Inflation and Its Impacts on Vietnam Essay Example
Inflation and Its Impacts on Vietnam Essay Example

Inflation and Its Impacts on Vietnam Essay Example

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  • Pages: 8 (2098 words)
  • Published: December 14, 2017
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1. Introduction Inflation - a global phenomenon is becoming a burning issue in many countries all over the world today. The Oxford® Dictionary of Business presents the following definition for inflation: “A general increase in prices in an economy and consequent fall in the purchasing value of money. ” In Germany in January 1921, a daily newspaper cost 0.

30 marks. Less than two years later, in November 1922, the same newspaper cost 70,000,000 marks. All other prices in the economy rose by similar amounts.This occurrence is one of history’s most spectacular examples of inflation, an increase in the overall level of prices in the economy (Principles of Economics, N.

Gregory Mankiw, Chapter 1, p. 13). When prices go up, the cost of money decreases and your purchasing power consequently goes down. For example, with

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3% inflation, the price of a $100 T-shirt today would be 103$ next year. In short-term, inflation may seem not worth mentioning; however, in long-term it will lower the standard of living.

According to the example above, with just 3% inflation annually, in 20 years you will need a whole of $180 to buy the same T-shirt.That means over that time, if your income cannot follow the price, you may be at risk of financial problem. Currently, inflation is also a big trouble in Vietnam as well as Asia countries. Vietnam’s government estimated that the inflation rate in April rose to 21. 42 percent, the sixth consecutive month of significantly increasing and among the highest rate in Asia (Vietnam’s inflation hits 21. 4 percent in April, Thanh Nien Daily News, April 26, 2008).

Such hazardous situation has drawn great attention

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of authorities and general public on account of its severe impact on the economy in general and on people’s life in particular.This paper, with the purpose of giving the background knowledge of inflation, discusses the questions of what causes the high inflation, how inflation affects our economy and social life and what are the solutions as well as suggestions to solve this serious problem. 2. Discussion of findings 2. 1.

The causes of the high inflation Unfortunately, there is no generally conventional cause of inflation; however, there are two explanations economists offer: demand-pull inflation and cost-pull inflation (Foundations of Economics 2nd Edition, Michael Parkin and Robin Bade, 2006). “Demand-pull” inflation can be described as oo much money followed by too few goods. The idea here is that there are times when people have the means and desire to buy more goods and services than the economy can create. They are willing to buy commodities and purchase services and hence, they are ready to spend more money on their need. Because demand is high and supply is limited, prices are bid up, resulting in higher inflation. The three most likely causes of an increase in aggregate demand will also tend to increase inflation: increases in the money supply, increases in government purchases and increases in the price level in the rest of the world (Cost-push inflation vs.

Demand-pull inflation, Mike Moffat, About. com: economics). The second cause is called “cost-push” inflation. Demands are escalating so quickly that vendors are incapable to meet such a high demand rate. To overcome this, they need to raise their number of workers, number of machines, etc. Therefore, they must increase their

prices of goods to maintain their profit.

Again the value of material goes up and the value of currency goes down. The two main sources of decrease in aggregate supply are: an increase in wage rates and an increase in the prices of raw materials (Cost-push inflation vs.Demand-pull inflation, Mike Moffat, About. com: economics).

To base on two theories above, the cause of Vietnam’s inflation can be interpreted as “demand-pull” inflation. Dr. Thai Van Can, a consultant at the World Bank and IMF analyzes Vietnam’s contemporary macroeconomic (What caused Vietnam’s 15% inflation, Thanh Nien Daily News, March 18, 2008). According to Thai, “The root cause of the inflation is credit expansion, caused mostly by the management of large capital inflows in an environment where the exchange rate is used as a nominal anchor.

Vietnam has received considerable net capital inflows in recent years, about 39 percent of GDP (Gross Domestic Product) in 2004-2007 and 15 percent in 2007 (Thai, 2008). However, money has been directed into the stock market, real estate and other non-tradable sectors. It is the reason why land prices in major cities are among the highest in the world. Similarly, in September 2007, the stock market index was at three times its end-2005 level (Thai, 2008). Consequently, mismanagement of these capital inflows contributed to an increase in money supply and became the main cause of inflation.On the other hand, the high inflation in Vietnam also becomes worse due to slow and inefficient government’s reactions.

In an interview with Thanh Nien Daily News, H. E. Dr. Le Danh Vinh, Vice-minister of Trade stated that the government did not respond quickly and effectively enough

and that’s why inflation has raised this high. He said by the first quarter of 2008, the government realized that it was time to act but there weren’t any coordinated measures among government agencies and ministries.

Since mid-2007, policy has been used to rein in the credit expansion – by raising reserve requirement and the base, discount, and rediscount interest rates. However, the tightening of liquidity forcing banks to buy VND20 trillion (US$1. 26 billion) has badly affected the credit market. 2. 2. The impact of inflation on economy and social life Inflation is viewed as being unwelcome as a result of some serious economic and social effects.

There is a fact that high inflation has affected the living conditions of people from all social strata.Firstly, inflation impacts on income distribution by making a random redistribution of real income. In general, the pattern of income distribution tends to become more imbalanced than it was before inflation. People who receive fixed money incomes are usually disadvantaged because their incomes are not adjusted fast enough to balance for the effects of continuously rising prices. They are teachers, construction workers, pensioners, beneficiaries who will all suffer the worst consequences of inflation.

