go\emments to(
timely and wise actions as well as the applicalion of Keynes lheor> in handling crisis wc
conducive to the more stable condition oflhe global eeonom\.

Ob\iousl_\. there is a connection between cach ct)untr\'s features which affected the

measures to deal with crisis and the idenlification of this connection will help people
understand the nature of those measures, from which enhances effecti\eness in prevenlii
and handling crisis.
2. Reason of the study and objective of the study
In general, the writer realize that there is a close relation beUveen state's role ar
governments' current measure to crisis
Therefore. 1 choose to do research on: Victnatncse Governtnent's role in econom
mana^etnerit during crises.

The stud\ has objeclixe to idenlif> the connection bciween slate mechanism and ways i

resolve crisis, from which apply to Vielnam in order to enhance effectiveness (
pre\'cnling and o\ ereoming crisis
3. Situation of research

' John 2009, pp 10


6

Relating to the issue of economic crisis, a lot of researches have been done under differen

aspects. Vietnam's government and Ministries also have special documents an<
conferences on this issue.

The researches have various objective of study and draw many remarkable conclusions
Within the scope of this study, I recommend the following conclusions:

- Vietnam's demand stimulus policy is essential but it has not completely achieved the aii


of demand stimulus packages-in the study 'The problems of the demand stimulus packag

number one - lesson for Vielnam\s demand stimulus package" written by Vo Thi Thu

Anh (2010) focuses on the effectiveness of the demand stimulus package number one. Th

writer points out 10 limitations in demand stimulus package and proposes lesson f(
Vietnam's demand stimulus.
- Many countries such as US. UK, China and Vietnam are implementing econom
stimulus package which tend lo eorreel the mistake and do not tend to stimulus accordir

lo the Keynes theory, which is shown in the research ''Vietnam's current polic\ to prc\ei
crisis. Research number 1: Demand stimulus policy". Writer Ngu\en Due Ihanh ar

other aulhors (2008) demand stimulus packages research on the feasibility of measures i
mobili/e capital for demand stimulus policy and measure according to components of tl
economy.

- Keynes lheor>- is the most important theor>' in pre\enling depression. Writer Nguye
Hoang Bao, Ho Hoai Anh, Doan Kim Thanh (2008) in the stud> "Ke>nes theor
arguments and pre\enlion of economic crisis in Vietnam" have analyzed Keynes' theor
arguments aboul this ihcor> and propose theoretical suggestion to stimulus demand
Vietnam.

- State role in the market-based eeonom>- is shown in man> economic theorii
(Neoclassical economies, Keynes, New liberlarianism...) and in the smd> "Role of stale
the market-based econom> in some modern and conlemporar>- economic theories ai
applicalion to Vietnam", author Pham Thi Hong Diep (2008) asserts that the govemme

in the market-based socialist econom> o( X^ieinam has an important role in anii-cris

policies.


7

- In the study "Global Economic Crisis and Developing Countries: Impact and Response'

of Duncan Green, Richard King, and May Miller-Dawkins (2010), the authors do researcl
on crisis' impact on Vietnam and some Asean countries in terms of work, social stabilit>

food, etc and forecast potential elements which might affect the recovery such as
economic structure, government role, etc

According to the writers, researches on the relation between state mechanism - role c
government and way to handle crisis have not been done before. Therefore. I would lik
to do a research on the issue of economic crisis in Vietnam.
4. Research tasks
In order lo achieve that goal, the study has the following specific tasks:

- Systematizing theoretical questions aboul economic crisis, measures lo deal will
economic crisis in the world, theory on state role in the economy.

- Analyzing policies to overcome crisis and effectiveness of economic stimulus policy ii
Vietnam, China, US and Japan
- Analyzing, commenting and make assessment oflhe relation belween State mechanism
- government role and policies preventing crisis of those countries

- Proposing some solutions to enhance the effecti\eness of prevent and deal with crisis ii
Vielnain
5. Research Questions:

The study aims to find out answers for the follow ing questions:
-

Does State mechanism affect measures to deal w ith crisis?

-

llow to enhance the role of Vietnamese Go\emment in crisis period?

