CASE STUDY 2

1. Identify the causes of high inflation is Vietnam in 2008.

- Increasing aggregate demand beyond the capacity of an economy with the
existence of many “bottlenecks” related to economic, social and legal
infrastructure had put an upward pressure on inflation.
 The strong expansion of expenditures, private and public investment
was the factor that drove up aggregate demand. (Demand for
consumption was increasing, reflected in the total retail sales of
consumer goods and services in the 2000-2007 period rising at an
average rate of over 20% per year; if excluding the increase of price
level, the growth rate was still over 10% per year.)
 In the world market, prices of crude oil and many other raw materials
and commodities soared. With gasoline crude oil price increased from
60USD/barrel in early 2007 to over 100USD/barrel at the end of
2007,...Specific, In Asia, especially China, the global energy demand
has increased dramatically, along with political instability and military
conflicts in the Middle East, which are the direct causes of high oil
prices that had a historical record of 110USD/barrel in March 2008 =>
thereby adversely affecting prices in Vietnam.
 Credit growth in Vietnam had increased too fast in recent years. (The
growth rate of total means of payment and credit balance in 2007
doubled compared to that of 2006. As of 31-12-2007, the total means
of payment increased by 46.7% compared to 31-12-2006) => The
reason for the sudden growth of credit was the rise of net inflow of
foreign currency in 2007 of up to 22 billion USD, equivalent to 30%
of GDP.
2. Assess the impact of the government’s inflation control policy. For each group
of solutions, analyze the effect on the overall price and output of the economy to
evaluate the advantages and disadvantages of each solution.

Inflation is caused by a rise in the supply of money, which can occur through a
variety of causes in the economy. Inflation rises faster as the money supply
grows faster. The price level is proportional to the money supply when all other
factors remain constant. When the money supply is increased in this way, the
money loses its purchasing power. Fiscal and monetary policies are important
tools for expressing the government's thoughts and economic growth orientation
 to the economy. Taxation and government spending are the two basic measures
used to implement fiscal policy. Meanwhile, the government controls the money
supply and even adjusts the foreign exchange rate to implement monetary
policy.

- First is to implement tight monetary policy. The government advocated to

strictly control the total means of payment and credit balance right from the
beginning of the year.
 Advantage: Tight monetary policy can slow an economy that is overheating,
limit spending in an economy that is accelerating too quickly, or curb
escalating inflation.
 Disadvantage: The tightening of the currency will put pressure on increasing
bank interest rates, increasing borrowing costs for businesses that want to
expand production. output fell, the national growth index was affected, putting
pressure on jobs and people's income.
- Second is to adjust fiscal policy towards strict control and improve the
efficiency of public spending relying on State budget. Investment items of
state owned enterprises would be closely reviewed. In terms of fiscal policy,
the Vietnamese government has implemented a contractionary fiscal policy
in order to reduce the money supply and aggregate demand, causing the AD
curve to move to the left, resulting in reduced output and prices. In terms of
the Vietnamese government's policy of promoting the development of
industrial, agricultural, and service production while maintaining a balance
between money and supply, it can be seen that the government has made
efforts to promote the supply side, thereby increasing supply and, as a result,
lowering price output levels. It is clear that, despite the fact that the rate of
price rise has moderated, the majority of products for production and living
are still at high levels. As a result, trade operations, production, and business
in general, as well as huge businesses and corporations in general, must be
controlled.

