FW: INCOME INEQUALITY RE: MAJOR PROBLEM

 

“I believe this [income inequality] is the defining challenge of our time.”
Barack Obama (2013)

 

“One of the leading economic stories of our time is rising income inequality, and the dark shadow it casts across the global economy.”
Christine Lagarde (2015)

 

There is a clear recognition of the risks, dangers and the pain which income inequality imposes on society. Despite the recognition, it is a problem which seems to constantly be forwarded on to successive generations to resolve rather than finding a decisive set of solutions.

We will all do well to pay heed to the US Senator John Sherman who in 1890 when he introduced his landmark Sherman Antitrust Act said that he sought to “put an end to great aggregations of capital because of the helplessness of the individual before them” and also because he fundamentally believed that amongst all of the nation’s problems, “none is more threatening that the inequality of condition, of wealth and opportunity.”

So why does inequality matter? Why is it important that we all strive towards resolving it? Societies that are hugely imbalanced and unequal ultimately become fractured which in turn lead to painful social and economic consequences that affect everyone. Neither the rich nor the poor will be able to avoid the huge social costs of a fractured society.

The stark facts

  • 62 of the richest people in the world own what the bottom 50% of the world’s population own.

  • 1915: The richest 1% of Americans earned 18% of the national income.
    1930s to 1970s: The share plummeted and remained below 10%
    From the 1970s: The share has increased to almost 30%

  • 1980: The top 0.1% wealthiest Americans controlled about 9% of all household wealth
    2015: The top 0.1% own 22% of all household wealth.

  • USA: The top 1% of America control 40% of America’s wealth

  • Germany: Poverty has risen by half since 2000.

  • 1965: CEO pay at the largest 350 U.S companies was 20 times as high as the pay of the average workers
    1989: The figure is 58 times as high
    2012: The figure is now an astounding 273 times as high.
    (It is worth bearing in mind that Peter Drucker argued that the pay ratio between the top executive and the humblest worker should be no greater than 20 to 1.)

  • OECD: The gap between the rich and poor is now at its highest level in OECD economies in 30 years according to a report produced in 2014. The overall increase in income inequality has been driven by the richest 1%.
  • 2008: The United Nations University (UNU) and the World Institute for Development Economic Research (WIDER) estimate that the global Gini coefficient (a measurement of inequality between 0 – representing complete equality and 1 – representing complete inequality) was 89.

    An alternative way to interpret this is that in a population of 10 people, if one person had $1000, the other nine have only $1 each.

  • 2014: The Credit Suisse Global Wealth report estimates that that the richest 0.7% (who hold over US$1 million in wealth) held 44% of the global net worth.

Some context

The economic success stories of many countries hides a dangerous truth – that a significant majority of economic gains are going to those at the very top of the income distribution whereas those lower down have seen real incomes stagnate or diminish.

This has in turn perpetuated further inequality as those in a position of privilege often use their wealth and influence to shape policies that further increase their concentration of power. These policies have not necessarily been in the interests of those lower down the income ladder.

A research conducted by Martin Gilens, a political scientist at Princeton, lends credence to the notion that the US government responds more positive to the most affluent ten percent of Americans whilst “the preferences of a vast majority of Americans appear to have essentially no impact on which policies the government does or doesn’t adopt.” (A video of Gilen’s lecture can also be viewed here.)

The erosion of the social compact

This wasn’t always the case though. Whilst there has always been inequality, it has never been to this extent or been as pervasive. There was also more concerted effort to reduce the level of inequality and dampen its deleterious impact on society.

The experience of the First World War revolutionised American attitudes towards taxation and redistribution of income. When the War Revenue Act of 1917 was passed, there was talk of “conscription of income” and “conscription of wealth” at a time when young men were enlisting en masse. “Let their dollars die for their country too,” one congressman said. The call for fiscal patriotism helped legitimate the progressive income tax in the United States, and by 1944 the top marginal rate had risen as high as 94 percent.

Across Europe, a fear that the lack of reform could lead to social and political turmoil and the horrors of two World Wars meant that policies such as social insurance, minimum wage, a strong welfare state and progressive income tax were implemented leading to more egalitarian societies and economies.

inequality 2The experiences of global ears produced visions of a social bond holding countries together and nurtured the notion that every single person owed a debt to the welfare of the broader community and society.

However since the 70s, the disappearance of these conditions has meant that the support for egalitarian public policies has also diminished.

