While it is normal for Vietnam’s comparatively lower prices to converge with those in other countries, managerial causes of soaring inflation remain a pressing concern
Persistent, Sky-High Inflation Hard To Avoid
By Nguyen Dinh Bich
Vietnam's prices are comparatively low and should converge to global levels, as the experience of many other countries suggests While it is normal for Vietnam’s comparatively lower prices to converge with those in other countries, managerial causes of soaring inflation remain a pressing concern
It is understandable why some senior lawmakers lament a consumer price index (CPI) of 7-8%, especially given the concern which an inflation rate of 2-3% ignites in other countries. In fact, according to the International Monetary Fund (IMF), Vietnam’s inflation in 2004-2010 stood at 10.3% per annum, or 2.7 times as much as the world’s average, 5.3 times as much as that in developed countries and 2.1 times as much as that in Asia’s developing economies.
However, it is unfeasible to pull inflation down to 4.9%, the price level seen in other developing countries in Asia, or even lower. Three reasons account for this assessment.
First, Vietnam’s development and price levels are lower than in many other countries. Rapid price hikes are therefore understandable. Figures from the World Bank (WB) show that while Vietnam’s gross national income (GNI) per capita of US$1,010 in 2009 enabled the country to join the list of middle-income economies, the figure was still less than one third of the actual income of this group (US$3,400) and one eighth of the world’s (US$8,751). In fact, Vietnam’s GNI per capita was only 2.6% of that of rich countries and gave it the 172nd rank out of 213 countries. If purchasing power parity is considered, the country’s performance picks up somewhat.
Vietnam’s PPP-adjusted income per capita (US$2,850) equaled almost 45% of the figure for middle-income countries (US$6,340), or 26.9% of the world’s average (US$10,614) and 7.8% of that of rich countries. Its ranking would be 160th, up 12 notches.
This means the real purchasing power of each U.S. dollar in Vietnam was 2.82 times as much as the figure before PPP adjustments indicated. The gap in middle-income countries, as well as the entire world, was 1.86 times and 1.21 times respectively. The PPP-adjusted figure in rich countries, meanwhile, equaled merely 95.6% of pre-adjustment statistics. In other words, Vietnam’s prices are comparatively low and should converge to global levels, as the experience of many other countries suggests.
Indeed, Australia experienced inflation of 6-15.3% in the 1971-1990 period while Korea was gripped by CPI of 6.6-68.3% in 27 out of 30 years in the 1953-1982 period. Britain also underwent price increases of 6.1-24.2% in 1970-1985 and China grappled with inflation of some 12% per annum in 1987-1996, a much dreaded byproduct of its economic growth. The latter’s PPP-adjusted income per capita is therefore only 1.85% as much as the pre-adjustment figure.
However, reliance on imported inputs must share the blame for escalating prices. Import has hit 82.4% of gross domestic product (GDP) over the past four years and input has accounted for up to 64.5% of the import bill and taken a share of 53.1% of GDP, which is rather unusual by global standards.
Therefore, when global prices were stable, Vietnam’s inflation, while substantial, was only 1.5-2 times as much as the world’s average. In contrast, when global prices fluctuated sharply in 2004-2008, inflation understandably leapfrogged.
Clearly, investment in downstream industries at the expense of upstream and intermediate sectors, as well as the large-scale export of raw materials, has been Vietnam’s shortcoming and given rise to inefficiency.
Another significant cause is escalating aggregate demand. Furthermore, as GDP (in real U.S. dollar prices) has expanded by more than 11% per annum over the past decade – among the highest rate in the world – domestic demand is also on the rise. This, in turn, has further boosted inflation.
In short, inflation is hard to tame as domestic prices pick up to converge to regional and global levels.