 Advantage: Control inflation, It is a tool to overcome market failures and

effectively reallocate resources in society.
 Disadvantage: This policy will have a time lag. It is difficult for the
government to grasp the impact of the policy on the actual scale. So it will be
difficult to make adjustments.
- Third is to give priority to the development of industrial, agriculture and
services production and ensuring the balance between supply and demand for
goods. The government encouraged domestic and foreign investments
industries, particularly in export-oriented sectors, to enhance production
capacity and promote economic growth. In agricultural production, the
government supported farmers through initiatives like provide subsidies,
access to credit and modern farming techniques. And price stabilization
measures were put in place to prevent excessive fluctuations and ensure
affordability of essential goods.
 Advantage: Prioritizing the development of these sectors can lead to rubust
economic growth by expanding production capacity, creating employment
opportunities, and attracting investment. Developing multiple sectors
simultaneously helps diversify the economy, reducing dependence on a single
industry and enhancing resilience against economic shocks.
 Disadvantage: Rapid industrialization and agricultural expansion can lead to
environmental degradation. A heavy emphasis on industrial production and
exports can make the economy vulnerable to external shocks, such as global
economic downturns or changes in international trade policies.
- Fourth is to direct export promotion and strictly import control to reduce trade
deficit. In terms of export management, functional ministries and branches
have put in place measures to boost total export turnover, including continuing
to export rice to ensure food security and keep world rice prices stable.
Because of the direct impact of a number of import restriction laws, such as
raising import taxes on autos and auto parts..., foreign cash sources for import
are closely controlled.
 Advantage: Increased revenue. Expanding exports can lead to the creation of
new job opportunities, particularly in export-oriented industries. Balance of
payments. Domestic industries can be protected from competition, providing
them with the opportunity to grow and develop.
 Disadvantage: Dependence on External markets. Loss off natural resources.
Limiting imports can result in a reduced variety of products available to
consumers, potentially leading to lower quality or higher prices for certain
goods.
- Fifth is to encourage thrift in production and consumption.
- Sixth is to further supervise market management avoid goods speculation
especially regards to essential items such as petroleum, cement. medicine and
food. Cross-border smuggling should be immediately stopped.
 - Seventh is to strengthen measures to support stabilizing people's lives and
production and expand the implementation of social welfare policies to help
people, especially the poor.
- Eight, the mass media should promote and propagate information correctly
and avoid provocative and false information causing psychological insecurity
in society.

3. What difficulties and challenges may be encountered when implementing the

above solutions?
- First, with the trend of increasing integration into the global economy and
various market economy development, the monetary policy goal is not
obvious, and there are no preferences. The State Bank's policy management
actions had to achieve a variety of goals, including currency value
stabilization, inflation control, and economic growth, among others. In truth,
there is a tension between the goals: if the State Bank prioritizes inflation
control, it must sacrifice economic growth; they cannot achieve both goals at
the same time.
- Secondly, tightening monetary policy and adjusting fiscal policy may face
resistance from various stakeholders, including businesses and individuals
who may be negatively affected by these measures. There might be concerns
about reduced access to credit or decreased government spending in certain
sectors.
- Thirdly, overcoming the consequences of natural disasters and epidemics can
pose significant challenges. Rebuilding infrastructure, supporting affected
communities, and ensuring food productivity in the face of climate-related
events or health crises require effective coordination and resource allocation.
- Next, in terms of fiscal measures, pursuing an expansionary policy to help
the country through the global crisis put enormous pressure on the already
troubled and weak economy, and it was unclear until recently how the
government would manage its departure strategy. Although the economy
recovered to some extent from the global financial crisis in 2010, growing at
6.8% in 2010 (almost back to pre-crisis levels), it has not been restructured to
achieve a high level of growth in the future, and the economy has been
plagued by structural issues since before the global financial crisis in 2008.
In the aftermath of the global economic crisis, whether Vietnam's economy
continues to recover and grow at a steady pace is a crucial matter for the
policy makers.
- Managing inflation while ensuring sustainable economic growth can be a
delicate balancing act. Implementing tight monetary policy measures to curb
inflation may inadvertently slow down economic activity and investment,
potentially affecting job creation and overall economic performance.
- Beside, encouraging investment and removing market barriers requires
addressing bureaucratic hurdles, ensuring transparency, and creating a
favorable business environment. Streamlining administrative procedures,
reducing corruption, and improving regulatory frameworks are ongoing
challenges that can hinder the implementation of policies.
- Finally, terms of social security policy, the government should do more to
help people who are most vulnerable during the global economic downturn.
More steps are needed to minimize unemployment, assist laid-off workers,
and provide subsidies to the needy in rural areas. Social issues should be
addressed as part of the fiscal stimulus package.