6. Object and scope of the study

Objects and scope of the study is the role of government in some economic mode
in Vietnam. China, US and Japan, these govemmenls' policies in crisis and stud\ tht

relation between oo\crnmcnr role - policies to prc\ent crisis. The scope propose:


8

comments on state mechanism, role of the state within the issues related to economic
crisis.
7. Methodology

After collecting data from secondary sources, the writer use the method of statistics, date

analyzing, comparing, etc to make clear the research problem. Four countries is chosen t».
analyzed, in which 2 countries apply market-based socialist economy, one applies frcf

market-based economy and one applies developed state, which are: US, Japan, China an(
Vietnam

8. Design of Study :
The Study is divided in lo four chapters:
Introduction
Chapter 1: Theory on crisis and crisis prevention
Chapter 2: Governments' policies in crisis
Chapter 3: Stale role and measures to handle crisis
Chapter 4: Enhancing role of state in preventing and overcoming crisis in Vietnam
Conclusion
Reference

CHAPTER 1 : THEORY ON CRISIS AND CRISIS PRE\ ENTIOI>
1.1 H'hat is economic crisis ?

Economic crisis is the the downturn of economic actixities of a countr> or globs

econoniN, brouglit on bs a financial crisis and is likeh happens uhen the econom;
experiences sudden downturn.
ihe possible signals of economic crisis is the falling CiDP in 2 continuous quarters or i
the whole year, a drying up of liquidity, rising falling price due to inflation or deflat.or
out How inu of foroiun currenc), etc


9

1.2 Keynes' theory on crisis and crisis prevention

John Maynard Keynes (J.M.Keynes) is the proponent of "visible hand" theor> whicl"
mentions the necessity of Government intervention into the econom\. With its adjustment

the government can prevent or limit the likelihood of economic crisis and even when th*

economy reveals the signals of crisis, the government can implement policies to recove
the economy.

According to Keynes^ theory, with the Aggregate demand model: Y - C ^ 1 + G + NX i

which Y is the total demand quantity on a product of an economy. C is consumption, I i:
investment, G is government spending, NX is net export.

According to this model, in order lo handle crisis, it is essential to increase Y b^

increasing variables in the aggregate demand, however, when crisis happens, the variable:
C, I, NX will not increase automatically, they needs the inter\enlion oflhe govemmen
through macro policies. Demand stimulus in Keynes' model is lo stimulus 3 factors o
aggregate demand: consumption, investment, government spending.
The important research of Keynes in preventing crisis is in 1932 when he wrote the boot

"General theory on employment, interest rate and money", it was not until the beginnin;

of 1936 was it published and he assumed that "this theor> helps prc\cnl downturn, lead:
the economy recover quickly, creating a more balance and stable capital system"^

According to Keynes, a recession results from the situation in which the econom\ ha:

abundant production capacitx, supply surplus causes price lo reduce in all markets
consumers are not encouraged to consumer, which leads to the lower demand quantity ir

comparison with suppK quantit). After all, the econom> gets stuck in crisis and unable tc

overcome. Therefore, in order to sohe the problem, an adequate!}- big demand quantit\ is
required.


On the other hand, according to Keynes, while the households, corporate tend to save

monc\ and consumers less than their income, government is the onh unil ha\ ing ability tc
consume all or even more ihen ils income. In the normal economy,

financial

intermediaries will help transfer money lo corporate to invest, bul in the crisis period,
because of low profit, the corporate might not want to invest.
• Luong Thai Bao: '^Keynes and measure to overcome crisis


!0

Because of these 2 basic arguments, Keynes suggests the basic measure to prevent crisis i

stimulus the demand on the basis of transferring buying abilit> from private, household:
to government to increase demand, helping the economy to get over from crisis.
1.3 Market economy models in the worI(f*
The market-based economy is the popular economy model in most countries in the worl
It might be divided into the 3 following types:
-

Free market economy

-

Social market economy


-

Developed state economy
1.3.1 Feature of free market economy

-

Has a freer market mechanism than olher economies. In this market economy, ih
economic relations are solved Ihrough market, state intervention is limited.
Therefore, all problems and failures oflhe economy mainly originates from
breakdown or incomprehensive oflhe market.

