the effects of wto

8/18/2019 The Effects of Wto

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The Effects of WTO Integration on Vietnam’s Economy

Tien Nguyen

This paper mainly provides an overview of Vietnam’s socio-economic changes since its WTO

integration in 2007. This was a significant event that marked a trning point of Vietnam into the

world’s economy in general and particlarly in trading progress. !owever" it seemed that people

had nderestimates the impact of WTO accession on Vietnam’s economy" ths failing to analy#e

foreign capital inflows and related macroeconomic isses. $fter the integration" Vietnam’s

economy showed a prominent improvement from real aspects to social isses and economic

instittions. On the other side" %ality of growth remained modest" trade deficit widened"

inflation srges" while Vietnam’s vlnera&ility to negative e'ternal shocks gets rapidly apparent.

The paper then goes deeper to the nderneath reasons why Vietnam did not stand in a stronger

place as it was spposed to &e after the great integration.

Introduction

After twelve years of negotiation and effort for accession, Vietnam eventually got

aroved from the World Trade organi!ation "WTO# in Novem$er %&&', and then $ecame the

1(&th mem$er of the WTO, with commitments $eing imlemented since )anuary %&&*+ This

draws a massive attention to economists and investors+ eole had a strong faith in the growth

and develoment rosects of the country, the e-ansions in trade and investment inducement,

and ressures to underta.e further domestic reforms+

Aarently, during the year of %&&* and the first half of %&&/, Vietnam’s economy

e-erienced a $oom of consistent high growth and macroeconomic sta$ility+ As a result, many


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investors found the country so aealing and attractive as a gold0mining destination, in which

wealth was never found that easy to reach+ Achievement in foreign relations, along with such

economic successes, have future affirmed Vietnam’s osition in the international arena+

owever, after a short eriod of over0e-citement in the first coule years, Vietnam then had to

face the world’s economy downturn+ As the macroeconomic scenario li.ely imroved $y the end

of %&&/, the country has suffered from e-treme negative imacts of overall financial crisis and

recession+

In such a situation, analy!ing the imacts of the WTO integration on Vietnam’ economy,

in all asects from economic ones such as trade, investment, growth, macroeconomic sta$ility to

more social ones and institution, is no easy tas.+ It re2uires a massive amount of serious wor. in

every asect of the economy ta.ing into account of what is really going on+

Analysis of WTO Integration’s Imact on Vietnam’s Economy

In general, the imacts of Vietnam’s economy from WTO accession can $e listed into the

following categories+ 3irstly, Vietnam is a mem$er of WTO, which means the $eginning of

imroving and getting more international relationshis in foreign affairs+ 4econdly, interactions

of WTO commitment with other trade arrangements that $rings out the ositive outcomes and

secial rivileges from international trade+ Thirdly, Vietnam is a$le to access to glo$al tur$ulence

more 2uic.ly such as rice shoc.s and financial crisis+ Ne-t, Vietnam’s olicy would $e more

fle-i$le to adat with the rest of the world+ Then, it now can $e reached to a real economy,

encountering with international trade and investment+ 3urthermore, the country’s macroeconomic

asect increases its sta$ility+ In addition, economic institutions function more efficient and

effective in terms of legal framewor. and state organi!ation structure+ 5astly, there are social


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imacts from WTO integration such as emloyment, overty, income ga, which all show

ositive signs+

All emirical studies of the ossi$le imacts on Vietnam’s economy following its WTO

accession, however, show a coule of ma7or disadvantages+ 3irstly, all studies seem to

significantly underestimate the ace of growth of the country’s e-orts and 89+ It seems that

their 2uantitative analyses fail to roerly account for a num$er of factors, the most nota$le of

which are erhas e-ternal shoc.s and institutional changes+ 4econdly, none of the researches

have so far incororates a rigorous analysis of the inflows of foreign caital and macroeconomic

issues associated with these+ The channels of effects of caital inflows are often 2uantifies in too

simle a manner, if any, while such inflows in fact turn out to leave olicy0ma.ers erle-ed in a

