The path to economic recovery and further growth

Prof. Dr. Andreas Stoffers Friedrich Naumann Foundation for Freedom in Hanoi

Vietnam’s response to the looming pandemic was swift, forceful, prudent, and successful. In contrast to some other countries, where governments have been appeasing the situation until the beginning of March, describing the wearing of masks as pointless and denying a danger, Vietnam had already positioned itself successfully at that time.

As a consequence, Vietnam was able to keep the number of infections very low. Until well into the summer there were no deaths due to COVID-19 in Vietnam, which earned the country worldwide praise for its crisis management. The fact that Vietnam’s economic growth slowed down, but remained positive, bordered on a miracle, but was due both to the crisis management and the preparatory work of the previous years of liberalisation and stabilisation of qualitative growth.

The figures are remarkable: in the second quarter of 2020, Vietnam was still able to record economic growth of 0.36 per cent on-year while the EU suffered losses of 14.4 per cent on-year and the US 9.5 per cent on-year.

Global fiscal dangers

In the wake of the pandemic, balance sheets of leading central banks exploded. Since March the Fed’s balance sheet has risen from $4.1 trillion to $6.9 trillion, while that of the European Central Bank (ECB) has risen from €4.6 trillion ($5.44 trillion) to €6.3 trillion ($7.45 trillion). The central banks in the UK and Japan have experienced similar growth, albeit at lower levels.

The State Bank of Vietnam pumped at least $2.4 billion via the purchase and sale of securities in April and May into the market. The growth of money supply increased rapidly from February (0.94 per cent) to June (5.15 per cent). Interestingly, that is much lower than the growth levels in the previous year and most likely driven by the fear of inflation.

The ECB and the Fed have increased their assets around 5-7 times since 2008. Today’s sums correspond to a share of assets of major Western central banks in GDP (in 2019) of the respective economic areas of 53 per cent (Eurozone) and 30 per cent (the US). These ratios are likely to be much higher in 2020 as the economy shrinks while balance sheets grow.

In the West, central banks mainly increased the money supply to buy government bonds and thereby buffer debt-financed government spending during the economic crisis. They also print money to buy foreign currencies and thereby depress the value of their own currency, trying to create export advantages.

The central banks now print money to provide the states with credit, which they receive when the commercial banks buy government bonds with central bank money or when the central bank buys government bonds directly. Some governments use the money to partly nationalise companies, provide them with credit, and finance social welfare and economic stimulus programmes. But there are also disadvantages associated with this.

When GDP declines, the supply of goods and services decreases. But if the money supply expands at the same time, prices rise and money loses value. Until now, in Western countries inflation has mainly taken place in the real goods sector. Now, in addition, the shopping basket of the consumer will soon become more and more expensive.

While the purchasing power of income has so far only been reduced rapidly for real estate, shares or commodities, the purchasing power of everyday goods will most likely decrease significantly over the next 6-9 months. Inflationary expectations and mistrust in the strength of the currencies can arise, which is fuelling the price of gold.

Moreover, government subsidy, nationalisation, and credit programmes can further sustain economic supply structures that may not be sustainable. The effect would be a collective delay in bankruptcy and a cementing of the misallocation of resources. The process of “creative destruction” would thus be prevented and the sustainability of an economy would be endangered.

This does not mean that monetary and fiscal policy measures should not be used to alleviate the greatest need. Rather, it should be borne in mind that interventions should only be very limited in time and extremely cautious.

In Germany, for example, due to the certainly justified protection of small- and medium-sized enterprises (SMEs) from the consequences of COVID-19, emergency aid was paid out and the insolvency law was partly suspended (meaning obligatory timely notification of insufficiency) until the end of September.

On the one hand, this helps to ensure the survival of otherwise healthy companies and to prevent a sell-out of company knowledge to foreign countries at bargain prices. On the other hand, it allows companies that have managed soundly and innovatively to face the state-pampered competitors they thought they had already overcome.

In addition, companies that are actually not viable and that are still in the market only because of the postponed announcement of an insolvency can drag other healthy companies down with them. The German credit agency Creditreform estimates the number of these “zombie companies” to be 550,000 by now. If the suspension of insolvency reporting is extended until March 2021, up to 800,000 companies in Germany alone could be among these apparent deaths and massively disrupt the hoped-for economic upswing.

Repositioning for Vietnam

In the last few months I met several economists, became a panelist at discussions, and held talks with businessmen from both Vietnam and the EU. Moreover, FNF Vietnam conducted some of its own research. I am convinced that Vietnam will emerge stronger from this crisis if it takes the right path and follows certain recommendations.

Firstly, emergency aid for citizens and businesses in need through no fault of their own is out of the question. However, all fiscal and monetary policy measures should be made with great care. A purely Keynesian distribution of money to increase demand in the form of helicopter money would have a negative impact on the Vietnamese economy in the medium and long run. Instead, government measures should serve to increase supply and flow into improving production, especially in terms of quality and sustainability. SMEs in particular should receive greater support in order to increase their resilience.

Secondly, the crisis will inevitably lead to the insolvency of some enterprises. If these companies are otherwise well positioned and viable for the future, state support may be appropriate for a limited period of time. If companies lack these prospects and business models, there should definitely be the possibility that they will clear the way for new, better ones that can powerfully follow the path of the Fourth Industrial Revolution.

Next, the Vietnamese are thinking about a second package for saving the economy after the pandemic. The first one (including $13 billion for payment restructure, loans, $2.7 billion for “helicopter money”, and $7.8 billion for enterprise loans) did not seem to work well. There are over 32,000 businesses out there that ceased operation. The second package could be at least $3.4 billion, but it is open in which way it should be spent. Restructuring loans, deferred payments, and tax reductions are better ways than just printing money.

In addition, monetary policy should also not follow the false path of “modern monetary theory”, according to which government debt is available at no cost. There is no free lunch. The previous path of cautious interest rate cuts is going in the right direction, but it should by no means approach a disastrous zero-interest rate policy that destroys the banking system and creates zombie companies that only survive on free debt.

Fourthly, the path of consistent liberalisation of the economy, as Vietnam has been pursuing since the 1980s, must continue – despite all protectionist siren calls in the world. The newly-implemented EU-Vietnam trade pact is an excellent approach for Vietnam to reposition itself after the crisis and take a pioneering role within ASEAN.

Finally, the phrase “knowledge is power” counts. Education plays an essential role in Vietnamese culture and, in addition to practice-oriented university teaching, especially in core subjects, vocational training should be promoted more strongly as an attractive alternative.

In its many thousands of years of history, Vietnam has overcome many crises that were significantly more severe than the current one. If the country continues on its current liberal economic path, it will improve its position in world markets in both the medium and long term.