We now live in a world where even high skilled jobs are being commoditised so that even highly educated workers are not making sufficient progress as gains in economic growth are limited to a very elite group of financiers, entrepreneurs and managers. In the past only unskilled workers lost jobs to automation, now even highly skilled occupations are at risk with the advancement of artificial intelligence, robotics and automation.

The social structure of Silicon Valley provides us with an instructive view of the future: One where expert systems have replaced the majority of people and a tiny but well-remunerated minority direct the economy whilst the majority exist to serve them alone.

The conflict is no longer just between the working class and the middle and upper classes – it is now between a tiny elite and the great majority of citizens. As the majority develop a sense of common interest, or what Marx may have termed ‘class consciousness’, the need to resolve inequality will become more acute as the resentment of it intensifies.

 

What happens when income inequality starts to become entrenched?

  • Health: Societies that are more unequal tend to have lower life expectancies, higher infant mortality, higher levels of infant mortality and high levels of diseases and conditions such as HIV/AIDS.
  • Human capital development: As inequality rises, scores on the UNICEF index of child well-being become significantly worse. Literacy rates are also lower and youth unemployment also becomes a major issue. A higher level of equality also leads to a greater level of innovation as a result of greater access to opportunity.
  • Social mobility: Inequality restricts social mobility – equality of opportunity is enhanced by greater income equality. Reduced social mobility further exacerbates income inequality and this becomes a vicious spiral from which an effective functioning economy becomes more and more difficult.

    inequality1 2
    (C) Walt Handelsman
  • Economic progress and stability: An IMF report highlights that by reducing inequality and bolstering longer term economic growth are “two sides of the same coin.” In both rich and poor countries, inequality is strongly correlated with shorter spells of economic expansion and growth over time. Unequal economies are also more susceptible to severe boom-and-bust cycles leading to greater volatility and crisis. Extreme levels of income inequality depress economic growth. An OECD report estimates that inequality has had a cumulated loss of GDP across OECD economies of 8.5% over twenty-five years.
  • Social challenges and issues: Inequality breeds corruption. Unequal societies also lead to greater economic instability. If one considers the root causes of the Arab Spring, the lack of economic opportunity or equality is one of the main drivers leading to revolt.

A blueprint for change and resolution

The solution and change required for income inequality is not a zero-sum game. There will be those who are impacted more than others, but it is essential in calibrating the world in a more equal way.

It is very easy to be dangerously complacent and ignore equality, but chronic economic inequality hurts everyone, both the rich and the poor.

Resolution of a problem like inequality requires a revolutionary approach. We need to accept a fiscal revolution or risk a social one.

I’ve highlighted below briefly some key practical steps that need to be considered as we seek an urgent resolution to the problem of income inequality.

  1. Tax reforms – Income taxes need to be more progressive (the way they were previously in times of greater equality). There needs to be a reform in the way the transfer of wealth is also taxed. The OECD has suggested that attempts to reduce inequality tax and transfer policies will not harm growth as long as the chosen policies are well designed and implemented. The OECD further argues that redistribution efforts should focus on families with children, on the youth and the improvement in human capital investment through the promotion of skills learning and development.
  1. Continued focus on economic growth and employment – Policies targeting economic growth need to continue as growth ensures jobs are created and ensures employment. Employment will support social mobility which is essential to the reduction of inequality.
  1. Ensure emphasis on social mobility – Social mobility is a key driver towards the reduction on inequality. Emphasis on education, skills learning and development is vital to support social mobility.
  1. Support small savers and small businesses – Policies should not be tilted towards just merely taxing the rich but also be aimed at increasing the wealth of small savers and businesses. For instance we should consider the introduction of accounts for small savers and businesses that guarantees positive returns in excess of inflation. It is also a widely observed phenomenon that lower income families borrow more to support their consumption and this in turn creates a systemic risk.
  1. Enhanced social policies – Governments and policy makers should also consider more directed interventions to enhance the social conditions of lower income families. For instance, in the UK, the Child Benefit offers a weekly allowance to parents for every child they raise. The transfer could be better targeted by making the income taxable as personal income, which will reduce the size of the benefit for those in higher tax brackets or who do not have face any other mitigating circumstances. In the UK, child poverty has dropped sharply whilst in the USA; it has risen by a third between 1969 and 2013. A child-benefit programme will help make a major dent in child poverty and also represent a powerful investment in the future. Introducing a child-benefit program in the US will make a major dent in child poverty and represent a powerful investment into the future.
  1. Minimum wage – Governments should also take an active review of the minimum wage policies in their countries and recalibrate them to local conditions. There is always a temptation to keep minimum wage lower because neighbouring countries are keeping theirs lower, but this beggar thy neighbour policy will not benefit anyone in the long run. Countries that make the effort to ensure greater equality will be healthier in the long term.
  1. Automation and technological change – Governments should take an active interest in the direction of technological change. It is mostly governmental grants and labs that are responsible for the underlying research that has led to the progress in automation and technology and they therefore have the right to ensure a clear review is undertaken to mitigate the social impacts of technological change through appropriate fiscal and taxation policies.