-

In this model, the labor market has high fiexibility and rules on labor market ten
to protect the capitalists rather than the emploxees
1.3.2 Features of social market economy

-

Social market economy is derivatives of free market econom>. Bul its content,

fact, is the reasonable combination between social, economic and polilical aspects
-

It considers markets as necessary condition, not sufficient condition and conside
law, stale, ethnic, etc no less important than economic, financial policies. This
model appreciates government "stimulus role in inter\ention and social welfare.
1.3.3 Economic institution of developed government model


-

The main function oflhe government in this model is to impulse long-term
economic growth and development. Therefore, the go\emmeni has to implcmen

*' Hoang Ngoc Hoa. '^Market-based economy institution model and the market-based socialist economy in
Vietnam"


policies on economic restructuring basing on the achievements of
industrialization and re-industrialization based on knowledge to adapt the quick
change of market requirements to create competitive advantage to enhance
competitiveness.
-

The government does not only care about rule of the market economy but also
instructs, directs, adjusts the direction and content of the economic activities to
fulfill government' development function.

1.4 Government' role in crisis and measure to overcome crisis
Government and market are the two close entities in the market economy. According to
Keynes, the government's intervention in crisis is essential to overcome crisis.
Although the government always has to respect operating regime of the market, Adam
Smith's ^invisible hand" theory can also lead to market to operale effectixely when the
asymmetric information is handled well. When crisis happens, almost all the markets are
asymmetric information market and the governmenl\s inler\ention is not merely in sectors
refused by private or attractive sector, it is in all sector all o\er the counlr>'.
Hence, how can the government do to deal wilh crisis?
Obviously, depending on cach nation's economic situation, public response and polilical
context, its own government will ha\e different choices showing it priorities. However,

according to demand stimulus theor) of Keynes, the solution groups include:

-*- Implementing high salar\* policx lo restructure sectors for the purpose of focusing on the
highest productivity sector, prohibiting or discouraging the low produclivit}' and high cost
sector.
+ Increasing government spending (along with adjusting monetar> polic\: reducing
interest rale), from which gi\e companies condition lo in\est. hire more workers, increase
output for the purpose of expanding market. Government invests in project producing
necessary goods.
+ In the period of crisis, companies do not want to in\est but keep cash or buy short-term
securities to make profit, rhercforc. on one hand, goxcrnmcnl should impose tax on
income before investment ol^ companies and go\emment uses that sum ot money to
expand market and cause companies to sohe.


12

+ Trade protection: in this period, each nation tries to encourage export to boost growth,
therefore, to some extent trade protection will help domestic companies produce and not
cut labor.
Those solutions will be adopted in the form of 2 main policies: monetar\ policy (to adjust
money supply in the economy) and fiscal policy (including lax policy, government
spending impulse policies and demand stimulus policies, etc)
However, in consideration of Keynes' limitation pointed out by Classic Economy or
Austrian school. Neoclassical Economics such as: demand stimulus policy might generate
interest group related to government, policies need lo much power abuse, etc all
governments need to consider when implementing the policies:
+ When choosing demand stimulus measures, measure that can generate the highest
multiplier (k) must be prioritized, which means those measures ha\e lo boost maximum
consumption

+ Implementing in short-term until the economy is stable, government's inter\ enlion must
be stopped, if continued it might be barrier against natural selection of market economy
+ Demand stimulus is lo lead the econom\ to ils normal orbit, regard of nation and
companies' competitiveness enhancement issue. Compelitixeness is the issue needs paid
high attention even before or after economic crisis. Il must not onh implement within the
orbit but also comply with competitiveness. The opinion of changing technologx to
enhance competitixeness in crisis is opposite to Kexnes as importing machines to change
technology will increase import and reduce multiplier (k) in the economy
In addition, according lo many economists' opinion such as Laxvrenee Summers . the
solution lo deal xvilh crisis through the demand stimulus package must assure al least 3
criteria: timely (the measures must hax'e prompt effect, increasing economic spending
promptly), right object (the objects will consume and consume almost all of their the
demand stinnilus quantity) and short-term (implement demand stimulus in short-iemi to
improxe effectiveness of demand stimulus package and haxe no effect on long-lenn
budget)
Aceordinu lo the analvsis on measures to handle crisis in 4 countries including US. Japan,
China and Vietnam, it can be seen that the main idea is Keynes' theorx by government's
' Nguyen Hoang Iiao. el al. "Kc\ncs's theor\. arguments and prc\ention of X'ietnam economic crisis".
' liurence Summers : economic professor, fomier principal o^Har^ard, economic counselor for LS president Obama


13

intervention through increasing aggregate demand (by government spending, encouraging
consumption, investment, etc) which is economic stimulus packages.
Although there are many ways to deal with crisis using Keynes^ theor> and government'
role is undeniable, in fact, not all countries totally agree with Keynes' solutions.
Consequently, does state nature affect the implementation of solution according to
Keynes' theory to different extents?


