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Chapter
One: introduction International economics nowadays plays an essential
role in the researches of the economic growth and development. The performance
of international economic activities in general and trade activities in
particular of a country can have a significant impact on the whole economy's
performance. There have been many studies of the trade
performance and trade balance. The imbalance of trade, i.e. the surplus (excess
of export over import) and deficit (excess of import over export) is often seen
as a problem. In general, persistent trade deficit may do harm to the economy,
since trade deficit leads to foreign exchange gap and foreign exchange
scarcity. This will lower the country's position in international payment.
Therefore, improving trade balance or reducing its deficit is raised as a big
matter to the policy-making for a sound economy. Economic studies show many approaches to improving
trade balance. Among the variables having effect on trade balance such as
domestic GDP, foreign income, commodity prices and exchange rate, exchange rate
is regarded as an important factor, since it significantly affects exports and
imports of a country. In theory, depreciation of real exchange rate will
increase export and decrease import, thus improving trade balance. As a result,
in policy terms, devaluation is often used as a good instrument
suggested by IMF stabilization program for improving trade balance for
countries suffered from trade deficits. However, in practice, the result is
still ambiguous and mixed. Some countries succeeded in improving trade balance
by devaluation, but some not. In Vietnam, the exchange
rate regime has been really a problem. Since 1993, Vietnam has continuously
suffered from large trade deficits, after the only surplus in 1992. During
1993-1996, the nominal exchange rate was relatively stable while the real
exchange rate is seen appreciated[1].
The competitiveness of exports may reduce in line with the increase in real
exchange rate. Especially since 1997,
Vietnam has suffered from appreciation of its exchange rate in comparison with
those of its major trade partners. The reason is that the financial crisis in
East Asia forced affected countries to float their exchange rates with sharp
depreciation of exchange rate (from 20
per cent to 80 per cent in terms of US dollar). As a result, trade balances in
these countries in 1998 were improved Since 1994, debate on
whether Vietnam should take devaluation is still in question and some
economists have asked for devaluation. Vu Ngoc Nhung (1994) and another author
in Vietnam Banking Review (1998) called devaluation an effective instrument to
improve trade balance. Besides, Le Viet Duc (1995), Nguyen Thi Hien (1995) and
Truong Xuan Le (1995) argued that devaluation is not a solution for exports
promotion and trade improvement. Recently, some quantitative analysis in trade
balance and devaluation tried to determine a clearer relationship between trade
balance and exchange rate. However, the answers are still mixed. In addition,
the significance of coefficients is low. In some regressions, there are
problems in econometrics specification. This thesis attempts to
analyze Vietnam's trade balance and the impact of exchange rate changes to
Vietnam's competitiveness and trade (exports and imports), including
quantitative analysis. The thesis will give answers to the following questions: ·
How is the performance of trade (exports, imports and balances) in
Vietnam during 1989-1998? ·
Whether the real exchange rate in Vietnam has been overvalued and how
did the real exchange rate affect trade balance, and the structure of trade? ·
What are policy implications for improving trade balance? The remainder of the thesis
is as follows: Chapter Two is about the theoretical framework on trade balance,
exchange rate and the relationship between exchange rate and trade (exports and
imports), including theories and empirical evidences from some countries.
Chapter Three will review Vietnam's economy in the period 1989-1998 and its
major economic reforms, especially in trade. From the economic and trade
performance and the analysis of factors of exports and imports, there will be
some derivations about the relationship between trade and exchange rate. And
then, in chapter Four, the quantitative analysis will check whether or not
trade and exchange rate (both nominal exchange rate and real exchange rate)
have any relationship. From the findings in chapter Three and chapter Four,
some policy recommendations will be withdrawn in chapter Five, which will be
the conclusion for the thesis. Further explanations for the research will be
seen in the Appendix. Chapter
Two: theoretical framework I- Definitions and
theoretical framework I.1. Definitions Trade balance[3]
shows a summary of a country's trading activities, including exports (sales of
domestically produced goods and services to the rest of the world) and imports
(expenditure of goods and services bought from the rest of the world). Trade
balance is the difference between the country's value of exports and value of
imports. Trade balance may be surplus or deficit. A surplus of trade balance is
the excess of exports over imports of goods. A deficit of trade balance is the
excess of imports over exports of goods. Exchange rate is the price
of one country's currency in terms of another’s. In this thesis, exchange rate
is defined as the units of domestic currency per unit of foreign currency (e.g
VND/1 USD). The effects and
implications of exchange rate are measured by nominal, real and
effective exchange rate. The nominal exchange rate is
merely the price of one currency in terms of another’s with no reference made
to what this means in terms of purchasing power of goods/services. The real exchange rate is
the nominal exchange rate adjusted for relative prices between the countries
under consideration. RER = NER x Pf/Pd
(where: RER is the real
exchange rate, NER is nominal exchange rate, Pd is the domestic
price, and Pf is the foreign price). When RER rises, there is real
depreciation of domestic currency relatively to foreign currency. When the RER
falls, there is real appreciation of domestic currency. Real effective exchange rate
is the real exchange rate adjusted by a basket of exchange rate: REER = å WiRERI .(Where REER
is the real effective exchange rate adjusted by the basket of real exchange
rate RERi of the traded countries weighted with its share in trade Wi). REER is often considered as a more useful
measure for a country's competitiveness in the trade with the whole world but
not a single country, because it measures the competitiveness of a country in
the world of many countries. In reality, there are
several types of exchange rate regime which define how exchange rate works. The
two typical ones are fixed exchange-rate system and floating exchange rate
system. Under a float exchange rate
system, the exchange rate is free to fluctuate day by day and will fall or rise
in line with changing market conditions, serving to keep a country's balance of
payments more or less in equilibrium on a continuing basis. When exchange rate
increases or decreases, export and import will change accordingly, and so the
trade balance changes. Under a fixed exchange rate
system, the exchange rates once established will remain unchanged for
relatively long period. If the exchange rate gets too far out of line with
underlying market, the exchange rate can be refixed at a new value, which makes
imports and exports changes accordingly. When exchange rate is
refixed, it is the case of devaluation or revaluation policies. Devaluation and
revaluation refer to adjustments in fixed exchange rate regime. If the exchange
rate peg[4]
is increased, the price of foreign currency in terms of domestic currency is
increased and the domestic currency is said to be devalued. If the exchange
rate peg is decreased, the domestic currency price of foreign currency is
decreased, and is said to be revalued. In the real world, nominal
exchange rate is often used as an instrument in economic management or as an
economic policy. Exchange rate policy is regarded to be important when economic
policies are aimed both at stabilizing the volume of transactions and at
avoiding inflation. The changes in volume of transactions are resulted from the
changes in competitiveness, which is defined as the relative prices of
domestically produced commodities in the world market. The competitiveness is
then seen as an intermediate target of exchange rate policy aimed to changes in
the international transactions. I.2. Conventional
theoretical approaches
I.2.1. The Elasticity
approach: Trade balance[5]
changes including exports changes and imports changes are influenced by the
price elasticity of demand for exports and imports. The price elasticity of
demand for exports is the percentage change in exports over the percentage
change in price as represented by the percentage change in the exchange rate
(foreign elasticity of demand for exports). The price elasticity of demand for
imports is the percentage change in imports over the percentage change in their
price as represented by the percentage change in the exchange rate (home
currency elasticity of demand for imports). A devaluation policy will be
effective when the Marshall-Lerner condition holds, that is when the sum of the
price elasticity of demand for exports and the price elasticity of demand for
imports is greater than unity. If the sum of these two elasticities is less
than unity, devaluation will lead to a deterioration of the trade balance. I.2.2. The Keynesian
approach: Keynesian models of an open
economy can be integrated with the elasticity approach to investigate the
effectiveness of devaluation as a policy instrument. This means that with the
demand determined output, devaluation will be expansionary as long as the
Marshall-Lerner condition holds; it will increase net exports, aggregate output
and employment. From the study of aggregate demand, we can see that the effects
of the devaluation depend on both the Keynesian income multiplier and the
demand elasticities for domestic exports and imports. The reason is that
devaluation affects income by means of an expenditure-switching effect,
shifting the expenditures of foreign and local residents toward domestic goods.
