Exiting the short-term policymaking loop

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An employee prepares money for a loan at a bank in Ho Chi Minh City

The low inflation rate presents an opportunity for policymakers to start planning for the longer-term instead of getting entangled in short-term fiscal and monetary measures to combat price rise, an analyst said.

Talking to Vietweek, Tran Du Lich, a former member of the National Assembly's Economic Commission, also argued for the need to use public spending to help the economy recover.

Excerpts:

Vietweek: What do you think of the recent hike in electricity prices?

Tran Du Lich: I believe that electricity prices must be decided by the market. The government must definitely not subsidize power prices for businesses, otherwise they will be dissuaded from improving technologies and saving energy.

We still can help lower-income people while raising electricity prices. For example, those who consistently use less than 100kWh per month can be subsidized. Those who need more power will have to pay the market price. [Letting the market decide prices] must be prioritized to develop a market economy.

On the other hand, the electricity industry has to reduce power [transmission] losses and improve their management.

But since the health of businesses is at an alarming level now, won't price hikes like that push them against the wall?

Adjusting the prices of public products and services - healthcare, electricity, transportation - at one point or another is inevitable. So the issue is when to do it so as not to affect inflation. The government must give a clear signal about policies so that businesses can work out their strategy.

The optimistic macroeconomic data is conflicting with the reality of a stagnant economy. How do you see the situation?

When I meet businesses these days, their first question always is: "˜When will the economy recover? When can we start long-term-planning?' This is a worrying fact since it means the business community finds itself lost.

Between 2006 and 2008 we let excessive speculation distort the economy, which resulted in a situation in which the government has had to resort to short-term measures to stabilize the economy. Inflation has been a major obsession in economic policymaking for many years. Running after curbing inflation, all the policies have had to revolve around the use of [short-term] fiscal and monetary tools. This has dented market confidence.

Do you think there are signs of green shoots?

Yes, I believe so. The fall in aggregate demand and the tight monetary policy have helped curb inflation. I see it as the fever passing. However, the causes of the fever are still there, so to deal with them and help the economy recover, I think we can, between 2013 and 2015, put an end to short-term policies and turn to medium-term policies to direct the market. As for inflation, we must start to change from passively to pro-actively engaging it by basing our policies on a target inflation rate, which I suggest is fixed at 7 percent for the next three years.

What do you think the specific medium-term monetary and fiscal policies should be?

In Vietnam, I think monetary policy is the first to have an effect on the economy. [So] it is essential that medium-term interest rates are reduced. That will encourage businesses to work on long-term plans. The central bank should be asked to calculate such factors as money supply, credit growth, interest rates, and forex rates for the period of three years based on the 7-percent inflation rate.

In terms of fiscal policy, we should take into account the great impact of public spending on the economy. In my experience, consumer demand falls every time public spending is tightened.

Therefore, budget deficits should also be planned for a three-year period. For example, if this year the economy is too weak to absorb credit, the government can increase public spending temporarily and decrease it when the economy can absorb more credit. It will be acceptable for public spending to make up about 30 percent of gross capital formation.

It will make sense for the government to withdraw investment from some unimportant sectors to make up for increasing public spending. The government can, for example, invest in public-private partnership projects to build more hospitals, using its capital as a boost.

The government can also consider reducing or waiving value-added tax or corporate tax for businesses. It should adjust tax policies to increase aggregate demand through 2015, not just 2013.

The bottlenecks for now are bad debts and the stagnant real-estate market. What are the solutions for them?

The central bank's efforts to resolve the bad debts situation are essential, but there are problems beyond its capacity. Reducing bad debts depends on the market and businesses' recovery, which will take a relatively long time. However, I believe that if the above policies are implemented, consumer confidence will improve and businesses will gradually recover and be able to repay their debts.

Resolving bad debts is closely linked with reviving the property market. In my opinion, the property market is in a bad shape, but not beyond hope. In fact, there is one market segment with high demand but low supply - apartments priced at under VND1 billion in Hanoi and Ho Chi Minh City and around VND500 million in other cities and provinces. What are redundant now are the high-grade apartments and residential projects which were developed in places where infrastructure was still poor. Honestly, it is really hard to recover the investment in such projects.

Besides its VND30 trillion package [to low-cost loans to home buyers and developers], the government can also select a number of real-estate projects to develop infrastructure to help improve sales. For example, if there's a subway linking Ho Chi Minh City and the new residential area in Binh Duong Province, this residential area will be bustling in just a few years. If sales warm up in one area, other areas will follow.

I strongly believe that the government must have a role in reviving the real-estate market, the market cannot work it out on its own as some analysts have suggested.

What are the problems in drafting and implementing medium-term policies?

The biggest problem is that such policies do not help work toward a general strategy. A fiscal policy works on its own, as does a banking policy.

But I do not think it is too hard to draft such a general strategy based on aggregate demand in the economy. If we can do that, the economy can grow at a slower pace of 5.5 percent or 6 percent for the next three years. Then growth will increase to 7 or 8 percent a year but we will have a stable economy. We will then have the foundation to make the next five-year plan. In sum, I believe that now we have the opportunity to break away from the short-term policy making mindset.

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