CHAPTER 2 : GOVERNMENT'S POLICIES IN CRISIS
The writer classifies government's policies inlo the objects that receive benefit from
policies and view on demand stimulus criteria according to Keynes' Iheorx'.
The writer chooses 4 countries to analyze, in which 2 countries pursue the social market
economy, one pursues free market eeonoiny and one pursues developed slate model.
Analyses xvill focus on Vielnam for the purpose of proposing solutions to overcome
crisis for this country. US, Japan and China will be analyzed some main and brief points.
2.1 Policy of US Government
The US government has carried out 2 actions lo prevent economic crisis:
a. Stabilizing

financial

market

With the particular reason from the national financial sxstem, US government has taken
action to rescue the tlnancial market such as: equitx purchase program xalued USD 700
billion made in October 2008 to bux shares of manx US banks. In March 2009, pour USD
750 billion into Fannie va Freddie Mae, spend USD 300 billion to bux long-term bonds
b. Stitnulating detnand
US government implement 2 demand stimulus packages, the first one in Februarx' 13
2008 after the crisis signal in 2007, valued USD 152 billion ihrough Economic Demand
Stimulus Act 2008. The second one in Januarx 2009 valued USD 787 billion
The first demand stimulus package focus on 2 solution groups: the first is to encourage
people's consumption by assisting low income people and children such as repay personal
income tax, subsidize for children under 17 xears old ($300^ child), assist those xvho get


14


trouble from subprime lending. The second group is to support companies' investment
cost such as give tax treatment for companies, allow quick depreciation.
The second package focuses on the 2 solution groups to increase government spending
(making up 2/3 value of the demand stimulus package) and reduce tax. The particular
solutions are as follows"
-

Assisting companies to create job for 2.5 million workers by lending companies tax
about $ 3000 for each newly hired employee, removing tax on profit from capital
for small and medium enterprises

-

Assisting citizens: house owners, reducing tax for individual, households and
increasing unemployment insurance

-

Investing in public work such as hospital, roads

Table 2,1: Structure of US' demand stimulus package
Unit: USD
Order Fields
Plan
Proportion of
demand stimulus
package
1
Reducing tax
237 billion

30.2
2
Education
141.6 billion
18
3
Health care
111.1 billion
14
4
Social welfare
102 billion
13
11.4
5
Building infrastructure
90 billion
6
7

Energ)'
Other
Total

58 billion
47.3 billion
787 billion

7.4
6

100%

(Source: Boris Sobolev. Obama: Change to come)
We ean reali/e that American Government has used the advices of Kexnes theorx and two
stimulus packages to stabilize total demand; hoxxever xvhile Keynes theorx just focuses on
raising total demand then American Government has tbcused more on the collapse of
financial system xvhen spending a considerable amount of money to cope xxiih this
problem,
2.2 Policy of Japanese Government
In 8/2008 Japanese Goxernment has gixen demand stimulus package of 7, 2 thousand
billion Yen equivalent to 81 billion USD. On 12/12 2008 Japan has declared nexv plan to
stinnilale economy xvith the value of 26, 9 thousand billion Yen equivalent to 302 billion
USD.


15

Japanese policies are as foUoxvs:
Support small and medium-sized enterprises
Individual support : 12000 Yen/person
Tax exemption for labors, house buyer xvith difficulties due to economic recession \
Support directly to households
Money supply to financial system
Tax exemption of roads
Melhods to encourage enterprise to employ and use labors.
Together xvith demand stimulus package, Japan also proposes policy to save financial
market xvith 10 thousand billion Yen (equivalent to about 112 billion USD) for the market
of forex and banking.
Table 2.2 : Japanese demand stimulus package structure^
Unit: JPV


No.