num$er of issues, for e-amle, maintaining macroeconomic sta$ility in the conte-t of raid

caital inflows and its trade0off in terms of economic growth+ These are a few angles that studies

should state and overcome, if they are to $ring more relevant information inuts to the olicies

dealing with WTO mem$ershi as a factor of change+

Now, we will ta.e a closer loo. in Vietnam’s economic develoment in %&&*0%&&/+ In

terms of trade, Vietnam’s comarative advantages seem to continue revealing through the e-ort

acceleration+ An e-ort growth rate of %1+: ercent in %&&* is neither imressive relative to that

of %&&' "%%+* ercent# nor comara$le to e-ectation rior to the country’s WTO accession "Vo,

%&&:#+ The e-ort growth rate of %:+( ercent in %&&/ resulted largely from a surge in world

commodity rices "Vo, %&&:#+ The imact of the WTO accession on Vietnam’s merchandise

imort aears to have $een more clear0cut+


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Vietnam’s total investment is e-ected to rise in terms of overall 89+ The investment

ratio, measured $y total investment over 89, was a$out 6& ercent in %&&& "Vo, %&&:#+ 9uring

%&&'0%&&*, the increase in real total investment was artly e-lained $y the e-ansion of

investment $y the state0owned enterrises "4OEs#, esecially in %&&', investment from $udget+

This trend somehow terminated in %&&/ than.s to the 8overnment’s measures to tighten fiscal

olicy+ A rise in the state investment from $udget aears to have crowding out effect on rivate

investment+


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inflows in %&&* left olicy0ma.ers with enormous erle-ity, articularly in formulating olicy

resonse+ The attemt to control money suly in the second half of %&&* was ineffective+

The raid increases in inflation and trade deficit, esecially in the first half of %&&/, have

com$ined to e-ert high ressures on dong to dereciate+ owever, since August %&&/, the

sta$ili!ation olicy ac.age that Vietnam imlemented $egan to ta.e effect+ As a result, trade

deficit situation seemed to $e imroved, and together with lower inflation, this in turn heled

ease the ressure of dong devaluation+

At resent, there is, however, uncertainty of ressures on the e-change rate movement+

This is very much associated with the e-ectation of inflation, trade deficit, and the difficulties in

mo$ili!ing foreign caital in a conte-t of serious =dollari!ation> and =goldi!ation> in Vietnam

and the ease of Vietnam’s macroeconomic olicies for stimulating the economic activities+

In The Wealth of Nations =The natural effort of every individual to $etter his own

condition is so owerful, that it is alone, and without any assistance, not only caa$le of carrying

on the society to wealth and roserity, $ut of surmounting a hundred imertinent o$structions

with which the folly of human laws too often encum$ers its oerations+ "4mith, 1:&;#>+ It shows

how the human desire to engage in trade, and more articularly to trade in gold in Vietnam has

overcome what 4mith called =imertinent o$structions> to roduce a reasona$ly efficient mar.et

for the trading of gold+ Vietnam does have a reasona$ly efficient rivate mar.et for gold,

however, this rivate mar.et rice is significantly a$ove the world rice, and this is the ta- that

the Vietnamese government’s olicies ma.ing the trading of gold difficult imose on the citi!ens

of Vietnam+


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It is a $asic tenant of neo0classical economic theory that imort controls, and rice

controls often result in a loss of consumer welfare+ It can $e certain that when a $lac. mar.et for

a roduct develos consumers ay significantly more for that roduct than they would if that

roduct were availa$le on the oen mar.et+ It is undou$tedly true that the heroin addict ays

significantly more for heroin that he would on an oen and relatively unregulated mar.et+

owever, it is really often difficulty to cature 7ust e-actly how much more+ There is no

relatively free and oen mar.et for heroin to comare the rice the addict must ay to, and data

as to the actual cost of heroin is not easily availa$le to one unfamiliar with that culture+ While

individuals can differ as to whether drugs should or should not $e legali!ed, none can actually