It is crucial that we as a collective rise up to face the challenges of income inequality and work closely to create a more equal society. The corrosive impacts of inequality will affect us all and the sooner we can find solutions to achieve an equal society, the better, for all.

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Muzzling a rockstar central banker – the Indian way

This article reflects only my own personal thoughts and do not reflect the official position of any other organisation. Responsibility for the information and views expressed this article lies entirely with me. 

The news of the resignation of India’s central banker Raghuram Rajan has unsettled Indian investors, and rightfully so.

Rajan was one of India’s best central bankers and was a cornerstone in driving the Indian economy over the last three years.

Here is a man who in 2005 at a conference in Jackson Hole made some prescient statements about how financial developments have made the world a riskier place and called out the systemic risks posed by banks to the global economy. (His speech can be found here: https://www.imf.org/external/np/speeches/2005/082705.htm). He was derided as a luddite who was misguided. However, the developments of the 2008 financial crisis proved him right and a number of his proposed safeguards have since been implemented.

Some may question why the current Indian administration has removed a man who is widely recognised as an architect of India’s growth story.

It goes back to 2014, when Rajan questioned Modi’s “Make in India” campaign and cautioned against “against picking a particular sector such as manufacturing for encouragement, simply because it has worked well for China. India is different, and developing at a different time, and we should be agnostic about what will work.”

Last year, Rajan also questioned the rising of sectarian tensions and intolerance propagated by factions associated with the currently ruling government.  In a speech to the Indian Institute of Technology last October, Rajan lambasted the rising intolerance and stated: “India has always protected debate and the right to have different views. Excessive political correctness stifles progress as much as excessive license and disrespect.”

This is consistent with the pattern of behaviour displayed by the current Indian administration .

What have Modi and his administration achieved in the last two years:

 

So what does this administration do in response? Remove one man who can help make a difference and help improve matters.

Another great article here: By getting Raghuram Rajan out, Modi may have won, but India has lost

I am genuinely concerned at the state of affairs in India and despite the sometimes effective PR campaign Modi’s government may run, the cracks are beginning to show.

India’s always been a home to alternative thoughts, ideas, ideologies, religions, faiths, beliefs, ethnicities and ways of life. We have been a beacon of hope and democracy for all and it is very sad to see the very edifices of inclusivity and secularism crumbling.

 

 

Greece – Defiance in the wake of economic and policy waterboarding

The events overnight in Brussels have been nothing short of what can only be considered as a brutal attack against the Greek government and its people.

Watching the images of the embattled Tspiras and Tsakalotos, the new Greek Finance Minister, struggling in meetings with Merkel and the rest of Europe’s leadership, while doing their best by the people who elected them and also gave them a clear ‘No’ vote last weekend, was painful.

However, despite the struggles, I cannot but feel a deep respect for the Greek government who are trying valiantly to hold things together in the face of such steadfast adversity.

Germany and a raft of other nations are demanding that Greece pass a whole series of legislative reforms in the next 72 hours before they extend any credit lines. Some of the bills being demanded include:

  • VAT reforms
  • Changing the pension system
  • Implement spending cuts
  • Increasing the tax base
  • Establishing greater independence for the national statistics office
  • Privatising the electrical grid.
  • Return of the ECB, IMF and the European Commission to Athens

How this is meant to all be realistically debated, agreed and passed by the Greek Parliament in 72 hours is ludicrous. In essence, a gun is being held to Athen’s head and a series of demands are being made which, if not met, will lead to an economic and social collapse in the country. In circumstances such as these, what options do the Greeks really have?

Privatising national assets worth €50B

Amidst these changes, there is also a plan by the European Commission to privatise €50B worth of Greek national assets and use it as a trust to pay off their debt! Again, this is an example of a country that’s down being crushed in an absolute and merciless manner.