Sectors

Plan

1
2
3
4

Tax support for localities
Solve employment
Environment
Credit for small and medium-sized
enterprises
Consumption support and other
supports
Total

3500 billion
600 billion
800 billion
1200 billion

Density' in
demand stimulus
package (%)
48,6

8,3
11,1
16,7

1100 billion

15,3

7200 billion

100%

5

(Source: China daily: Japan unveils stitnulus package)
We can see that Japan also has the similarity xvith the US xxhen using demand stimulus
policy together xvith saving financial market. In the detail of demand stimulus policx
implementation, Japanese Government also follows Kexnes theorx', out of xvhich:
Solutions to stimulate consumption of people: including individual support (the
elderly) of 12 thousand Yen (il is considers lo be failed due lo polilical purpose); direct
support to households, tax exemption for labor, support lo buy house.
Solutions to stimulate spending lo invest in enierprises: encourage enierprises to employ
and use labors, support small and medium-sized enierprises xia supporting credit capital

2.3 Policy of Chinese Government
Chinese Government has approved economic stimulus package x\ ith the \ alue ot 586
billion USD (4000 billion Yuan) on 9.11.2009 after industrial gro\xih of China reduced
from 16% in 6.2009 to 8.2% in 10, xvhich xvas the loxvesl xx iihin 7 past years and export
in 10.2009 just slightly increases 19.2% compared to the same term.
Chinese economic policy before global recession in 2008 is: to maintain groxxlh and

hinder infiate. I loxxever xvhen Chinese economy gets trouble, Chinese Government has
transferred to the policy of stable economic dexelopmenl.
** The writer extracts the data of the first demand stimulus package of 7200 billion Xen to consider due to the
limitation of information of the second demand stimulus package of Japanese Government.


16

Chinese stimulus package occupies about 12.7% GDP ( according to adjusted GDP in
2008) xvhich xvill be implemented xvithin 2 years xvith three groups of demand stimulus
methods.
People-oriented consumption stimulus:
Chinese Government considers the demand from 800 million rural people is one of factors
that actively use domestic products and increase real demand for the economy; it is the
demand stimulus method to create high effect then the Government has basic policies to
improve people's living standards via increasing social welfares, constructing
distinguishing support programs for farmers; encourage spending by reducing tax;
spending for rural area occupies 700 billion Yuan.
Stimulus to invest in enterprise :
Encourage the banks to lend small and medium-sized enterprises; tax exemption for such
enterprises; implement financial melhods such as loosening credit, loxvering basic interest.
Besides, with regard to export enterprises. China also has private polcies such as
increasing import and export lax refunding for textile, electronic sectors; encourage
enterprises that uses many labors.
We can realize that China is also very clear xvhen orienting the target into small and
medium-sized enterprises which have about 4.3 million enterprises, 95% export activities.
which contributes 60% total CJDP, 50% lax income, 68% export source and solve 75%
new jobs each year.
This policy has reached three criteria of Keyness, especially the norm of right object.
Solution via investment spending of Government:

Chinese Government focuses on spending lo support natural calamity (earthquake in Tu
Xuyen province - this item occupies 1000 billion Yuan, equal lo 25% tolal demand
stimulus package), to invest infrastructure especially traffic infrastructure. According to
statistical data, spending to dexelop infraslruclure is 1500 billion Yuan, occupxing 38%
lotal demand stimulus package.
Besides, Chinese Government also has many policies to increase spending to invet in
education xvhich focuses on vocational Iraining.
Table 2.3 : Chinese demand stimulus package structure
Unit: \ uan

No.

Sectors

Plan

1

Adjust consequence of natural
calamity in Tu Xuyen province
Housing for rural area
Raise capacity for rural area
Social welfare
Construct infrastructure

1000 billion

Density in
demand stimulus
package (%)

25

400 billion
370 billion
150 billion
1500 billion

10
9
4
38

2
3
4
5

1

1

6
6

Sustainable development and other
support
New technolog) and industry
Total

210 billion


5
1

1

370 billion
586 billion

9
100%

(Source; Report of Zhang Ping al Conference on national dexelopmenl and innovation of China)


17

We can see that, in spite of following the principle of demand stimulus of Ke>-nes. the real
amount of money is not much. Chinese Government has spent most of money to save
natural calamity (25%), infrastructure investment (38%) (mainly to develop highxvay
system - this investment not meet the fast criteria), investment in rural area to improve
development difference (9%). And it seems that Chinese Government has combined wilh
many other problems (not merely to save economy urgently) via stimulus package of 4000
billion Yuan.
2.4 Policy of Vietnamese