As a consequence, the larger the demand elasticities for imports and exports,
the stronger the impact of the devaluation on income. I.2.3. The absorption
approach: The absorption approach was
developed by Alexander (1952). In this approach, the trade balance surplus
equals to the excess of income over domestic expenditure: CA = X - M = Y - A Where CA = X - M is the
current account[6], Y is national
income, A = C + I + G is the domestic absorption (expenditure), X is exports
and M is imports. The most important insight
of this approach is the distinction of the two basic ways in which domestic
policies can affect the current account. First, expenditure reducing requires
expenditure to fall in relation to real income. Second, expenditure switching
requires the composition of expenditure to move from foreign to domestic goods.
In this case, if there are unutilized resources, the switching of expenditures
will generate an increase in real income as a result of an increase in output,
and thus in an improvement of the current account. I.2.4. Dynamic model Faik Koray (1990) focused on
the relationship between trade balance and exchange rate in an equilibrium
business cycle model. Two-country equilibrium model of the world economy
analyzes the co-movements in the exchange rate and trade balance in response to
exogenous disturbances: the confusion between monetary and supply shocks, and
the confusion between shocks to permanent and transitory government purchases. If there is a positive shock
to domestic money supply, two effects will occur. The direct effect is the
proportional exchange rate depreciation. The indirect effect is exchange rate
appreciation with less than proportional level. However, the net effect is
depreciation in exchange rate. Besides, the perceived shock does not lead to
change in trade balance, but the misperceived shock will lead to increase in
aggregate demand, increase in domestic production, then lead to deterioration
of trade balance. If there is a transitory
shock to government expenditure, the indirect effect is appreciation of
exchange rate and higher aggregate demand accompanied with decline in domestic
production. In the end, trade balance deteriorates. In contrast, if there is
permanent shock to government spending, exchange rate will appreciate but trade
balance is intact. In conclusion, Faik shows
that policies directed at reducing trade balance deficits via a depreciation of
the exchange rate either by Central Bank intervention or by excessive domestic
money growth are counterproductive. Negative shocks to domestic transitory
government purchases or positive shocks to foreign transitory government
purchase which depreciate the exchange rate, on the other hand, improve the
trade balance deficits. Besides, the relationship
between exchange rate and trade balance is also analysed by monetary approach
and Dutch Disease. However, in these two cases, the impact is adverse, that is
the exchange rate is influenced by the changes of trade balance, and trade
balance in turn will change with the changes of competitiveness. II- Empirical Evidences II.1. Arguments in
the impact of devaluation on trade balance
II.1.1. Structuralist’s point
of view: Structuralists argued that a
devaluation could worsen rather than improve the balance of payment.
Devaluation may work better for industrial countries than for less developed
countries. Many LDCs are heavily dependent on imports of production inputs, so
that their price elasticity of demand for imports was likely to be very low.
While for industrial countries that had to face competitive exports markets,
the price elasticity of demand for their exports may be quite high. So
Marshall-Lerner does not hold for the case of LDCs. The analysis of exchange
rate policy become more complicated in this case as it affects at the same time
aggregate domestic demand as well as supply. There are, in other words, aspects
of supply-side, structural policy as well as demand side, absorptive effects,
inherent in the use of this instrument. The Marshall-Lerner condition does not
hold for the case of SSA. With regard to imports, demand elasticities tend to
be low due to the heavy dependence on imported inputs, which must be paid for
in scare foreign currency. In addition, even if exports demand is assumed to be
rather elastic, many SSA countries produce goods for which the supply
elasticity is not infinite due to the underlying structural characteristics of
the economies. Thus, a devaluation may, particularly in the short run, cause
results, which are unexpected from an orthodox perspective. Concerning with the
devaluation, some structuralist economists argued that short-, medium- and
long-term effects must be distinguished, and that devaluation may lead to
increases in unemployment and stagflation in the short run. The short-term
impact of devaluation on output hinges on whether the negative effects on
aggregate demand are outweighed by the positive impact on supply. This in turn
depends on whether output is close to full capacity output or not, and on
possible short-term supply constraints. Devaluation will at least in the short
run tend to be inflationary, through the increase in imports costs, and this
impact may be substantial in the very open imports dependent economies such as
those of developing countries, for example sub-Saharan African countries. II.1.2. A study of real
effective exchange rate From the study of Agnes
Csermely (1993) in exchange rate policy in former socialist countries, it is
clear that the impacts of exchange rate are often on both price level
(inflation) and current account deficit. Almost former socialist countries
suffered from current account deficit widening after an adjustment in exchange rate.
In the study, he introduced a measure of real effective exchange rate (REER). Through a study of Hungary
in 1990-1992, with the question that how can competitiveness be improved, Agnes
said that trade surplus may be achieved through the artificial dampening of the
exchange rate, but not as a strategy for improving competitiveness if in the
long run, there is no increase in living standard. The competitiveness of
Hungarian production could be improved by devaluing of forint and by lowering
the cost in terms of dollars and unit cost. It is obvious that a single
devaluation may only be successful if it is supported by an economic policy
restricting demand. Real devaluation is regarded as the most efficient method
of bringing the economy into external equilibrium. I.1.3. Case of J-curve Empirical experiences of
many countries show[7] that right
after the devaluation time, the country faces deterioration in trade balance.
After a longer time, the trade balance would improve. This situation is explained
by the J-curve effect analysis. Over the short run, the value of these
elasticities is rather small because both exports and imports are less
responsive to changes in relative prices. However, over the longer periods of
time, the volume of exports and imports would respond to relative price changes
and the effects on the trade balance would tend to be positive, so that would
lead to improvement in trade balance. I.1.4. Other studies In a study of how trade
flows respond to relative prices, Carmen (1994) showed an examination about the
relationship between relative prices and imports and exports in a sample of 12
developing countries[8].
In general, the countries in
the sample appear to meet the static Marshall-Lerner condition for stability,
as changes in relative prices do produce long-run reallocation of trade flows.
However, the sign of the relation between the terms of trade and the trade
balance will depend on the elasticity of substitution between the imported and
home goods rather than in the fulfillment of the static Marshall-Lerner
condition In a conclusion, several
empirical regularities emerge. First, the analysis suggests that income and
relative prices are both necessary and sufficient to pin down steady-state
trade flows. However, the traditional specification appears to fare better when
modelling developing country demand for imports than when being applied to
industrial-country demand for exports from developing countries. The latter may
suggest that a fruitful area to investigate is intra-developing country trade.