This call towards privatisation is worrying. If all basic services are privatised, who is going to buy over these national services and run them? The Greek people, already suffering from a 25% contraction of their economy over the last few years, massive unemployment and falling pensions, will be dealt with possibly higher prices and debt! How is this going to realistically alleviate the conditions of the Greeks?

The word ‘Europe’ is Greek

Where is the famed European solidarity? The European experiment was meant to be a showcase of unified achievement, progress and development. It was meant to highlight how Europe, as a whole, is greater than the sum of all its parts. However, tonight’s events have hardly been a ringing endorsement.

To their credit, Hollande and Dragi have been fighting Greece’s cause and maintain a united Europe, but it is a fight they are surely losing.

The IMF is also seeking to replace the Tspiras government with one that is more likely to carry out the painful reforms which are being demanded of Greece. If this does happen, it does make a shambles of the whole notion of democracy, ironically, in the birthplace of democracy as we know it!

What hope of espousing the values of democracy, fair-play and justice to the rest of the world which will see this and realise that in the end, the might of economic power will trample over the notions of decency and support every time.

It is no coincidence that #ThisIsACoup is trending on Twitter right now.

Indonesia’s Economy – Opportunities and Challenges – notes from a lecture by Bapak Gita Wirjawan, Minister for Trade, Indonesia

ImageS Rajaratnam School of International Studies (RSIS) Distinguished Public Lecture by Bapak Gita Wirjawan, (GW) Minister of Trade, The Republic of Indonesia. (2nd September 2013, Pan Pacific Singapore) on “Indonesia’s Economy: Future Challenges and Opportunities.”

I had the pleasure of attending the distinguished public lecture by Pak Gita last week and I wanted to share some salient points from the discussions

 

Key highlights and introduction

  • July results for trade is a continuation of the trends observed in June – and are actually worse. (There was a US$2.3 billion trade deficit in July 2013 alone – cumulative deficit of US$6 billion for the whole of 2013). (Click here to see news on the latest trade deficit)
  • Continued outflow of capital resulting in a downward pressure on the currency.
  • The ongoing slowdown in Europe and uncertainty in the US/Middle-east is also having knock-on effects on Indonesia.
  • We are witnesseing a “recalibration of the global economic outlook.”
  • However, Indonesia has seen significant progress made under the Susilo Bambang Yudhoyono (SBY) presidency – Under Sukarno’s era, the GDP per capita was around US$500 per  capita – this went up to US$1,200 under the Suharto era. However the Asian Financial Crisis in 1997-1998 had a catastrophic impact on Indonesia, where the GDP per capital plummeted to US$600 per capita. Indonesia also very narrowly avoided the Balkanisation of the country during that period.
  • After the political reforms post-Suharto, GDP climbed steadily to US$1,100 under the Megawati presidency and today (2013), the GBP per capita has just about exceeded US$5,000 per capita under the SBY presidency. This has also resulted in the increased purchasing power of Indonesia leading to heightened domestic consumption, particularly from a growing middle class.

 

Can Indonesia emerge from the middle-income trap?

  • Indonesia’s improved its policy and position in the fiscal space.
  • However in the social space, the gini coefficient (one indicator of income inequality) has risen, which implies a widening income gap and disparity. This remains a critical issue which the government needs to resolve.
  • Furthermore, there is still an over-reliance on the commodities sector which is prone to very violent swings and shocks.
  • Infrastructure development remains a challenge for the country.
  • The needs to be further work done in the educational space as well.

 

Education and the economy

  • In 15 years, there will be 150 million Indonesians under the age of 30.
  • There remains an urgent need to sharpen the educational infrastructure.
  • As GW says, “It is important that we need a good runway, not just to land, but to also support us in taking off.”
  • Between 2012-2022 – it is estimated that Indonesia’s accumulated GDP be will be over US$60 trillion – on a cumulative basis.
  • There needs to be a supply side narrative to realise this estimated accumulated GDP and that remains the challenge.
  • The SBY government leaves a sustained economic trajectory for Indonesia.

 

The woe of the number of taxpayers (or lack thereof!)

  • For an economy in the top 20 largest economies grouping – the G20 – there are fewer than 20 million tax payers! (comparatively?)