Government

Crisis reality in Viet Nam and influences of crisis
Viet Nam does not receive internal impacts from banking system as other nations in the

world due to uneomprehensive integration and participation into MBS and CDS like the
US and European countries, however just like other nations, influence of intemational
marker, especially from American market has impacted on financial and currency market
of Viet Nam.
Such impact has made economic groxvth rate slow. At the beginning oflhe year 2008,
growth rale of GUP expected to be 8.5 - 9%, hoxvever in 2008, GDP of Viet Nam just
increases 6,23 % and in 2009 il increases 5,32% , which is the lowest level within 10
recent years.
The crisis has impacted on Vietnamese export inlo the US xxhich is one oflhe biggest
market of many Vietnamese products such as textile, leather shoes, seafood...cuiTcnlly,
American market occupies aboul 21-22% Vietnamese export tumoxer ( data in 2008).
Besides, the next export markets of Viel Nam are l^U and Japan which arc also impacted
then export turnover of such nations also reduces.
Crisis also impacts on capital market of Viel Nam; security market also reduces strongly;
foreign investors oecupx' aboul 20% capital which are ready to x\ithdraxv capital then
capital mobilization from foreign banks is more difficult then capital of domestic
enterprises is also narroxved doxvn, and interest is increased highly.
ODA and FDI are also reduced because foreign enterprises or goxernments get ditficullies
in their oxvn nations.
Under the impacts of global financial crisis, right al the first quarter of 2008, Vietnamese
Government has quickly given many solutions to prevent.
Policy of Vietnamese Government
On 11/12/08, the Government has promulgated Resolution No. 30 2008 NQ-CP on 12
solutions to prexent recession, maintain economic growth rate and ensure social security,
including 8 solutions lo promote the rale of Governmental spending.
On 13/01/09. financial ministry had promulgated Circular no. 03/2009TT-BTC on
reducing 30% CIT in quarter 4/2008 and in 2009 tor enterprises w ith charier capital of not
more than 10 billion dong or enierprises with contract labors of above three months of
quarter 4/2008 not more than 300 people. Besides, the Goxernment also implements other
methods such as loosening currencx' poliex' (reducing interest; increasing monex supplx

via reducing compulsorx slore rate...); adjusting exchange rate of VND'USD to stimulate
export.
We can synthesize policies of Viet Nam Government via the tblloxving table:


Table 2.4 : Synthesize policies of the first demand stimulus package of Viet Nam
Financial policy
Reduce 30% CIT.
Extend 9 more months for paid tax in 2009.
Refund 90% VAT for exported products.
Currency policy

From 1.2008 to 1.2009, Viet Nam State's Bank has reduced basic
interest rate 6 times lower, from 14% to 7%.
Compulsory store reduces 1% for VND and 2% for foreign
currency.
Expand exchange rate fluctuation of VND/USD to 2% in 11.2008,
to 3% in 3.2009 and then lo 5%.

Social policy

Support 4% interest rate for credit items issued within 8 months
maximum from 1.2.2009 lo 31.12.2009
Unemployment insurance since 1.1.2009.
Support loans w ilhoul interest tor enierprises to pay salary,
insurance and unemplovment benefit for labors.

Then with regard to Viet Nam. we have the following conclusions:
Viet Nam has used three groups of demand stimulus:
People-oriented consumption stimulus:

With this melhod. Vietnamese Government has divided clearly two groups of method
applied to two different groups of object: the poor and the whole people in general.
- Policy for the poor:
This is fragile object when economic crisis happens. Risks of such object are salan. debt,
salar\' reduction and unempknment.
The outstanding polic)' for this group of object is uncmplo>ment benefit.
Until 1.1.2009 unemployment benefit is officially implemented and one \ear later, when
labors and go\ernment contribute enough 1% salar> within at least 12 months then
spelldin^ items from unemplo\ nient benefit can promote its own effect.
According to a study on the effect of demand stimulus policies then unemplo\ment
benefit is to create a maximum demand on one dollar of stimulated demand.
On the other hand, this polie> has helped Vietnamese Go\ emment to create equal factor,
ensure social securitN then create stable psycholog\ for people.
With rcard to de\ eloped nations, the sNstem of unemplo>menl benetit is considered as a
tool of iuitomatie absorption for the cconom>. it means that when the econom> develops
strongiN and unempkn nient rate reduces, funded cash flow is higher than spent cash fiow
then it will reduce total demand.
On the contrarv, when the econom> gets recession, the unemploxed receives mone> from
budget then it can reduce their difficulties and picN cnl total demiind from fast reducing .
'" "unemployment benefit skips the chance to change". Sai Gon Marketmg. 12 I 2009.