Second, it is found that, for the majority of cases, the relative prices are a
significant determinant of the demand for imports and exports. Third, while
relative prices have a predictable and systematic impact on trade, price
elasticities tend to be low, in most cases are well below unity. Finally, while
industrial-country income elasticities are well above those of their
developing-country Asian and Latin American counterparts, this is not the case
for Africa. The high primary commodity content of African exports probably
accounts for this result. II.3. Studies of Vietnamese
economists By considering the
fluctuations of monthly exchange rate in 1993 compared to 1992, Vu Ngoc Nhung
(1994) favored devaluation for promoting exports. The reason is that with the
inflation of about 6-7 per cent and a devaluation by 8-9 per cent in December
1993, the loss of reduction of exports value is traded off by the cheaper
imports price and reduction of imports value, and therefore trade surplus[10]
was achieved. Also in the paper, he said that those authors opposing
devaluation have mistakes in some problems. These problems are that the current
exchange rate could promote Vietnam’s production. He concluded that in Vietnam
devaluation is a good instrument for a better economic performance. However, in
this case, export will be more expensive so that export value is not
necessarily higher. From the analysis of current
situation of Vietnam's economy, Le Viet Duc and Tran Thi Thu Hang (1995)
pointed out that the loss from devaluation is more than gains. At that time, it
was not suitable to carry out a devaluation. Even though Vietnam suffered from
serious deficits in current account and balance of payment, this is
indispensable for a developing country being in the process of attracting
foreign investment and foreign aids. This process is often accompanied by
reduction of domestic interest rate, inflation and appreciation of domestic currency.
But this is only the negative impact in the short run. In the medium and the
long run, loans with low ICOR would be more efficient and profitable; therefore
economic growth rate would increase. At the same time, this would automatically
lead to real devaluation without any nominal devaluation, and so increase
competitiveness. Considering the deficits of
trade balance and balance of payment, they showed that the low exports growth
rate is not due to exchange rate changes. Data from 1988-1994 shows that
devaluation is not accompanied with improving trade balance deficit. By a
quantitative analysis checking Marshall-Lerner condition, the result is that
the sum of elasticities of demand for imports and exports is much lower than
unity. So that Marshall-Lerner does not hold for the case of Vietnam during
1988-1995. Nguyen Thi Hien (1995) and
Truong Xuan Le (1995) are among those opposing devaluation as a
solution for improving trade balance. They considered that devaluation is not a
unique solution for exports promotion.
In case of Vietnam, exports and imports are rather irresponsive to
exchange rate, there are many other variables that have more effects on trade.
In addition, the impact of devaluation is stronger and negative on many
economic fields and variables like inflation, purchasing power of domestic
currency... Other experiences of
devaluation are from the context of East Asian Crisis. The affected-countries’
economies turned down with the collapse of financial markets and banking
system. Empirical evidences for the consequences of crisis are the reduction of
economic growth to nearly zero in 1997 and the loss of confidence of local
currencies, which can be seen from the below table. The
crisis left many serious consequences to the regional countries. The
worst-affected countries are Thailand, Indonesia, Korea, and Malaysia. During
the crisis, these countries were facing series of collapse in financial and
monetary system, and then the loss of local currencies’ confidence. All these
countries took devaluation in 1997. As a result, the changes in the GDP growth
rates and trade activities are rather positive. In general, both exports and
imports decrease sharply but balances of trade are improved. However, there are other reasons for the
changes in trade rather than devaluation. Firstly, lower GDP growths decreased
domestic demands for imported goods. Secondly, crisis-affected economies need
recovering by concentrating domestic resources on restructuring the economies.
Both exports and imports reduce by about 30-40 per cent. The more reduced
imports may be the reason for improving these countries’ competitiveness in
dollar terms, so that increases exports and lowers imports to some extent. In
general, devaluation is one of the factors leading to the improvements in trade
balance of crisis-affected countries. It is still not agreed whether
devaluation is an important factor. Recently in Vietnam, there
have still been debates of the impact of exchange rate on trade balance. An
article in 1998[11] discussed
about the improvement of trade balance by devaluation as the financial crisis
happened in East Asia and devaluation were taken place in many regional
countries. The article showed that a devaluation of VND brought good conditions
to exports and reduced the country’s trade deficit. The decision to adjust the
exchange rate in August 1998 improved competitiveness of Vietnam’s exports. The
adjustment reduced the imports and improved the trade balance. According to the
article, Vietnam’s trade deficit was expected to reach USD 1.91 billion as
compared to the figure of USD 2.35 billion lower than 1997’s figure. The recent
adjustment in exchange rate seems to have no pressure on inflation. Pham Chi Quang (1999) showed
a negative impact of devaluation on trade balance by checking Marshall-Lerner
condition for the case of Vietnam. Using exchange rates recorded (including
official exchange rate, buying exchange rate, and selling exchange rate in
HoChiMinh city), he received a strict relationship between income and trade
balance but not between exchange rate and trade balance. Therefore, he argued
that devaluation could not be a unique instrument in improving trade balance.
Other policy variables might seem to be much more efficient. III- Approach for analyzing
the case of Vietnam For the case of Vietnam, the
answer for whether devaluation improves trade balance is still in
consideration. In this thesis, I’d like make an analysis in Vietnam's
performance of trade and the impact of exchange rate on trade. In addition, I'd
like to use the elasticities approach to check if exchange rate has a positive
or negative relationship with trade. The approach to checking Marshall-Lerner
condition is as follows: TB = X (GDPf, E)
- M(GDPd, E) Where TB is the trade
balance, X is exports, GDPf is the foreign income, M is imports, GDPd
is the domestic income, E foreign exchange rate (NER, RER or REER) - E increase
implying depreciation and E reduce implying appreciation. The responsiveness of the demand
for exports and imports to a devaluation is measured by the price elasticities
of demand for exports and imports (for exports: hX, for imports: hM ), which measures the
percentage change in exports or imports due to 1% change in the relative prices
of foreign or domestic goods. That is hX = %DX / %DE and hM = - %DM / %DE The Marshall-Lerner states
that the direct effect of a devaluation on the trade balance will be positive
(i.e. improvement in trade balance) when the sum of the price elasticities of
demand for domestic exports and imports exceeds 1 (hX + hM > 1)[12].
Using the elasticities
approach in combination with the examination of the structure of Vietnam’s
imports and exports and the traditional exports and imports functions during
1989-1998, I hope that devaluation may bring about some positive results. By
the way this could suggest the way to improve trade balance, and to reaffirm
the government’s decision to devalue VND. Chapter
three: Vietnam's trade performance and
the exchange rate policy I. Overview of Vietnam's
economic reforms in 1989-1998 period I.1. Review of the main
reform policies and economic performance before and after 1989 The period of 1976-1979 was
of unifying and turning the economy into an integrated whole in accordance with
central planning principles. The state and collectives constituted the
foundation of the economy from the production to distribution of factors and
income, including foreign trade and foreign exchange management activities.