 

Indonesia and her geopolitical relevance

  • GW highlighted the example of how South Korea has used its soft power effectively (from Gangnam style to Samsung products) to drive international trade and economic growth. What can Indonesia do to achieve a similar impact?
  • GW also highlighted that Indonesia has the ability to develop a high degree of political relevance because:
    • Indonesia has the potential to serve as the ‘middle power’ to narrow the gap between the Middle-East and the West
    • Indonesia can also narrow and bridge the gap between China and the US (a slightly debatable claim?!)
    • However, Indonesia needs sustained political order in order to develop and create this geopolitical relevance.
      • Indonesia must engage in Democracy 2.0 – the next iteration of her democratic freedoms enjoyed post-Suharto.
      • Improve her manufacturing and technological sector (invest in high-quality and high-yield technology and sectors).
      • Without Democracy 2.0 – it is highly unlikely that Indonesia will sustain her political and economic reforms and progress. Areas such as corruption must be tackled with and though there has been some good initial progress, this must remain sustained for there to be tangible returns and a progressive shift.

Indonesia as the ‘middle power’

  • Indonesia believes in regional cohesion and solidatiry.
  • ASEAN is a great example of multilateralism – socio-political, cultural and economic solidarity have helped ASEAN overcome initial challenges and be a more cohesive and effective regional bloc.

 

The future of Indonesia

  • Indonesia must continue her path of bundling pluralism and democracy.
  • Economic growth must be achieved hand in hand with economic equity – otherwise the unbalanced growth will have severe social impacts and fractures.
  • Without this economic equity – all of the work being undertaken now will be an exercise in failure.
  • This will take time to achieve.
  • Indonesians have now come much closer together than ever before (Indonesia has the second highest Facebook usage and the third most users on Twitter).
  • Indonesia and Indonesians must have the ability to say and proclaim that they have the wherewithal to move on with the necessary reforms and changes required for Indonesia’s sustained progress.

 

Nepal – reflections on opportunities

Image

Having just returned from Kathmandu, I realise that it is one of the few places in the world where there is a direct inverse correlation between the temperature of the environment and the warmth of the people. The colder it gets, the warmer the people!

The purpose of this is to share some personal thoughts on how Nepal could further develop its economy and deliver on its vast potential. It is not intended to give an economic analysis of Nepal’s development, but for robust information in that area, the following link will be a good place to start: http://www.adb.org/countries/nepal/economy  

Specific areas for development

  • Improvements in airport infrastructure and management (in brief: outsource to external private contractors)

The airport management system at Nepal currently is not optimal nor ideal to support increased volumes of tourist arrivals. The immigration queues are normally snaking through the entry doors and it takes an excessively long time for individuals to clear the airport customs. Airports tend to provide the first view to a new tourist and shape one’s own perceptions of a country. First impressions tend to be lasting ones.

Airport infrastructure improvements are extremely financially incentive affairs and governments often find it difficult to raise necessary capital and finances to support the required improvements. However, one possibility the Nepal government can consider is to outsource the management of the airport, immigration and customs duties to an independent private company and impose on them strict Service Level Agreements (SLAs).  This is widely practiced in countries such as Singapore where SATS (Singapore Airport Terminal Systems) Pte Ltd is the private contractor who manages the Changi Airports. This has led to better efficiencies and also improved the customer/passenger experience.

An improved airport management system will certainly encourage repeat tourists and business visitors owing to the ease of travel and entry/exit into Nepal. It also will lead to better clarity on immigration and customs procedures and systems (something that is not clearly available at the moment).

  • External tourist agency for Nepal in select countries (in brief: Nepal as a centre for tourism. Regional/international tourism centres established by  the Nepal government. Tie-ups with regional airlines serving Nepal airport. Consider new potential markets like the Middle East and South America aside from traditional visitor markets in South Asia, Europe, Australia and South East Asia). 

Nepal should also consider establishing tourism centres in a number of targeted countries to encourage tourist arrival numbers. The impact of a tourism centre in increasing the number of a visitors from a particular country cannot be underestimated.

This will require a significant investment on Nepal’s part, but with the increased tourism dollars as a result of these investments, we can be reasonably certain that there will be a significant returns on investment (with a relatively short payback period).

Nepal should also consider working with airlines serving Nepal (particularly regional ones like Silkair, Thai Airways and Qatar Airways) to promote Nepal as a centre for tourism destination and to set up joint country promotions. This will have an impact in increasing passenger volume for both the airlines and also Nepal.