19

Table 2.5 : Stimulated effect
Fiscal Stimulus
Unemployment benefit
Exemption of budget income for the States
Tax refund for once
Increase tax credit for family with children

Adjust minimum tax level
Reduce tax
Elastic tax for small enterprises
Reduce tax for dividend and interest on
capital
Reduce property tax

of demand stimulus policies''
Demand on one stimulated dollar
$1.73
$1.24
$1.09
$1.04
$0.67
$0.59
$0.24
$0.09
$0.00

- Policy for the whole people:
Vietnamese Government has implemented the policy of elastic individual income lax (to
the end of 5.2009). This is the private policy which is implemented by financial ministr\';
although the system of individual income tax of Viet Nam is not completed and elastic tax
is noi Ihe direct form of consumption stimulus, this policy has crealed positive
psychological effect and people can increase spending.
Vietnamese Govemmenl has applied Ihe policy of delayed income tax from securities.
This policy has impacted on securities investors, at the same time it is also the solution for
stimulating capital market.
Besides, the policy to reduce VAT for 19 groups of products from 1/2/2009 to 31/12/2009
is also a Governmental method lo encourage consumption.

Stimulate lo invest in enterprise
Vietnamese Government has spent most of stimulus package for in\eslmenl in enterprise;
according to statistics via table then supporting interest rale for credit loans occupies
17.000 billion, implementing tax reduction policy: 28.000 billion and increasing debt
balance of credit guarantee for enterprise occupies 17.000 billion.
Such policies are implemented \ ia reducing tax by many forms lor enterprise, at the same
time encourage enterprises to implemenl new invested projects, increase emplo\ ment of
workers via supporting interest rate.
Currencv poliev :
Table 2.6 : Policy to reduce basic interest and realistic interest rate of saving and
lending in 2008

II

The center to study policy and development 2009. "Demand stimulus policy in Vietnamese background"


20
29\
14ô

10H

ã29%

3ô
OH

/ X/.X/.^.^^'^/X/
-Bisir Rjif


RcOiiaDcioglDicrfM

Rcdiicoaot iDtcrfii m e

Basic rate is lowered wheo the ecooomic don-ntum

«*-Dc^Mit rair

—Baiit rate Utdifis riif

Deposit rate and Lendise rate have Tallen

( Source : Report on market study of Habubank securities in 2009)
When currency policies are done, investment channel for depositing in 2008 was not
attractive any more then people and enterprises have implemenied olher replaced
investment channels.
When basic interest reduces (6 limes of adjusted reduction), interest for lending (for
people) and investment lending (for enterprise) in Viet Nam have also reduced. This will
support people to spend more, enterprise will be encouraged to expand production and
recruit more labors.
Policy lo support ¥% interest rate:
This policy is less applied by nations due to the worr}' of infiate and direct interference
into exchange rale.
Such solution has well implemented two principles of'Tast and short term" although the
supporting 2% interest rale in the second stimulus package has made this solution lasted
one more year. The principle of right object in this solution has not shown the right spirit
of Lawrence Summers - right spending and spending all demand stimulus quanlit). If the
loans come to the enterprises that really need capital and use man\' labors then it can reach

high effect, "but if enterprises, especially big enterprises wilh capital deficit that use old
debt reversion for loans wilh high interest to enJo\ lower interest then the profit of such
solution is to save but not stimulate demand"
Fituwcialpolicy: reduce tax and extend the lime to pay tax for enterprises. This is a useful
melhod which can help enterprise to maintain or expand production. However, this policy
has reduced income for State's budget which can impact on other spending of
Government. On the olher hand, supporting without selection for all enierprises can make
effect of such policy reduced.
Policy to encourage export support:
Viclnamese export has big mechanism in GDP ( occupying 77% GDP in 2007) which
had stronu reduction in 2()()8 and 2009: Go\ernment has implemented one more solution
for enterprises which is to refuiKl tax temporarily 90% for exported products.
According to Keynes, niethods to encourage export should focus on sectors \\ ith the
highest domestic rate (such as seafood...) to have the highest total demand''(according to
the following lormula of Ke>nes k = 1/[(1 - c) + {e - m)] ) . Although Vietnamese
Government has not indicated this. Governmental agencies also implement methods to

i :-

v a Ttij Thuy Anh. "Problems of the first demand stimukis package - experiences for demand stimulus polic) in

Vict Nam".
• ,,• vi
" Ngu>en Hoang Hao.ct al. "Keynes theory, arguments and prevent economic recession in Viet Nam


21

encourage export support such as support to look for new export market.. .especially
export of seafood and agricultural products.