Market and its forces did not have any function in the economy at that moment. Changes in economic policies
had been made from early 1980s. In agriculture, the contractual quota was
widely applied in farming household in 1979 and early 1980s. In industry, the
state authorized state owned enterprises to operate freely beyond the
assignment of state plan. However, the state continued to maintain monopolistic
power in controlling production and distribution by the two-price mechanism. In
general, these changes in economic policies did not function in promoting the
economic growth, stabilization and development. The Sixth Party Congress in
December 1986 marked the transition period in the Vietnam's economy. An overall
transformation really took place with macroeconomic reforms. The multi-sectoral
economy was recognized, the outward-oriented program replace the closed
imports-substituting production. Structure of the economy changed in favor with
light industries and services, especially goods and services for exports. The culmination of the
reform came in March 1989 with a series of radical changes which formally swept
away most of the remains of the command economy and ushered in a new era of
market economy. The main features of the economic reforms included tightened
control over credit expansion, an increase in interest rate to positive level
in real term, devaluation and unification of exchange rate and liberalizing all
prices. These measures in banking and financial sectors pushed back the rampant
inflation in the previous 1986-1988 period. Table 3.1: Selected
macroeconomic indicators for the period 1989-1998
The 1989 reform programs
were more comprehensive and thus made a watershed for the Vietnamese economy,
as a fundamental transformation in economic management was begun. The results
can be seen from the below macroeconomic indicators from 1989 up to now. I.2. Trade reform Vietnam had for years
pursued an inward-looking development strategy, characterized by the
orientation of agricultural and industrial activities toward the domestic
market. Trading activities in the period before reforms were limited in trade
agreements with the CMEA. Exports and imports were not promoted but only implemented by SOEs. Price and
volume of exports and imports were planned by government authorities. With the introduction of
“doi moi” in 1986, Vietnam started to take the process of economic structuring
and creating institutional and policy environment for economic development.
However, just in 1987, the changes affecting Vietnam’s interactions with
international markets really started with the introduction of Law on Foreign
Investment, the introduction of “open door” policy. Since 1988, series of
policies and regulations on trade, exchange rate and foreign investment were
introduced to promote international activities. Firstly, the reforms were aimed
at foreign exchange control, trading organizations and customs tariff. The
Foreign Exchange Control Decree in 1988 liberalizes retention of foreign
exchange, opening of foreign currency accounts, use of transfers to pay for
imports and repay foreign loans: devaluation of exchange rates in trade and invisible
payments. Also in 1988, the restriction on establishment of trading
organizations relaxed and central government monopoly of foreign trade was
terminated. Especially, trading activities became more active thanks to the Law
on Imports and Exports Duties that introduces the custom tariff. The changes in trade brought
about by its actual factors become considerable from 1989. These factors
included opportunities to participate in trade, tariffs, non-tariff barriers,
foreign exchange control and exchange rate, and also international commitments. In January 1989, the
government decided to liberalize the establishment of foreign trade companies,
resulting in the number of trading companies increasing from 80 in 1987 to 156
in June 1989[13]. Private
companies were allowed to directly engage in international trade. The reforms of tariff system
were marked by the Law on Imports and Exports Duties 1988. Since 1993, Tariff
Law was amended to add provisions for other than normal importation, the
responsibility to initiate change in tariff was passed from Ministry to
Ministry of Trade. In 1996, maximum tariff rate reduced to 80 per cent, special
sales tax was imposed at rates up to 100 percent on imported passenger cars
following the reduction in tariff rate. In March 1989, exchange rate
was devalued to a level that virtually unified it with the parallel market
exchange rate. This devaluation replacing the early overvaluation implied an
increase of the exchange rate for trade transactions within the plan from VND
900 per USD to 4500 per USD (end-of-period official exchange rate). In 1991, foreign exchange
trading floors were opened at the State Bank of Vietnam. The period after that
saw another important reform that was the introduction of inter-bank foreign
exchange market. At the same time, other regulations in foreign exchange
transactions became more effective and closer to the world market's activities. In addition, Vietnam's
joining regional and multilateral trading arrangements has liberalized
Vietnam's trade: signing a preferential trade agreement with the EU in 1992;
joining ASEAN in 1995, it also became a member of the AFTA; in 1994, Vietnam
was granted observer status at the GATT and in 1996 it submitted a memorandum
on its foreign trade regime as part of its application for WTO. Also, Vietnam
is currently negotiating a trade agreement with the United States. In November
1998, Vietnam became a full member of the Asia-Pacific Economic Cooperation
(APEC) group, and submitted an Individual Action Plan (IAP) for meeting the
liberalization objectives associated with membership. In the "open-door"
time, the increase of foreign investments has significantly contributed to the
development of trade. The Law on Foreign Investment introduced in 1987 and its
revisions in 1990, 1992 and again in 1996 has created a more favorable
environment for foreign investment. Together with efforts such as the lifting
of the US embargo, the changes have prompted substantial inward flows of
foreign capital. And foreign investment has brought in its train a rapid
expansion of imports of capital goods - and, more recently, producer goods -
prompting requests for streamlining the trade regime and its administration. II. The trade performance II.1. Overall picture of
trade Table 3.3: Trade performance
during 1989-1998 (in million of USD)
Before 1988, foreign trade
was subject to decisions by the planning authorities and could only be carried
out by a small number of state-owned trading monopolies. In those years, trade
was limited by the trade agreements by Vietnam government with foreign governments.
At that time, Vietnam was heavily reliant on the Council for Mutual Economic
Assistance (CMEA) for most of its basic commodities, so the total value of
trade was low and limited within the framework of the CMEA. Domestic
enterprises had not enough incentives to trade abroad. Vietnam is now trading with
48 countries all over the world, the leading partners are regional countries
like Japan, Singapore, South Korea, Thailand… The volume and value of trade
increase five-folds in the last ten years, trade activities are getting more
plentiful and larger. Both exports and imports are
expanding sharply by 30-40 percent per year in USD terms in average. All key
components of exports experienced growth. Light manufactured exports doubled,
increasing from USD 20 million in 1990 to USD 2,480 million in 1998 driven by
growth in textiles and garments, and footwear. Agricultural exports (including
rice) and crude oil exports also increased sharply during the period 1989-1998.
Rice exports rose five-folded to USD 1,024 million, securing Vietnam’s position
as one of the world’s leading rice exporters. Crude oil exports grew from USD
200 million in 1989 to USD 1,332.2 million in 1998, taking the first rank in
exports by commodities. Merchandise imports rose at
a speed of about 45 percent of GDP annually. Imported capital and intermediate
goods were the fastest growing imports items. Mean while, official reports
showed that consumer goods imports grew slowly and constituted only a small
probably significantly higher, due to the smuggling of these goods through
China, Cambodia and along Vietnam’s long coastal line. In the period 1989-1998, the
trade activities increased accompanied with the trade market in the whole
world. Table 6 shows selected trade partners of Vietnam in the period 1989-1996[14].