In addition to the traditional markets of South Asia, South East Asia, Europe and Australia, Nepal should also perhaps consider new markets like the Middle East (where Nepal can be an attractive and relatively nearby destination during their sweltering, hot summer seasons) , South America (where the allure of the mountains of Nepal can prove to be an intoxicating difference) and Africa (particular the rising middle-class in Africa who seek to explore new places aside from the traditional European/American destinations).

  • Burgeoning MICE (Meetings, Incentives, Conferences, exhibitions) potential for Nepal (in brief: Nepal could be a choice location conferences, regional corporate meetings, exhibitions, staff retreats etc for most Asian countries)

Nepal’s geographical proximity to a wide number of countries (from Europe to Asia) and her natural advantages (beauty of surroundings, weather) and relative low costs could result in Nepal being a primary MICE location. Plenty of large corporate companies could host their regional meetings, staff retreats and conferences and exhibitions in Nepal.

Obviously this will necessitate investment in other areas including infrastructure (roads, stable electricity, etc), facilities (meeting halls, sufficient business grade hotels, etc) and training of local staff to accommodate the needs that come along with MICE.

  • Nepal as the medical destination of choice (in brief: Nepal could be a key medical hub for Asia and Europe and has natural advantages which can facilitate this development including great weather, relative low-cost and a generally spiritual environment conducive for healing)

Nepal has plenty of natural advantages that could potentially establish it as a key medical hub for medical visitors from Europe, the Middle East and Asia. There are already plenty of regional students pursuing their medical degrees (MBBS) in Nepal. If investment is made by a private medical health group and encourage some key physicians and medical experts to be based in Nepal at different times in the year, there is a real possibility of Nepal becoming a choice destination for individuals seeking medical treatment. Currently, Asian and European individuals go to Singapore, Thailand, India and Cuba (which has an excellent medical system). Nepal could also join the ranks of these nations.

Furthermore, Nepal also has a calming and enriching spiritual environment which is critical for healing. Emotional fulfillment is critical to physical recuperation.

  • Promotion of Nepal as an ecotourism destination and perfect location for movie/film shoots. 

Nepal has significant potential to be a key ecotourism hub. Nepal needs to ensure that in the wake of various industrial developments (particularly in the energy sector) that it does not neglect her own environmental obligations and protection of its rich biodiversity.

Nepal’s scenery and settings could also be a prime film shooting location for Bollywood and even Hollywood films!

The above are some suggested developmental opportunities for Nepal. A nation that has gone through significant changes in a relatively short span of time. However, it is a nation that has kept its heart and where people remain fundamentally passionate about the causes that matter the most for them and their loved ones. If this passion is retained, then I am in no doubt that the good times will be back soon!

Vietnam Economic Briefing (Dec 2011)

Vietnam’s GDP growth is expected to be about 6% for 2011, despite the various pressures of inflation, economic slowdown and falling sentiments amongst the business community.

With a new Cabinet in place, the country is embarking on a series of reforms which could be as instrumental as the “Doi Moi” (or “renewal”) exactly 25 years ago which set Vietnam on the path towards becoming a vibrant economic powerhouse within the region.

Some blame the poorly performing state owned enterprises (SOEs) for some of the country’s economic woes. Significant investment and capital were allocated to SOEs with poor returns on investment. Gross inefficiencies in operations and ill-advised diversifications into areas where they have little expertise or experience (such as stock markets and property investments) are two of the reasons why the SOEs have performed poorly.

I’ve outlined below the background to the current Vietnamese economy, responses by various stakeholders and my own personal comments and suggestions.

The scenario now

Vietnam’s economic challenges now include:

  • High inflation rate (currently at close to 20%);
  • A slowdown in economic growth and output;
  • Rising external debt;
  • FDI pledges have dropped by about a fifth – compared to 2010;
  • Further devaluation of the Dong vis-à-vis the US Dollar, further exacerbating inflationary pressures;
  • Increased incidences of bad-debt and non-performing loans – creating a greater pressure on the banking sector.

The government’s efforts

Prime Minister Nguyen’s key considerations for Vietnam include:

  • To ensure that Vietnam meets it’s socio-economic developmental objectives;
  • Ensure that the State Bank of Vietnam work closely with relevant stakeholders and achieve a targeted, flexible and corrective monetary policy so as to maintain growth and curb inflation;
  • To have a re-active approach to issues that arise from wider implementation of monetary policy and ensure social cohesion and harmony;
  • Control market prices and reduce trade deficit;
  • Be better prepared for natural disasters and ensure better disaster management (eg. floods, storms, etc);
  • Improve public sector and administrative reforms.