Besides, some other methods to help enterprises reduce labor dismissal such as: reducing
contribution of enterprise in social insurance, unemployment benefit...to reduce labor cost
for enterprise.
Solutions to stimulate investment spending oflhe Government
Vietnamese economic stimulus package focuses on the method to stimulate Governmental
investment spending such as deposit of Staters budget for urgent project: 37.100 billion.
Such policy is implemented for :
•
Spending lo invest in rural infrastructure: this policy can reach 3 criteria: fast
(Government gives priority to invest in small projects, especially rural traffic and system
of agricultural irrigation to quickly implement and fulfill), right object ( support t o '
improve competitiveness of agricultural products) and short term (projects will be finished
after a year of implementation).
Together with this policy, Government supplemented one solution to buy agricultural
store for national store, at the same time, reach the target of Governmental spending and
promote rural labor market.
Spending for education: applied methods such as increasing infraslRiclure for schools,
especially difficult areas, raising salary for teachers, increasing scholarship..
This policy will help enlerprisc to ensure the time of economic stimulus and ensure long
term personnel vision.
Table 2.7 : Structure of Vietnamese first demand stimulus package
No.
Sectors
Plan
Density in
demand stimulus
package (%)
1
Support interest rate for credit loan
17.000 billion

10,7
Temporarily withdraw capital for
3.400 billion
2
2,1
basic construction in\ cstmcnt
23.2
Deposit State's budget to
37.200 billion
3
implement some urgent projects
18.9
4
Transfer capital from 2008 to 2009 30.200 billion
12,5
20.000 billion
5
Issue Governmental bond
6
7
8

Implement the policy to reduce ta.\
Increase debt balance for credit
guarantee lor enterprise
Other items of demand stimulus to
ensure social security
Total

28.000 billion

17.000 billion

17.5
10,6

7.200 billion

4.5

100%
160.000 billion
( Source: Report of ANZ bank)
Wilh expected GDP in 2009 of 1.600.000 billion, the rate of stimulus package value
compared to CJDP of Viet Nam occupies 10% which is \er>^ high compared to other
nations.
Table 2.8 : Scale of budget spending compared to GDP of \ iet Nam and some Asian
nations


22

Unit: %
Nation
China
Hong Kong
Korea
Taiwan
Indonesia
Malaysia
Philippine

Singapore
Thailand
Viet Nam

1990
18,5
14,28
15,54
14,48
19,6
27,68
20,4
21,3
13,94
21.89

1995
12,18
16,42
15,76
14,39
14,68
22,07
18,17
16,1
15,35
23,85

2000
16,29

17,71
18,91
15.41
15.83
22,89
19.27
18.84
17.33
23.36

2006
19,2
15,83
23,6
15,9
20.07
24.92
17.31
15.8
16.38
27.79

(Source: Report of ADB in 2007)
We can realize that Vietnamese budget spending is about 30% GDP, which is two times
higher than Singapore and the highest within 10 nations in statistics.
Stimulus package spending occupied 10% GDP (the first stimulus package) will make
budget decifit of Viet Nam more complex and lose balance in economy.
According to experiences from economic recession in 1930s indicated by H.W.Amdt in
the book so-called "' economic lesson of 1930s" which was published in 1944 then "the
recession had made lolal national income from lax reduce at the lime when the authority

must spend more to save unemploN nient and olher objects. Although budget decifit will
happen, nations still try lo maintain their own income and reduce spending lo the lowest
level to balance budget"'^ then we can sec that losing balance in economy via losing
budget is really a trouble.

CHAPTER 3 : THE ROLE OF STATE AND METHOD TO
SOLVE CRISIS
3.1 The role of the State in crisis
In Keynes theoiy, the role of the State in sohing crisis is very important which cannot be
denied.
The role of the State is mentioned in two aspects: positi\e participation of the Government
and Governmental spending.
a. Positive participation of the Government
Unlike the viewpoint in uhich the role of the State just hinders the process of natural
purification of technology, management capacity, production and allocation scale of
invisible hand; market econom> just keeps enterprises with effective trading: realit) of
two crisis (economic recession in 1930s and economic crisis in 2008) has proved that:
when the economy loses balance, active and positive interference of the State in economic
"John 2009, p24