ASEAN4 Among
many factors, exchange rate has a significant impact on trade activities. In
terms of nominal value of exports, the depreciation will make exports cheaper
and vice versa. However, it depends on whether exports are elastic to the
changes in exchange rate. In the case of Vietnam, the performance of foreign
exchange control and exchange rate management show that exchange rate does not
exert significantly on exports. The presence of many non-tariff barriers and
the performance of domestic production seem to have more important impact on
exports. The effect of exchange rate will be discussed in detail in section
III. The next part will be focused on the structure of exports and analysis of
factors on exports of some major commodities. II.2. Exports activities and
its structure Vietnam has significant
export growth for a long period of time. This is mostly due to the economic reforms,
especially trade reforms. The first impacts on exports were the implementation
of regulations in 1988, notably foreign exchange control decree which
liberalizes retention of foreign exchange, opening of foreign currency
accounts, use of transfers to pay for imports and repay foreign loans. Also in
1988, there were devaluation of trade and invisible payments exchange rates;
restrictions on establishment of foreign trading organizations were relaxed and
central government monopoly of foreign trade was terminated; especially, the
Law on Imports and Exports Duties was introduced with custom tariff. With this
turning point in trading activities, many regulations on exports have been
introduced since 1989. As a result, export volumes increase steadily. Exports
growth rates exceeded 30 per cent per year in 1994-1996. This is mainly resulted from
the trade and investment reforms in the 1989-1996 period. These reforms are
increasing the number of trading organization from 1989, including many private
companies (from 1991); regulations on
tariffs and quotas, on shipment, and administrative management According to GSO statistics,
there was trade balance surplus in 1992 with the rapid increase in exports. All
key merchandise exports experienced growth. Light manufactured exports doubled,
increasing from US$ 1 billion in 1995 to US$ 2 billion in 1996 driven by growth
in textiles and garments and footwear. Agriculture exports and crude oil
exports also increased sharply during this period. (See table 3.5). The structure of exports has
changed in favor of the light industrial products. Value of light industrial
exports exceeds value of major agricultural exports in 1997-1998. In 1998, the
first ranked exports is textiles and garments (see table 3.5), while in 1997 this
position is held by petroleum. In the whole period from 1989 to 1998, values of
agricultural products seem to be rather stable with light increase or
reductions in some commodities. This shows a fact that Vietnam's exports was
heavily dependent on agricultural exports. At the end of the period
studied, there were some changes in the structure of exports by commodities.
Exports of rice, coffee, marine products, textiles and garments, and footwear
continued to have positive growth. However, exports of petroleum, coal, cashew
nut start falling. For the whole period, oil and rice took the dominant
positions in the list of major exports. From 1994, textiles and garments
exports have sharply increased and reached
the second rank in the list. There are reasons for this such as the
change in the market structure, economic reform, change in policy priorities,
which will be discussed more in detail by analyzing exports of each major
commodities. * Exports of rice: Vietnam is now the world's
third largest exporter of rice. This is partly due to many economic policies
and new economic environment in the last ten years, when there is enhanced
security of land tenure for farmers, improved supplies of fertilizers and
water, and greater freedom in trading and pricing of rice. However, Vietnam is
not yet free from food shortages, remains a problem of strict control to
quantity of rice which can be exported and who can conduct those exports. Export of rice is now one of
the two commodities under controls by quotas and licenses system, rather than
exchange rate. This could be explained as follows: Ø Setting allocations of
exports quotas is not stable due to the requirement of domestic food security; Ø High handling port costs and
risks of delays in loading and unloading are another reason why buyers discount
prices; Ø Storage conditions for rice
exported are poor and there is substantial deterioration of quality; Ø Costs of contracting, and
transporting are relatively high; Ø Lack of information for
buyer and lack of grading systems... * Exports of crude oil Among major trade
commodities, petroleum and oil products take the first rank. However, the
impact of exchange rate on this exports is less strong than that of other
factors. In fact, exchange rate changes can lead to changes in revenue of
exports rather than on competitiveness influenced by price of domestically
exploited oil and the difference between world price and domestic price. * Exports of textiles and
garments: From late 1992, the
agreements on exports of textiles and garments were signed between Vietnam and
EU. According to this, Vietnam would exports to EU 21,937 tons of textiles and
garments, equivalent to USD 450 million[16].
From being zero in 1988-1989, exports of textiles and garments ranked the
fourth, in 1994 ranked the second and in 1998 ranked the first. Exports to EU
(by quotas) account for about 40 per cent total exports of textiles and
garment, the rest 60 per cent is exported to non-quota markets like Japan
(25-30 per cent), United States (2-3 per cent), SNG and Eastern Europe, and
some other Asian countries. This data show the fact that exchange rate has some
impacts on exports of textiles and garments but less strong than the impact by
quota system. * Exports of coffee In the case of coffee,
exchange rate together with productivity and the ratio of return to costs of
coffee production make exports of coffee more competitive. In 1998-1999,
Vietnam exported 336.764 tons of coffee (6.5 per cent higher than the previous
year) due to a large devaluation of VND in 1997. However, when coffee became
more competitive with the devaluation leading to increasing in the quantity of
coffee exported, the value of exports reduced by USD 60 million. So the
increase in quantity is not enough to offset the decrease in exports price.
This means that exports of coffee is not much elastic with the exchange rate. Among major export
commodities in table 3.5, rubber, tea, cashew nut, pepper and coal are somewhat
elastic with the exchange rate because exports of these commodities are not
controlled by quotas systems. Fluctuations of these exports can be seen in this
table. From the above analysis,
there is a fact that the management of exports in Vietnam is biased to
non-trade barriers like quotas, duties on exports, especially exports of the
major commodities (rice, crude oil, textiles and garments). The impact of
exchange rate on promoting these exports seems to be ambiguous. Therefore it is
unlikely that devaluation or depreciation of domestic currency (VND) would
promote Vietnam's exports. Through a quantitative analysis in Chapter Four,
this matter can be seen more clearly. II.3. Imports activities and
its structure Since 1986, Vietnam's
imports have been increasing rapidly, especially imports of materials and
machinery for production. The structure of imports is shown in table 3.6 where
imported commodities are considered in terms of percentage share in total
imports as well as in terms of USD value. The reforms after 1989 have
eliminated many administrative controls on exports and imports, allowing
businesses to exports or imports unbanned products. In an effort to achieve
trade balanced, Vietnam has been trying to restrict imports to protect domestic
production. In general, these changes are replacing non-tariff restriction with
tariffs, improving transparency and reducing the degree of discretion of the
customs administration. Tariff has gradually
replaced quotas on imports. Tariffs on many items have increased since May 1993
with rates ranging from zero to 200 per cent, thus the average was 11 per cent
higher than in 1992. However, the volume of imports is increasing with higher
growth rate than exports; this leads to continuing deficits in trade balance. From
1997, the growth rate is lower and reduced. This may be resulted from the
reforms, but may also be affected by the regional crisis in 1997 and
devaluation from neibouring countries. Since 1997, the government
has promulgated far-reaching reforms for further growth of the economy by
creating a neutral trade regime. In May 1998, the government approved
legislation to lower the maximum imports tariff to 50 per cent (with the
exception of six groups) and number of tariff-rates to 15. At the same time, there
was a decision to remove licensing of imports of consumer goods. However, the
implementing regulations have yet to be issued. The process of
industrialization is somewhat the process of shifting in structure of imports.