estimate what the financial cost to addict is of outlawing the roduct+ This is $ecause what the

roduct would cost in a relatively unregulated mar.et is un.nowa$le, and the $lac. mar.et rice

is not readily availa$le+ Argua$ly this circumstance would hold for large num$ers of other

roducts commonly sold on the $lac. mar.et, thus ma.ing emirical wor. on $lac. mar.ets

difficult+

owever, the gold mar.et in Vietnam resents a situation that is an e-cetion to

this rule+ Internationally there is a ro$ust and oen gold mar.et with reasona$ly efficient flows

of information, large num$ers of $uyers, and sellers, and for this reason the international sot

rice in gold can $e $elieved to resent a reasona$le aro-imation of the international gold

rice+ owever, the rivate sale of gold is outlawed in Vietnam? however, a somewhat oen and

well0su$scri$ed $lac. mar.et for gold does e-ist+


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rivileges $ased on their interest, which often $rings significant $enefits to them+ This $usiness

is $etter off for the well connected in terms of rofit and wealth+ A study $y Bruger discovered

that in oor economies, their governments tend to heavily regulate their eole’s economic lives

often to the citi!ens detriment "Brueger, 1:*;#+ Bruger’s study seems to accurately cature the

economy in Vietnam, where rent see.ing is not rare+Vietnam ran.s fourth in Asia for gold consumtion "VnEconomy, %&16#+ With a strong

demand over years, the government imorts gold at the international rice and then have a grou

of owerful men in the gold industry 0 gold council $id u the original rice through a rivate

auction+ Ne-t, after the winning rice is reached, the gold council will distri$ute those imorted

gold to smaller $usinesses with a mar.0u rate+ Eventually, consumers will $e charged at a higher

fee $y the local $usiness, where the trade hysically haens+ 9ue to the fluctuation of gold, the

a$ove we$site is a relia$le reference for sellers to count on from not $eing financially damaged+

The two most advantageous arties in this chain are o$viously the government and the gold

council+ It reresents a use of ower for their own $enefits, which conse2uently results an

im$alance of wealth in society or a ure loss to economy as a whole "enderson#+

The occurring event also demonstrates an e-istence of welfare loss, which hurts

consumers and economy as one+ 4ecifically, instead of aying a remium to gold sellers,

consumers can actually use that money for other goods+ Thus, it is $etter off for roducers and in

the meantime, worse off for consumers+ In other words, the gold mar.et has diminished the

growth and wealth of other industries, in which they have e-erienced a loss in urchasing

ower+ As a result, the ga $etween the oor and the rich is gradually increased+ The rich is

getting richer and the oor are getting oorer+


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The years %&&' and %&&* witnessed a $oom of activities in $an.ing industry as well as in the

caital and real estate mar.ets+ 4uch a $oom resulted from the e-ectations of rofit

oortunities once Vietnam oened its services mar.et in line with WTO commitments+

owever, the $oom in $an.ing and financial activities has also osed greater ris.s to the

financial system+ This increase in ris.s is artly due to the lac. of ade2uate fundamentals for

sustaina$le financial develoment in the longer term+ 3irstly, the caacity to manage and control

ris.s remained wea., and failed to catch u with the $oom in financial and $an.ing industry+

4uch a wea. caacity at the micro level constrained the efficiency and rudential management as

$an.ing C financial institutions e-and the scale and scoe of their investment activities+

Deanwhile, the monitoring and surveillance system at the macro level lags far $ehind the

develoment of the mar.et, while macroeconomic indicators are currently worrisome+

4econdly, the $an.ing system aeared to suffer from a lac. of li2uidity, articularly in

the first half of %&&/+ The declining roensity to save of the households left the $an.s and other

deository institutions in fierce cometition to attract deosits+ 4imultaneously, measures $y the

4tate


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ro$lem was further comlicated $y the increase in non0erforming loans, articularly those

made for uroses of consumtion and real estate investment, etc+, in the second half of %&&/+

