Bellerbys Economics - Mr Stephenson

Wednesday, January 30, 2008

Vietnam Inflation

Vietnam's economy is booming at 8.5% economic growth this year - but a good deal of this growth appears to be coming from easy access to credit. The main problem is that with interest rates at 8.25% but inflation at 14%, there is absolutely no incentive to save - in fact, it makes sense to borrow as the real value of your loan will shrink with inflation.

Consequently, borrowing last year increased by 37% - and believe me it wasn't spent on Vietnam's still rather shaky infrastructure. At the same time, inflation has been fuelled by rising food prices (wheat, pork), the price of imported oil (nearly all of Vietnam's oil has to be imported) and the extra borrowing has also fuelled house price inflation.

Aggregate demand shifting to the right; and aggregate supply shifting to the left - is not a pretty combination.

The Vietnamese government has promised to increase interest rates further - but it probably needs to do more than this - for a start, it could make it much easier to do business in the country. Instead of having to obtain a licence to start a business (a long drawn out procedure involving many visits to officials), it could make it a natural right for any Vietnamese to start their own business (or even more than one business) whenever they want to. This will increase the supply of goods and services dramatically - in fact, it's probably the most basic supply-side policy of all.

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