Intermediate goods and inputs, including machinery and materials, account for
the major share in total imports. Because imports of production inputs,
including machinery, petroleum, fertilizer and steel, are often followed by
FDI, share of machinery reduced in 1997-1998 due to lower demand for large
construction and investment. The structure of imports in
the last years shows a fact that a large part of imports is used in the
construction of domestic industries. This is the trend of the first stage in
industrialization following an imports - substitution strategy like Korea in
1970s. (However exports contributions by these industries using imported inputs
are still in consideration). Imports of materials and
intermediate goods are often accompanied by FDI. In 1997, FDI projects imported
26 per cent of total imports. In the period 1993-1998, the trend of FDI
development is a bit similar to the trend of imports: sharply increased in
1993-1996, stable in 1997 and slightly declined in 1998 (this decline is due to
the current financial crisis in East and South East Asian countries, major
investors into Vietnam). The increase in FDI from 1993 to 1996 led to increase
in trade deficit in this period (deficit of 16.9 per cent of GDP). Since 1997,
trade deficit reduced to 8.1 per cent GDP, due to more strict control on
imports and also due to the crisis in regional countries, which are major
investors in Vietnam. One imported goods often
influenced by competitiveness is consumer goods. However, imports of consumer
goods were strictly controlled, especially in recent years. In order to promote
domestic production, imports of consumer goods is more strictly controlled, so
its share in total imports is reduced from 16.6 per cent in 1992 to 9 per cent
and less in recent years. Until 1997, imports of
consumer goods were regulated with the objective of limiting consumer good
imports to 20 per cent of the value of exports in the previous year, applying
imports license and tariffs. Tariffs rates on consumer goods range from nearly
20 per cent (office furniture) to 80 per cent (motor vehicles) and even more
(depends on how much complete the commodity is manufactured). These changes in imports
structure could be attributed to the changes in imports controls such as
releasing control over some imported commodity groups, at the same time
tightening control over others. Those changes included imports quotas, imports
licenses and tariffs. In fact, the restrictions on
imports should be minimized, because Vietnam's imports of intermediate goods
are essential and important for the domestic production and for production of
exported goods as well. This leads to a fact that a large part of Vietnam's
imports in recent years did not depend on competitiveness defined by real
exchange rate. Quantitative controls and tariffs strictly controlled the amount
of imports elastic to exchange rate. So it is difficult to conclude that the
overvaluation or depreciation of VND in recent years did increase or decrease
imports. However, the control over
foreign exchange market and the exchange rate policy are still worth
considering in order to make a thorough analysis of factors of trade balance,
i.e. exchange rate. III. Foreign exchange
control and exchange rate policy Table 3.7: Exchange rate
changes in 1989-1998 period
The development of exchange
rate is worth considering since 1989 when the first important decision about
exchange rate was made. The unification and devaluation of the exchange rate in
1989 had an immediate positive impact on the country's exports and consequently
on the availability of foreign exchange. By the same time, foreign trade
activities were also facilitated by a more efficient management of foreign
exchange. In 1991, foreign exchange
trading floors were opened at State Bank of Vietnam. The exchange reform became
more efficient thanks to the liberalization of controls on retention of foreign
exchange and use of transfers from abroad. In turn, this allowed firms that
meet surrender requirements to open foreign currency accounts and sell foreign
exchange at prevailing exchange rates. At the same time, this allowed foreign
transfers to be used to pay for imported goods and services and make outward
transfers. In 1994, an inter-bank
foreign exchange market was introduced with buying and selling rates. At the
same time, the changes in foreign exchange management have been accompanied by
a restructuring of the banking sector. A two-tier system was created based on
the old mono-bank system. Entry by new and foreign banks was opened up. And
monetary policies were aimed at increasing confidence in the local currency and
financial system. The exchange rate policy
started functioning since 1989 on the bias to a market mechanism. In spring
1989, the official rate was unified and sharply devalued to close to levels in
the parallel market. Table 9 shows fluctuation of official exchange rate (end -
of - year rates) and market exchange rate (annual averaged rates) In 1998, the State bank of
Vietnam introduced surrender requirements, requiring enterprises with foreign
currency accounts to sell holdings in excess of "normal requirements"
to their banks (Decision 37/1988/QD-TTg of 14 February 1998). As for other areas of policy
relating to foreign trade activities, the retention of controls on foreign
exchange access seems to reflect the absence of stronger and more direct
disciplines on SOEs and of more commercially oriented decision making in the
financial sector. The State Bank introduced onerous deposit requirements on
letters of credit after a number of SOEs defaulted on long term L/Cs where
proceeds were reportedly used to finance speculative investments. This suggests
that financial and budgetary disciplines on SOEs are still weak. The above-mentioned
regulations show that foreign exchange payments are not facilitated in favor of
promoting foreign trade activities. Besides, Vietnam's exchange rate policy is
still under consideration. The exchange rate policy has been largely market -
based in the 1990s, as evidenced by the establishment of the inter-bank foreign
exchange market in October 1994 and the authorization of forward and swap
transactions in 1998. Until late 1997, the exchange rate against USD remained
pretty stable in nominal terms. But from the end of 1997, the regional
financial crisis made some countries take devaluation by at least 33 per cent
(Malaysia) and maximum 78 per cent (Indonesia). These countries are the most
important trade partners of Vietnam. IV. The impact of the 1997
Financial Crisis on Vietnam's trade and exchange rate regime From early 1997, the crisis
occurred in some ASEAN countries and then spread over the neibouring countries.
Those countries strongly influenced by the crisis were Thailand, Philippines,
Malaysia, South Korea, and Japan... which make up a large part of Vietnam's
trade. So Vietnam was unavoidably influenced, especially in three economic
sectors: foreign direct investment (FDI), foreign trade, and monetary and
financial sector. The inward flows of FDI were considerably declined. The
number of committed projects in the first seven months of 1998 reduced by 24
per cent (equivalent to reduction by 28 per cent in value terms) as compared to
the same period of 1997. Foreign trade was also
strongly affected by the crisis. Many regional local currencies were devalued,
resulting in a sharp decline of VND's competitiveness. However, this
devaluation facilitated imports into Vietnam. Vietnam's importers now had to
pay fewer dollars for their importation. But taking into account the domestic
product's competitiveness, this is a clear disadvantage to the growth of
Vietnam's economy in the long run. The empirical evidence shows
that exports from Vietnam to Asia fell by 5 per cent in 1997 and 20 per cent in
1998. The reduction in exports implies a weakening competitiveness. The effects
of the regional crisis have also made Vietnam less competitive for two other
reasons. First, there have been substantial currency devaluations in the
crisis-stricken countries. Indonesia's exchange rate depreciated by nearly 80
percent, while those of the Philippines, Thailand, Malaysia, and South Korea
depreciated by around 35-40 percent. The Vietnam dong on the other hand has
been devalued by less and not enough to
restore competitiveness to pre-crisis levels. With the devaluations and
other economic policies, the crisis devastated countries had improved their
trade balance from serious deficits in 1997. However, this was not resulted
from increase in exports. Data show that both exports and imports of these
countries reduced sharply in the crisis, but the lower domestic output (or
demand for imports) was the main reason. Exports and imports of these countries
reduced by 30-40 per cent and the much lower imports may be the reason for the
improvement in trade balance. Besides the consequence on
foreign trade, the crisis has also exerted an influence on VND's purchasing
power. As Vietnam's economy suffered from the imbalance between domestic
purchasing power and abroad purchasing power of VND, this crisis further worsened Vietnam's trade balance. The
devaluation of VND was therefore inevitable. This is a negative sign in
monetary market and financial system. The policy efforts of
Vietnam in recent years are to limit this imbalance and increase Vietnam's
competitiveness of exports. Three exchange rate adjustments in June 1997,
February 1998 and August 1998 devalued the dong by around 17 per cent, but this
was insufficient to offset the loss of Vietnam's competitive position and so
Vietnam's exports will be less and less competitive. Cheaper imports and more expensive exports make it more difficult
for Vietnam to compete with ASEAN countries and other Asian trade partners,
especially in other markets like EU or US. This is resulted from the
restructuring economies the crisis - affected countries and their devaluations.