The two years of %&&*&/ witnessed the significant early imacts, $oth direct and

indirect, of the WTO mem$ershi on Vietnam’s economy+ The actual changes in several

varia$lesFasects, such as confidence in long0term develoment and reform? efficiency of

resource allocation? e-ort, investment, growth, and interaction $etween integration and

domestic reforms, were $asically as e-ected+ Nevertheless, the scaleFscoe of changes in many

varia$les is far moreFless than redictions or could not $e thought of+ The factors such as

international rice or financial shoc.s, scale of foreign investment inflows, the e-ansion of

financial and $an.ing activities, etc+, had failed to $e roerly accounted for+ 4everal wea.nesses

and macroeconomic ris.s in the economy were hidden until %&&* $y a relatively high economic

growth+ The ro$lems were further comlicated $y the inaroriate "macro# olicy resonses

andFor ad7ustments+

The hallmar.s of the e-erience with Vietnam’s socio0economic develoment over the

first two years of WTO mem$ershi are memora$le+ 4everal ma7or lessons can $e drawn from

Vietnam’s e-erience+ 3irstly, coordinating domestic reforms with international and WTO

commitments and using these commitments as a =good ressure> for reform are critical to

esta$lish andFor consolidate the confidenceFcredi$ility of "local and foreign# investors and

$usiness community on Vietnam’s develoment otential in the long run+ Along with the rocess,

ad7usting macroeconomic olicy and strengthening financial monitoring and suervision are all

necessary suorting measures+ These should attract more attention, articularly as Vietnam is

finding itself $eing more deely involved in international economic integration+


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4econdly, deeer and wider economic integration facilitate more efficient utili!ation of

Vietnam’s static comarative advantages+ Induced A4EAN Economic


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The effectiveness of ad7ustment olicies, in addition, rests heavily on u$lic

communication, as transarency and accounta$ility of olicyma.ers are .ey ingredients for

u$lic confidence and consensus+ While olicy ad7ustments are imortant, if not critical,

enforcing olicy reviewing mechanismsFinstitutions should $e of great essence+ 3or instance,

those mechanismsFinstitutions should rely on information and olicy analysis, including olicy

choices and their imacts? forecasts and warnings? and cost0$enefit analysis of large0scale u$lic

ro7ects+ They should also $e indeendent, transarent with the wide0economy vision and

rofessionalism+ owever challenging it may seem, the tas. for olicy0ma.ers should $e no

more than ac2uiring information and institutions for having $etter olicy otions, in com$ination

with the =art> of imlementing such olicies+

Nonetheless, $oth oortunities and challenges are interchangea$le+ Of utmost

imortance are the lessons that Vietnam has learned, and how the country strives to have suita$le

reform as well as aroriate olicy resonses+ 3urther $enefits from integration then re2uire

acceleration of the structural reforms on large 4OEs, financial suervision system, and

indeendence of the 4tate hindering sustaina$le

develoment resent another area for imrovement which the country should $e wor.ing on "Vo,

%&&:#+


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Wor.s ited

enderson, 9+ "n+d+#+ (ent )eeking + Getrieved Darch %(, %&1;, from 5i$rary of Economics and

5i$ertyH httHFFwww+econli$+orgFli$raryFEncFGent4ee.ing+html

Brueger, A+ O+ "1:*;#+ The olitical Economy of Gent04ee.ing 4ociety+ $merican *conomic,

%:106&6+

4mith, A+ "1:&;#+ The Wealth of Nations+ In E+ annan, +hapter V ,igression concerning the

+orn Trade and +orn aws "+ (;+ 5ondonH 5ondonH Dethuen o+, 5td+

VnEconomy+ "%&16, )une /#+ Vietnam ranks forth in $sia for gold consmption+ Getrieved

Darch %(, %&1;, from Intellesia+netH httHFFwww+intellasia+netFvietnam0ran.s0fourth0in0

asia0for0gold0consumtion0%/(/((

Vo, T+ "%&&:#+ Vietnam after Two Jears of WTO Accession+ $)*$ *conomic /lletin, 11(016(+

the effects of wto

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