Year

2003

Degree Name

Doctor of Philosophy (PhD)

Department

School of Economics and Information Systems - Faculty of Commerce

Abstract

The objective of this thesis is to develop a dynamic macroeconomic model for Vietnams transition economy that is capable of analysing the impact of existing and prospective reform measures on its macroeconomic adjustment and development. The model enables the identification of ways in which reform policies have transmitted their effects to the domestic economy, as well as enabling an exploration of the impact of external shocks on the Vietnamese economy and the policy implications that flow from them. The macroeconomic adjustment policies emphasised in this thesis consist of trade liberalisation, state-owned enterprise privatisation, and expansionary fiscal policy. The findings obtained from this study are important in the context of contemporary Vietnam, in terms of providing the basis for evaluating alternative policy recommendations. The model developed contains a number of key assumptions. The domestic economy produces output that is consumed domestically and is an imperfect substitute for the imported good equivalent. The price of these goods is domestically determined. The deterministic framework of the model, combined with economic agents possessing rational expectations, is equivalent to the case of perfect foresight. Financial markets are assumed to be in continual equilibrium, while non-financial markets are subject to sticky price and quantity adjustment. The model developed focuses on the long run nature of the dynamic adjustment process, because the reform measures focused upon will exert important long run effects on the Vietnamese economy. This arises from allowing for physical capital stock accumulation and from the requirement that the current account balance must be zero in equilibrium. A number of specific features are incorporated in the model that make it more applicable to the Vietnamese case: (i) explicitly distinguishing the contributions of both SOEs and the private sector to domestic aggregate supply in examining the impact of privatisation policy; (ii) incorporating trade restrictions on either exports and imports in analysing the impact of external liberalisation on the economy; (iii) explicitly distinguishing the composition of government expenditure (current and capital) in analysing the impact of expansionary public investment spending on domestic private investment capital as well as economic development in Vietnam; and (iv) distinguishing macroeconomic outcomes from a fixed exchange rate with imperfect capital mobility system to that from a flexible exchange rate with perfect capital mobility system. Three types of policy reforms are simulated: (1) in carrying out privatisation it is assumed that 5 per cent of the capital stock of SOEs is given to the private sector; (2) the nominal exchange rate is assumed to be devalued by 5 per cent; (3) and the tariff rate is assumed to be reduced by 5 per cent. For each shock, with the assumption that the economy is operating in a fixed exchange rate system, the simulation was carried out at different speeds, gradually and immediately. Two extreme reform packages, in which privatisation, tariff reform, and devaluation are undertaken at the same time, designed to illustrate the more complex cases of gradualism and shock therapy approaches, are also considered. In addition, these shocks are considered in an alternative model, in which a flexible exchange rate with perfect capital mobility is assumed. The impact of changes in government capital expenditure, combined with these reform policies, on the Vietnamese economy, are then explicitly analysed. The simulation results suggest that different reform policies can have different effects upon the Vietnamese economy. The main findings from the simulation results for the single policy (exchange rate devaluation, tariff reduction, and privatisation) indicate that, under the fixed exchange rate and imperfect capital mobility system, for the short run period, the government should adopt the Big Bang approach because this has positive impacts upon Vietnamese economic development. For the medium and long run periods this approach would still be advisable for the case of an exchange rate devaluation, because by adopting this approach the deterioration of the private capital stock, aggregate supply, and international competitiveness could be minimised. However, there is no difference in the impact upon Vietnamese economic development irrespective of whether the application of the tariff reduction and SOE privatisation is up-front or partial. When these three policies are conducted at the same time, the Big Bang approach is still the best approach for the macroeconomic variables except for foreign asset stocks, which can have a benefit only from the reform package if it is done gradually over a specific period of time. For the complete reform policy package, when comparing the alternative versions of the model, under a floating exchange rate and liberalised capital controls, the gradual approach is somewhat better than the Big Bang approach in regard to the increase of domestic production, private investment and international competitiveness over the short and medium run periods. The major conclusion obtained from the comparison between the two versions of the model is that the reform package, when introduced gradually in the flexible exchange rate system with deregulated financial markets, can produce better macroeconomic outcomes for Vietnam. This conclusion is also supported from a simulation involving a temporary increase in public capital spending combined with a reform package.

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