To clarify this impact, we will have to see the quantitative analysis of how
much devaluation change competitiveness and trade, including exports and
imports. Chapter
Four: Quantitative analysis For the case of Vietnam I. Exchange rate development Although the nominal
exchange rate kept stable in 1992-early 1997 period, the real exchange rates
adjusted by the relative price between domestic and foreign CPI are changing in
different ways. The relative price of Vietnam and its trading partner makes changes
to the real exchange rate. The higher price level in the domestic market
implies a lower competitiveness, so that exports and imports of the country are
affected. The changes in real exchange rate in Vietnam in 1989-1998 are
calculated as in table 11 below, where NER stands for nominal exchange rate,
RER - real exchange rate adjusted by the ratio of Vietnam's CPI and US's CPI;
REER - real effective exchange rate adjusted by a basket of prices of Vietnam's
major trade-partners. Table 4.1: Real exchange
rate indexes (VND/USD) - 1990=100
Note: the increase in
exchange rate index (NER, RER, REER) means depreciation, the decrease in
exchange rate index means appreciation. The appreciation in real
exchange rate led to reductions in Vietnam's competitiveness because higher
inflation in Vietnam pushed export prices up. US's CPI is used to represent
foreign price of tradables because US dollar is the most common used payment
instruments in Vietnam. The higher inflation in Vietnam relative to the
inflation in US will lead to relatively expensive price of exports, means lower
competitiveness. These data show us a
relationship between the fluctuations of RER and the trade balance. While NER
index shows depreciation, trade balance continuously suffered from deficits in
the period 1993-1998. So the measure of RER is more reasonable to explain these
deficits because lower RERs (appreciation) imply lower competitiveness and
higher deficits in trade balance. However, the increased
deficits in trade balance are not accompanied by increase in exports and decrease
in imports. Data from table 3 show that both exports and imports increased in
nominal terms for the period 1989-1998, and table 1 shows that both exports and
imports increase in the real terms. This means that the appreciation of VND
against USD do not restrict imports. This negative relationship between RER and
imports are well explained in Chapter Three, which analyzed factors of imports,
including quantitative controls, tariffs and exchange rate. The real exchange rate is
not only adjusted with a single trade partner, but can also be adjusted with a
basket of major trade partners'[17]
currencies and price level. Table 4.1 shows the real exchange rate weighted
with Vietnam's trade partners' indicators. The changes in REER show the
changes in competitiveness. Even NER index increased over the period, the REER
index changed in a different way. The highest index of REER is seen in 1992,
when Vietnam had surplus in trade balance. The table also shows that, competing
in the world market[18],
Vietnam's competitiveness is lower and lower compared to its major trade
partners' prices and exchange rates. From 1993 afterwards, in the relation with
its major trade partners, Vietnam's competitiveness is by 15% in terms of real
effective exchange rate but does not make imports reduced. So the two decreasing real
exchange rate measures (RER and REER) are seen accompanied by trade deficits
from 1993 and 1998 but are not accompanied by restricting imports. This leads
to a conclusion that the improvements of trade balance in 1997-1998 are not
resulted from depreciation of VND against USD (devaluation policy). In this period, the
structure of domestic price changes in favor of commodity production. From
figure 4.1, we can see that the commodities price index (represents for
tradables) is relatively lower than services price index (represents for
non-tradables). In 1992 and 1993,
tradables price index felt sharply to lower than non-tradables price index,
implied a relative cheaper in traded price, so that increase competitiveness of
exported goods, improve trade balance. From 1993, the difference between
tradables and non-tradables has been narrowed and closer to general consumer
price index. This means a relatively reduced competitiveness of traded goods in
comparison with those of non-traded goods, resulting in deterioration in trade
balance. However, in Vietnam these
price indexes are not reliable enough to explain the relationship between tradable
and non-tradable prices and trade balance relating to domestic product's
competitiveness. The price movements in the figure above give a suggestion that
there is a change in the relation between these prices and trade balance,
implying a change in economic restructuring in bias to service and processing
sectors. From the lists of major exports and imports by commodities in chapter
three, we can also see this change, i.e. increase the share of manufactured and
processed goods traded. As for the impact of
exchange rate, in Vietnam, VND is four times devalued from 1989 to 1998, as
shown by the upward of the NER index line. This is not accompanied with the
higher competitiveness. In fact, the real competitiveness measured by RER and
REER is lower. In comparison with its trade partners, Vietnam's competitiveness
sharply reduced in 1990 and then reached the highest in 1992. From then on, the
downwardness of RER index and REER index lines show the reduction in
competitiveness. However, a question raised
here is that whether Vietnam's trade balance will be improved with devaluation,
or depreciation of VND. The quantitative analysis in the next section will help
answer this problem. II. The relationship between
trade and exchange rate Table 4.2: The movements of
key indicators in trade (1990=100)[19]
Using the Microfit Package
to regress the equations by Ordinary Least Squares Estimation, I have checked
the relationship of exchange rate with exports and imports, considering exports
without oil export. At the same time, the regressions use not only nominal
exchange rate, but also two other real exchange rate RER and REER. However, in
terms of statistic significance, only some of the regressions are statistically
significant with anticipated sign. The followings are the regressions used for
deriving exports and imports elasticities to exchange rate. LXD = - 6.2352
+ 0.0953 YFI + 0.012 REER (1) -4.9206 14.7179 2.0058 (0.002) (0.000) (0.085) DW-statistic = 1.6502 F(2.7) = 211.98 In equation (1), the
coefficient of REER is rather low, indicating that 1% change of REER would lead
to 0.012% change in the LXD. Meanwhile, the coefficient of YFI is higher and
more significant statistically. The elasticity of XD to REER is calculated as
follows: eX(REER) = (DXD / XD ) / (DREER / REER ) = 0.012 * mean REER = 0.012
* 1.4.44 = 1.25328 MD = -512.2825 + 10.13
YI - 3.7862 REER (2) -1.7746 14.4686 -1.9105 (0.199) (0.000) (0.098) R2 = 0.98785 DW = 2.1034 F (2,7) = 366.9691 (.000) Similar to equation (1), in
equation (2) the coefficient of REER is still lower and less significant than
YI. This implies that the effect of REER on MD is less than YI's coefficient
does. We have the elasticity of MD to REER as follows: eM(REER) = (DMD / MD ) / (DREER / REER ) = 3.7862 *
(104.44 / 456.43) = 0.86636 Similarly, we obtain
elasticities of MD and XD to RER and NER from equations (3), (4), (5), (6). MD = 3.6669 YI -
3.0102 RER + 0.6962 MD (-1) (3) 3.155(.020) -2.6704(.037) 4.5272(.004) R2 = .98698 DW = 3.3757 F(2.6)
= 304.1609 (.000) eM(RER) = (DMD / MD ) / (DRER / RER ) = 3.0102 *
(95.21 / 456.43) = 0.6279 XD = -5938.5 + 45.97 YFI + 12.397 RER (4) R2 = .99332 DW = 3.3121 F(4,3)
= 111.5164 (.001) eX(RER) = (DXD / XD ) / (DRER / RER ) = 12.397 *
(95.21 / 395.4) = 2.985 LXD = -34.4625 + 0.48552 LNER + 7.9861
LYFI (5) 31.7543(.000)
6.9841(.000) 27.2967(.000) R2 = .99774 DW = 2.1300 F(2.7) = 1547.8(.000) eX(NER) = (DXD / XD ) / (DNER / NER ) = 0.48552 MD = -1048.3 -
.88759 NER + 12.3593 YI (6) -19.88(.000) -2.3603(.000) 19.990(.000) R2 = .99200 DW = 2.1896 F(2,7) = 433.7939 (.000) eM(NER) = (DMD / MD ) / (DNER / NER ) = 0.88759 *
(179.2 / 456.43 ) = 0.333171
From the table of
elasticities, we can see that the sum of elasticities of exports and imports to
NER is less than unity, the Marshall-Lerner condition does not hold. This means
that with a nominal devaluation, trade balance will deteriorate. Indeed,
exchange rate has a little impact among many factors determining Vietnam
export's competitiveness, e.g world prices, domestic income, foreign income,
tariffs and other trade policies. However, the sum of
elasticities to RER and REER is higher than unity, the Marshall-Lerner
condition does hold. This shows a mixed conclusion about the effect of exchange
rate on trade balance. While a nominal devaluation does not improve trade
balance, real devaluation does improve trade balance from test of
Marshall-Lerner condition. In other hand, we can see that the elasticities of
exports are always higher than the elasticities of imports. So, although
devaluation promotes exports, it does not limit imports much because imports
are less sensitive with exchange rate than exports are. In the six equations, we can
also see that the coefficients of income (YI and YFI) are absolutely higher
than those of exchange rate. This suggests that the expansion of market to high
income countries and growth of domestic and foreign economies are the more
important reason for the changes in trade balance[20].