Meanwhile, people whose incomes rise faster than the inflation rate will experience increasing real incomes. They are individuals with money to buy real assets such as property, gold and antiques, which often increase in value faster than the rate of inflation. “Those dependent on assets with fixed nominal values, such as savings accounts, pensions, insurance policies, and long-term debt instruments, suffer erosion of real wealth; other assets with flexible values, such as real estate, art, raw materials, and durable

goods, may keep pace with or exceed the average inflation rate. (Funk & Wagnalls New Encyclopedia, 2006, World Almanac Education Group). In the article Vietnam Imports Inflation from VietNamNet, February 22, 2008, Phuong Loan stated that in a country with a high population and a high population growth rate like Vietnam, the number of poor people may increase with high inflation. Poor people who rely on their daily income cannot protect themselves and only a small number of Vietnamese people can make financial investments to protect themselves from price increases.

Secondly, inflation tends to increase spending and encourage borrowing as well as discourage savings. If prices are rising quicker than incomes, individuals will tend to buy at current prices before commodities become more expensive and less affordable. This action even can push the price of some goods become higher than it should be. Savings may be discouraged because with high inflation when the money saved is paid back, it can be worth much less than when it was lent and the real rate of interest may be low.Meanwhile, rising prices are a benefit to borrowers because when the cost of price decreases, the repayment is lower than real value they have to pay. Otherwise, inflation also makes people be less willing to loan out money.

They fear that once the loans are paid off, the money they receive will not have the same buying value then the money loaned. This insecurity can cause a bad effect over the development of new businesses whose finance is based on a big amount of loans.Thirdly, investment which means the creation of new capital goods can only occur if there

is saving. Inflation encourages spending and discourages savings, so funds that are needed for investment tend to dry up.

With lower levels of investment, the growth of national output (GDP) is consequently likely to slower down. This in turn leads to a decrease in new jobs and can increase the level of unemployment. Planning and investment decisions become more difficult to forecast as firms are insecure what will affect prices and costs during times of inflation.If firms are unable to pass on the increase in costs to consumers, this will impact on profits and force some firms to close or cut back production and employment.

Finally, inflation at a faster rate can harm exporters and benefit importers. It will be more difficult for exporting firms to sell their products because they are less competitive in terms of price. Inflation can decrease the international competitiveness that most governments make controlling inflation the central objective of their economic policy.Meanwhile, it is also difficult for local producers to compete in domestic markets because of cheaper foreign imports. Declining exports and increasing imports can lead to worsening in the balance of payments.

Dr Vu Thanh Tu Anh, director of the Fulbright teaching research programme in Vietnam, says that as high inflation eventually leads to high business costs and low transaction efficiency, it has an impact on businesses in different areas. Normally, exporters meet more difficulties than importers (Businesses try to minimize inflation impact, VietNamNet,April 21, 2008) 2. 3. The solutions and suggestions from authorities and experts When the high inflation is in emergency, certainly it draws much attention from the government and economic experts. Therefore, many solutions and suggestions

have been pointed out so far.

In an article published on the Vietnamese Government website, the Prime Minister Nguyen Tan Dung analyzed the reasons for current inflation and elaborated on the Government's measures to curb inflation and maintain economic growth. There are 7 proposed measures: •Tightening monetary policy Cutting down on expenses and public investments relying on the State Budget •Prioritizing the development of agriculture and industry •Balancing the supply and demand of goods to promote exports and reduce trade deficit •Encouraging thrift in production and consumption by reducing the price and saving fuel and energy •Supervising the market management to avoid goods speculation •Implementing social welfare policies and increasing salary and allowances to help poor people Therefore, controlling inflation requires much effort from the government as well as citizens to maintain macroeconomic development, ensure social welfare and sustainable growth (Seven-point plan to ease inflation, Viet Nam News, March 31, 2008). Dr.Thai Van Can, a consultant at the World Bank and IMF suggests that the government should take on reforms to direct capital inflows into productive uses.

These include accelerating the equitization of public enterprises, reforming the land use system and accelerating financial sector reform (How can Vietnam cut its 15% inflation, Thanh Nien Daily News, March 19, 2008). Businesses who are the most influenced by inflation also received many suggestions from economic experts so far to minimize the impacts of it. Dr Vu Thanh Tu Anh, director of the Fulbright teaching research programme in Vietnam suggests that the State should support export businesses in converting the US dollar into the Vietnamese dong.On the other hand, Ly Ngoc Tuan, Director General of the Vietnam Trade

and Construction Investment Company said: “I think the State should reduce inefficient projects and pour investment into projects benefiting the community. For example, we now lack power, why don’t we invest in power projects? ” Prof.

Dr. Tran Ngoc Tho from Economics University of Ho Chi Minh City also recommended that the businesses should restructure their organizations, cut down on staff to increase productivity, examine all production stages to reduce costs, increase the efficiency of the supply and distribution network while selecting highly competitive products and appropriate markets (Businesses try to minimize inflation impact, VietNamNet, April 21, 2008). 3. ConclusionIn brief, inflation takes a great influence on Vietnam’s economy and social life recently.

Today, the negative effects of inflation could be indicated in every sector of the economy, from banking, constructing to farming and textile. Therefore, battling inflation is a prioritized goal of country in this developing period. However, this is not a problem that can be solved overnight, so the government should make a correct forecast, combat inflation in a comprehensive manner and give effective instruments to citizens, businesses as well as ministries. Then, hopefully, the inflation problem can be cracked down in a short-term to stabilize the potential economy.

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