Macroeconomic stabilisation and inflation control are key pillars to achieving economic growth. The Vietnam Cabinet is also committed to improving efficiency and competitiveness (particularly amongst State Owned Enterprises (SOEs)).

There are three economic restructuring initiatives proposed:

  • Streamlining the public investment mechanism to ensure greater timeliness and efficiency;
  • Improving the productivity of SOEs;
  • Restructuring the commercial banking system.

The Prime Minister has also indicated that there will soon be separation of ownership and management of the largest SOEs (including the likes of PetroVietnam and Vinashin) which will force SOEs to adopt OECD levels of corporate governance. There will also likely be privatisations of SOEs which are better suited to the private sector (such as coffee, textiles and seafood) whilst nationally important industries such as power, oil and gas will be retained by the government.

The government will also continue to ensure that the agricultural sector is supported and grows sustainably; implement social welfare policies to achieve lower unemployment and poverty; and press on with economic restructuring reforms required for growth.

World Bank support

A Consultative Group (CG) meeting of donors will take place in Hanoi, Vietnam on the 6th of December to focus on restructuring the economy and poverty reduction in Vietnam.

Of concern to the World Bank is how restructuring efforts by the government in the public investment and banking sector will support social welfare and poverty reduction initiatives.

Suggestions for Vietnam

The Vietnam government should stick closely with its plans to reform public investment, improve SOEs and restructure the commercial banking system.

However the government will still face significant resistance from various interest groups including SOEs and large private conglomerates who may not benefit directly from the economic restructuring activities. The government must press on with reforms in the interest of the country. Failure to resolve the risks posed by debt-ridden state owned banks and enterprises will have the potential consequence of sinking the country in deeper economic malaise.

However, one must not lose sight of the fact that despite the obvious economic difficulties, the country still has a large population base, with a growing middle-class population; there is on-going commitment to education and development; and it has a large Asian economic hinterland.

My suggestions for Vietnam will be:

  • Stay firm on the path towards SOE reforms – an improved efficiency of the SOEs will enable them to become engines of growth for the country
  • Focus on dealing with corruption – failure to do so will erode public sentiment and also depress economic activity and dampen FDI into the country;
  • Maintain emphasis on raising education levels to international best practices and work to building capacity in the areas of people skills development to ensure a higher trained and educated workforce which will force Vietnam to move up the value chain in terms of services offered;
  • The country should continue supporting small and medium sized enterprises as they tend to be another major engine of growth for nations – support the small to see big benefits;
  • Provide easier access to finance – but ensure there are safeguards to prevent excessive and unprotected money lending which may cause a credit bubble;
  • Vietnam must also protect its rice paddy fields (enough golf courses – no more!!) and continue support to its agricultural sector;
  • There must also be a commitment to protect its natural resources (no point selling everything away and not having anything left to enjoy because all the natural beauty of the country is sold down the river in exchange for foreign currency which you cannot really spend anymore);
  • Continue commitment to ensuring good corporate governance in the country – and adopt best practices – starting with SOEs and listed firms. This will be important in building consumer and investor confidence in the market.
  • The government should also foster innovation and nurture and reward innovation at all levels. Vietnam has the human capacity to be one of the most innovative countrie in Asia, if not the world and the government should play this very important strength of the Vietnamese people to the country’s benefit.
  • A radical solution to tackle inflation: Vietnam goes through the inflation cycle every few years. What Vietnam should consider is to have only ONE primary currency, the dong. Under the dual currency system – with both dong/dollar being interchangeable in the market will erode the Vietnam economy over the longer term. This is because Vietnam loses control of monetary policy when the dollarization of the economy is widespread. What Vietnam should do is to peg its dong against a basket of major currencies including the US Dollar, Euros, Yuans, Singapore Dollars, Malaysian Rinngit. They should stamp out the dollarization in the economy by making sure that all goods and services in the country are only provided in dongs – create a wider demand for the dong. Start trading the dong in foreign capital markets. It will hurt initially (for up to 3 years) but once normal situation prevails, Vietnam will have greater control of its monetary policy and the Dong will become an international currency in its own right. Vietnam has sufficient critical mass of almost 90 million people to make this work.