Among the six equations, equations (5) and (6) are the best acceptable, taking
into account the significance of statistics. Equations (1), (2), (3), (4) are
somewhat acceptable; F-statistics for overall significance of the estimated
regression are significant at 99%. The Durbin-Watson statistics are positively
decisive. However, the model
specifications of these regressions show that functional form is not
significant. The auto-regression test shows that the variables used are
somewhat related to each other In general, Chapter Three
and Chapter Four analyze the relationship between exchange rate and exports,
imports, trade balance descriptively and quantitatively, showing a fact that
there are other factors affecting to the changes in exports and imports, e.g licenses,
tariffs, agreements with foreign trade partners and other quantitative
controls. It is hoped further studies on this matter will be carried out in the
near future. Chapter five:
conclusion
I. Summary In the section of theoretical framework, we can
see that there are orthodox theories, which argue that devaluation will improve
trade balance if the Marshall-Lerner condition holds. Besides, economists from
other economic schools introduce the opposite opinion about this problem. They
argued that in short-run, devaluation has a negative impact on trade balance
(through J-curve effect), and also in some LDCs where imports of capital are
essential, devaluation can even cause stagflation (according to the studies of
structuralists). The experiences from countries (in this thesis, these
countries are Hungary, and some ASEAN countries) about devaluation are also
mixed. Vietnam's authors have contributed to the research of this problem. But
the exact relationship between devaluation and trade balance is still a
question. Some find the positive impact of devaluation on trade balance, but
some find the opposite results. This thesis shows us some conclusions as
follows: ·
The
performance of trade in Vietnam from 1989 is significant with both rapid growth
in exports and imports. This is resulted from a series of economic reforms
since 1989 up to now. However, the factors influencing on exports and imports
of Vietnam are characterized by many variables besides exchange rate. For
example Vietnam just started joining world market and is still in the first
step of trading with the rest of the world. So the Vietnam's trade which begins
from a very low point will increase with really high rates but small volume. ·
The
exchange rate is appreciated in the real term eventhough depreciated in nominal
terms. Vietnam's RER and REER saw the appreciations of VND, and also lower and
lower competitiveness. Trade balance in fact has suffered from continuing
deficits, except in 1992, however this is not exactly due to the appreciation
of real exchange rate in this period. Other reasons belong to the increase of
imports accompanied with FDI activities, the economic difficulties in East
European countries in early 1990s, and the crisis in Asian countries in late
1990s. ·
The
results of quantitative analysis in Chapter Four show that while a nominal
devaluation does not improve trade balance, a real devaluation does. However,
the impact of exchange rate on trade is weaker than the impact of income on
trade. In addition, the coefficients of income are more statistically
significant than those of exchange rate. So the results of quantitative
analysis in Chapter Four are useful in referring as a methodology rather than a
determination of the relationship between exchange rate and trade balance. However, the limitations of limited access to
data and the loose structure of exports and imports can be the reasons for the
disturbances of trade and exchange rate. The impact of exchange rate on exports
and imports is therefore not very much. Both excluding and including oil and
oil-processing product from exports and imports, the results from Ordinary
Least Square regressions show that the relationship between trade and exchange
rate has an exact sign. In general, the overall analysis and the quantitative
analysis about the relationship between trade and exchange rate show a result
that in the case of Vietnam, trade is not much elastic with exchange rate. So
nominal devaluation is not a good solution for improving trade balance. II. Policy implications The question of how to improve trade balance
in Vietnam is always existing, especially in recent years. The impact of 1997
crisis in the region and experience show a solution relating to devaluation. In
the case of Vietnam, the policy implications for improving trade balance is not
only devaluation. ·
Trade
liberalization should take place more comprehensively in the framework of
comprehensive reforms. ·
Exchange
rate regime needs to be more important and more flexible in managing foreign
trade activities and foreign exchange market, especially in the period of
opening the economy to the regional and international economic organization,
and the period of globalization. ·
One
policy implication is that exchange rate will be devalued so that it becomes
the real devaluation. In this case, considering a nominal devaluation should
take into account the changes in relative price between domestic and foreign
(or a basket of foreign) prices, the changes in domestic and foreign (or a
basket of foreign) incomes. ·
In
the traditional markets, agreements are the dominant factor in exports and
imports. So the impact of changes in exchange rate is not significant. However,
in other markets, the role of exchange rate should be regarded more important.
Therefore, the combination of commodities exported or imported and the
destination of exports and imports is a great concern in terms of net gains
from trade. The exchange rate policy should be taken carefully, considering the
structure of trade and the sensitiveness of each export regions with exchange
rate. If the export to these regions elastic to exchange rate account for a
major part of overall trade, devaluation is a good solution to improving trade.
Then devaluation improve exports of some commodities significantly, the trade
balance will be improved with positive net gains. ·
The
structure by commodities and markets of exports and imports should be seriously
concerned in making decisions about how and where to exports and imports. The
agreements of exports and imports and other non-exchange rate factors (like
tariff quotas) help more convenient for negotiating trade activities, but they
will weaken the importance of exchange rate and the real competitiveness of the
country. III. Limitations and problems for further
study The most difficult problem in writing this
thesis is the limitations of access to data. •
This
concerns with the number of observations and the lack of data for some given
years. So I have to collect data from different sources. •
Marshall-Lerner
condition is only a simple way to check the relationship between exchange rate
and trade balance theoretically. However, using other quantitative theories is
impossible because of few observations and not having enough necessary
variables. •
Vietnam's
trade started developing in market mechanism from 1989, so that foreign trade
activities and exchange rate system are not much characterized by market
forces. •
The
relationship between exchange rate and trade in the case of Vietnam is therefore
disturbed by many factors including economic policies in an incompletely market
oriented economy. •
Planning
mechanism is still existing to some extent and in certain economic fields.
Exchange rate is not market determined for exports and imports. This is a
reason for the insignificance of results from regressions in Chapter Four. So this thesis will be better off with the
better data and need further studies which have more detail in disaggregate
analysis and have exclusions for some market and commodities inelastic with
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